RETIREMENT is a financial obligation that today’s younger generations are not handling well. That may be through no fault of their own — they suffer from lower incomes, after being adjusted for inflation, and student debt that makes it a struggle to save. But regardless of the reason, the failure to save for retirement is setting up Americans in their 20s and early 30s for financially stressed golden years.
The statistics are startling: Only 43 percent of eligible workers under 25, and 62 percent of those between 25 and 34 participate in 401(k) plans, compared with 70 percent or more of those over 45. And the young contribute less — 4.3 percent of income for those under 25 and 5.5 percent for ages 25 to 34. In contrast, Americans between 55 and 64 direct 8.7 percent of their incomes to these plans.
Skimpy retirement assets might be manageable if they were being offset by other wealth accumulation. But that hasn’t happened. In fact, adjusted for inflation, members of Gen Y — those born after 1980 — are poorer than their parents were at similar ages.
We should address this looming crisis via a radical restructuring of our retirement plans, including mandated savings.
While the saving problem may be acute for young people, it’s hardly limited to them. After rising during the financial crisis, the overall savings rate of Americans has once again declined to paltry levels. For those who have saved and invested in equities, the surge in stock market prices since the recession ended has helped, which has pushed up the value of retirement holdings.
But in an unfortunate irony, many millennials, who watched share prices collapse in 2008, then steered clear of the market, thereby missing out on its rise. Typically, these young Americans keep about half of their portfolios in cash — not a sensible long-term investment strategy.
Earlier this year, to take a stab at addressing the retirement issue, President Obama proposed a new form of Individual Retirement Account that would allow Americans with household incomes below $191,000 to put aside money that would accumulate tax free. Unfortunately, the Obama idea is only a symbolic and inadequate gesture. For one thing, its cap of $5,500 per year is too small, and it lacks automatic enrollment or mandatory employer-contribution.
For another, contributions would initially be invested at low Treasury rates. Younger workers should be investing mostly in equities, which, over time, should provide higher returns.
Under the Obama plan, when an individual’s account reached $15,000, funds would be moved into an investment offering from the private sector, which would confront people with the same daunting and unfamiliar choices that face holders of 401(k)s and Individual Retirement Accounts.
A better idea, but still offering only marginal improvement, is the one proposed annually by the president and ignored annually by Congress: requiring employers who do not provide 401(k) programs to offer automatic enrollment in I.R.A.s.
I’d love to see the restoration of defined benefit pensions, which combined automatic saving and sensible, long-term investment strategies. But that’s not going to happen. So at the least, we should take the responsibility for managing retirement funds away from ill-equipped individuals.
To that end, Senator Tom Harkin, Democrat of Iowa, has proposed a plan that would offer a more certain retirement benefit than existing individual plans provide, together with automatic enrollment, universal coverage, portability from employer to employer and professional management.
However, Senator Harkin’s plan has its own flaws — it doesn’t require any employer participation, and participants would be allowed to reduce their contributions or opt out entirely.
The best solution would take up the question of mandated savings. I understand that in today’s world of stagnant incomes, forced savings mean less money for individuals to spend now. But would we seriously prefer that our children become impoverished senior citizens? The approach I like is Australia’s superannuation program, which requires that 9 percent of workers’ pay be diverted into retirement accounts. Tax incentives are also provided, to encourage additional deposits.
The superannuation funds collectively have $1.7 trillion in investment assets. Adjusted for population, that’s the equivalent of $25 trillion for the United States, over twice what Americans have parked in 401(k)s and I.R.A.s. That’s an idea worth considering.
Young Americans are on track to be worse off in retirement than their parents. Let’s not just sit by and watch that happen.
For the last 6 years my very favorite book has been “Outliers: The Story of Success” by Malcolm Gladwell. This book tells a story of modern man that resonates very deeply with me. He depicts the life stories of some very familiar cultural icons, and as a part of telling those stories he explains that these people had enormously unique opportunities, and then they took advantage of them. It wasn’t just that they were self-made people (he actually thinks that is a silly thing to say) because people need to have an opportunity to capitalize on. I have listened to this audiobook probably about 14 or 15 times at this point, and every time I think about some different, or other things just differently.
I wanted to post this first chapter because it describes something very important. Gladwell talks about the importance of interconnectedness, and the importance of having a civilly inclined community. My family has tried to use this as a model, some of us more than others, but this story of Roseto was very impactful to me. If you are from Oklahoma you might enjoy that the doctor being discussed in this 1950’s study is from the University of Oklahoma, so just a fun little heads up on that 🙂
I hope that you enjoy the article, but I also decided to post the entire audiobook from YouTube, I dare you to listen to is, and please tell me what you think if you do!
1 : something that is situated away from or classed differently from a main or related body
2 : a statistical observation that is markedly different in value from the others of the sample
1. Roseto Valfortore lies one hundred miles southeast of Rome, in the Apennine foothills of the Italian province of Foggia. In the style of medieval villages, the town is organized around a large central square. Facing the square is the Palazzo Marchesale, the palace of the Saggese family, once the great landowner of those parts. An archway to one side leads to a church, the Madonna del Carmine — Our Lady of Mount Carmine. Narrow stone steps run up the hillside, flanked by closely-clustered two-story stone houses with red tile roofs.
For centuries, the paesani of Roseto worked in the marble quarries in the surrounding hills, or cultivated the fields in the terraced valley below, walking four and five miles down the mountain in the morning and then making the long journey back up the hill at night. It was a hard life. The townsfolk were barely literate and desperately poor and without much hope for economic betterment — until word reached Roseto at the end of the nineteenth century of the land of opportunity across the ocean.
In January of 1882, a group of eleven Rosetans — ten men and one boy — set sail for New York. They spent their first night in America sleeping on the floor of a tavern on Mulberry Street, in Manhattan’s Little Italy. Then they ventured west, ending up finding jobs in a slate quarry ninety miles west of the city in Bangor, Pennsylvania. The following year, fifteen Rosetans left Italy for America, and several members of that group ended up in Bangor as well, joining their compatriots in the slate quarry. Those immigrants, in turn, sent word back to Roseto about the promise of the New World, and soon one group of Rosetans after another packed up their bags and headed for Pennsylvania, until the initial stream of immigrants became a flood. In 1894 alone, some twelve hundred Rosetans applied for passports to America, leaving entire streets of their old village abandoned.
The Rosetans began buying land on a rocky hillside, connected to Bangor only by a steep, rutted wagon path. They built closely clustered two story stone houses, with slate roofs, on narrow streets running up and down the hillside. They built a church and called it Our Lady of Mount Carmel, and named the main street on which it stood Garibaldi Avenue, after the great hero of Italian unification. In the beginning, they called their town New Italy. But they soon changed it to something that seemed more appropriate, given that in the previous decade almost all of them had come from the same village in Italy. They called it Roseto.
In 1896, a dynamic young priest — Father Pasquale de Nisco — took over at Our Lady of Mount Carmel. De Nisco set up spiritual societies and organized festivals. He encouraged the townsfolk to clear the land, and plant onions, beans, potatoes, melons and fruit trees in the long backyards behind their houses. He gave out seeds and bulbs. The town came to life. The Rosetans began raising pigs in their backyard, and growing grapes for homemade wine. Schools, a park, a convent and a cemetery were built. Small shops and bakeries and restaurants and bars opened along Garibaldi Avenue. More than a dozen factories sprang up, making blouses for the garment trade. Neighboring Bangor was largely Welsh and English, and the next town over was overwhelmingly German, which meant — given the fractious relationships between the English and Germans and Italians, in those years — that Roseto stayed strictly for Rosetans: if you wandered up and down the streets of Roseto in Pennsylvania, in the first few decades after 1900, you would have heard only Italian spoken, and not just any Italian but the precise southern, Foggian dialect spoken back in the Italian Roseto. Roseto Pennsylvania was its own tiny, self-sufficient world — all but unknown by the society around it — and may well have remained so but for a man named Stewart Wolf.
Wolf was a physician. He studied digestion and the stomach, and taught in the medical school at the University of Oklahoma. He spent summers at a farm he’d bought in Pennsylvania. His house was not far from Roseto — but that, of course, didn’t mean much since Roseto was so much in its own world that you could live one town over and never know much about it. “One of the times when we were up there for the summer — this would have been in the late 1950’s, I was invited to give a talk at the local medical society,” Wolf said, years later, in an interview. “After the talk was over, one of the local doctors invited me to have a beer. And while we were having a drink he said, ‘You know, I’ve been practicing for seventeen years. I get patients from all over, and I rarely find anyone from Roseto under the age of sixty-five with heart disease.'”
Wolf was skeptical. This was the 1950’s, years before the advent of cholesterol lowering drugs, and aggressive prevention of heart disease. Heart attacks were an epidemic in the United States. They were the leading cause of death in men under the age of sixty-five. It was impossible to be a doctor, common sense said, and not see heart disease. But Wolf was also a man of deep curiosity. If somebody said that there were no heart attacks in Roseto, he wanted to find out whether that was true.
Wolf approached the mayor of Roseto and told him that his town represented a medical mystery. He enlisted the support of some of his students and colleagues from Oklahoma. They pored over the death certificates from residents of the town, going back as many years as they could. They analyzed physicians’ records. They took medical histories, and constructed family genealogies. “We got busy,” Wolf said. “We decided to do a preliminary study. We started in 1961. The mayor said — all my sisters are going to help you. He had four sisters. He said, ‘You can have the town council room.’ I said, ‘Where are you going to have council meetings?’ He said, ‘Well, we’ll postpone them for a while.’ The ladies would bring us lunch. We had little booths, where we could take blood, do EKGs. We were there for four weeks. Then I talked with the authorities. They gave us the school for the summer. We invited the entire population of Roseto to be tested.”
The results were astonishing. In Roseto, virtually no one under 55 died of a heart attack, or showed any signs of heart disease. For men over 65, the death rate from heart disease in Roseto was roughly half that of the United States as a whole. The death rate from all causes in Roseto, in fact, was something like thirty or thirty-five percent lower than it should have been.
Wolf brought in a friend of his, a sociologist from Oklahoma named John Bruhn, to help him. “I hired medical students and sociology grad students as interviewers, and in Roseto we went house to house and talked to every person aged twenty one and over,” Bruhn remembers. This had happened more than fifty years ago but Bruhn still had a sense of amazement in his voice as he remembered what they found. “There was no suicide, no alcoholism, no drug addiction, and very little crime. They didn’t have anyone on welfare. Then we looked at peptic ulcers. They didn’t have any of those either. These people were dying of old age. That’s it.”
Wolf’s profession had a name for a place like Roseto — a place that lay outside everyday experience, where the normal rules did not apply. Roseto was an outlier.
2. Wolf’s first thought was that the Rosetans must have held on to some dietary practices from the old world that left them healthier than other Americans. But he quickly realized that wasn’t true. The Rosetans were cooking with lard, instead of the much healthier olive oil they used back in Italy. Pizza in Italy was a thin crust with salt, oil, and perhaps some tomatoes, anchovies or onions. Pizza in Pennsylvania was bread dough plus sausage, pepperoni, salami, ham and sometimes eggs. Sweets like biscotti and taralli used to be reserved for Christmas and Easter; now they were eaten all year round. When Wolf had dieticians analyze the typical Rosetan’s eating habits, he found that a whopping 41 percent of their calories came from fat. Nor was this a town where people got up at dawn to do yoga and run a brisk six miles. The Pennsylvanian Rosetans smoked heavily, and many were struggling with obesity.
If it wasn’t diet and exercise, then, what about genetics? The Rosetans were a close knit group, from the same region of Italy, and Wolf next thought was whether they were of a particularly hardy stock that protected them from disease. So he tracked down relatives of the Rosetans who were living in other parts of the United States, to see if they shared the same remarkable good health as their cousins in Pennsylvania. They didn’t.
He then looked at the region where the Rosetans lived. Was it possible that there was something about living in the foothills of Eastern Pennsylvania that was good for your health? The two closest towns to Roseto were Bangor, which was just down the hill, and Nazareth, a few miles away. These were both about the same size as Roseto, and populated with the same kind of hard-working European immigrants. Wolf combed through both towns’ medical records. For men over 65, the death rates from heart disease in Nazareth and Bangor were something like three times that of Roseto. Another dead end.
What Wolf slowly realized was that the secret of Roseto wasn’t diet or exercise or genes or the region where Roseto was situated. It had to be the Roseto itself. As Bruhn and Wolf walked around the town, they began to realize why. They looked at how the Rosetans visited each other, stopping to chat with each other in Italian on the street, or cooking for each other in their backyards. They learned about the extended family clans that underlay the town’s social structure. They saw how many homes had three generations living under one roof, and how much respect grandparents commanded. They went to Mass at Our Lady of Mt. Carmel Church and saw the unifying and calming effect of the church. They counted twenty-two separate civic organizations in a town of just under 2000 people. They picked up on the particular egalitarian ethos of the town, that discouraged the wealthy from flaunting their success and helped the unsuccessful obscure their failures.
In transplanting the paesani culture of southern Italy to the hills of eastern Pennsylvania the Rosetans had created a powerful, protective social structure capable of insulating them from the pressures of the modern world. The Rosetans were healthy because of where they were from, because of the world they had created for themselves in their tiny little town in the hills.
“I remember going to Roseto for the first time, and you’d see three generational family meals, all the bakeries, the people walking up and down the street, sitting on their porches talking to each other, the blouse mills where the women worked during the day, while the men worked in the slate quarries,” Bruhn said. “It was magical.”
When Bruhn and Wolf first presented their findings to the medical community, you can imagine the kind of skepticism they faced. They went to conferences, where their peers were presenting long rows of data, arrayed in complex charts, and referring to this kind of gene or that kind of physiological process, and they talked instead about the mysterious and magical benefits of people stopping to talk to each other on the street and having three generations living under one roof. Living a long life, the conventional wisdom said at the time, depended to a great extent on who we were — that is, our genes. It depended on the decisions people made — on what they chose to eat, and how much they chose to exercise, and how effectively they were treated by the medical system. No one was used to thinking about health in terms of a place.
Wolf and Bruhn had to convince the medical establishment to think about health and heart attacks in an entirely new way: they had to get them to realize that you couldn’t understand why someone was healthy if all you did was think about their individual choices or actions in isolation. You had to look beyond the individual. You had to understand what culture they were a part of, and who their friends and families were, and what town in Italy their family came from. You had to appreciate the idea that community — the values of the world we inhabit and the people we surround ourselves with — has a profound effect on who we are. The value of an outlier was that it forced you to look a little harder and dig little deeper than you normally would to make sense of the world. And if you did, you could learn something from the outlier than could use to help everyone else.
In Outliers, I want to do for our understanding of success what Stewart Wolf did for our understanding of health.
*If you’d like to finish the book you can either listen to the audiobook posted above or buy it. I’m also happy to lend a copy to anyone who enjoyed this.
So in the last couple weeks there has been a lot of talk about the resurrection of the show “Cosmos“, with Neil DeGrasse Tyson replacing Carl Sagan, who many still feel is irreplaceable. But Carl himself with his fascination with the universe would take offense with the notion that he is the best their will ever be, at least I would imagine. He was ever the optimist.
Well, with many people seeming to feel re-energized with the new beginning of the show it comes at a perfect time that there be a marvelous discovery of evidence for the existence of a Big Bang event. As I am no scientist I am just going to post an article about the discovery, a video about it, and also I am adding the first episode of “Cosmos” with Carl Sagan. I hope you enjoy.
Alan Guth was one of the first physicists to hypothesize the existence of inflation, which explains how the universe expanded so uniformly and so quickly in the instant after the Big Bang 13.8 billion years ago.CreditRick Friedman for The New York Times
CAMBRIDGE, Mass. — One night late in 1979, an itinerant young physicist named Alan Guth, with a new son and a year’s appointment at Stanford, stayed up late with his notebook and equations, venturing far beyond the world of known physics.
He was trying to understand why there was no trace of some exotic particles that should have been created in the Big Bang. Instead he discovered what might have made the universe bang to begin with. A potential hitch in the presumed course of cosmic evolution could have infused space itself with a special energy that exerted a repulsive force, causing the universe to swell faster than the speed of light for a prodigiously violent instant.
If true, the rapid engorgement would solve paradoxes like why the heavens look uniform from pole to pole and not like a jagged, warped mess. The enormous ballooning would iron out all the wrinkles and irregularities. Those particles were not missing, but would be diluted beyond detection, like spit in the ocean.
“SPECTACULAR REALIZATION,” Dr. Guth wrote across the top of the page and drew a double box around it.
On Monday, Dr. Guth’s starship came in. Radio astronomers reported that they had seen the beginning of the Big Bang, and that his hypothesis, known undramatically as inflation, looked right.
Reaching back across 13.8 billion years to the first sliver of cosmic time with telescopes at the South Pole, a team of astronomers led by John M. Kovac of the Harvard-Smithsonian Center for Astrophysics detected ripples in the fabric of space-time — so-called gravitational waves — the signature of a universe being wrenched violently apart when it was roughly a trillionth of a trillionth of a trillionth of a second old. They are the long-sought smoking-gun evidence of inflation, proof, Dr. Kovac and his colleagues say, that Dr. Guth was correct.
Inflation has been the workhorse of cosmology for 35 years, though many, including Dr. Guth, wondered whether it could ever be proved.
If corroborated, Dr. Kovac’s work will stand as a landmark in science comparable to the recent discovery of dark energy pushing the universe apart, or of the Big Bang itself. It would open vast realms of time and space and energy to science and speculation.
Confirming inflation would mean that the universe we see, extending 14 billion light-years in space with its hundreds of billions of galaxies, is only an infinitesimal patch in a larger cosmos whose extent, architecture and fate are unknowable. Moreover, beyond our own universe there might be an endless number of other universes bubbling into frothy eternity, like a pot of pasta water boiling over.
‘As Big as It Gets’
In our own universe, it would serve as a window into the forces operating at energies forever beyond the reach of particle accelerators on Earth and yield new insights into gravity itself. Dr. Kovac’s ripples would be the first direct observation of gravitational waves, which, according to Einstein’s theory of general relativity, should ruffle space-time.
Marc Kamionkowski of Johns Hopkins University, an early-universe expert who was not part of the team, said, “This is huge, as big as it gets.”
He continued, “This is a signal from the very earliest universe, sending a telegram encoded in gravitational waves.”
The ripples manifested themselves as faint spiral patterns in a bath of microwave radiation that permeates space and preserves a picture of the universe when it was 380,000 years old and as hot as the surface of the sun.
Dr. Kovac and his collaborators, working in an experiment known as Bicep, for Background Imaging of Cosmic Extragalactic Polarization, reported their results in a scientific briefing at the Center for Astrophysics here on Monday and in a set of papers submitted to The Astrophysical Journal.
Dr. Kovac said the chance that the results were a fluke was only one in 10 million.
Dr. Guth, now 67, pronounced himself “bowled over,” saying he had not expected such a definite confirmation in his lifetime.
“With nature, you have to be lucky,” he said. “Apparently we have been lucky.”
The results are the closely guarded distillation of three years’ worth of observations and analysis. Eschewing email for fear of a leak, Dr. Kovac personally delivered drafts of his work to a select few, meeting with Dr. Guth, who is now a professor at Massachusetts Institute of Technology (as is his son, Larry, who was sleeping that night in 1979), in his office last week.
“It was a very special moment, and one we took very seriously as scientists,” said Dr. Kovac, who chose his words as carefully as he tended his radio telescopes.
Andrei Linde of Stanford, a prolific theorist who first described the most popular variant of inflation, known as chaotic inflation, in 1983, was about to go on vacation in the Caribbean last week when Chao-Lin Kuo, a Stanford colleague and a member of Dr. Kovac’s team, knocked on his door with a bottle of Champagne to tell him the news.
Confused, Dr. Linde called out to his wife, asking if she had ordered anything.
“And then I told him that in the beginning we thought that this was a delivery but we did not think that we ordered anything, but I simply forgot that actually I did order it, 30 years ago,” Dr. Linde wrote in an email.
Calling from Bonaire, the Dutch Caribbean island, Dr. Linde said he was still hyperventilating. “Having news like this is the best way of spoiling a vacation,” he said.
By last weekend, as social media was buzzing with rumors that inflation had been seen and news spread, astrophysicists responded with a mixture of jubilation and caution.
Max Tegmark, a cosmologist at M.I.T., wrote in an email, “I think that if this stays true, it will go down as one of the greatest discoveries in the history of science.”
John E. Carlstrom of the University of Chicago, Dr. Kovac’s mentor and head of a competing project called the South Pole Telescope, pronounced himself deeply impressed. “I think the results are beautiful and very convincing,” he said.
Paul J. Steinhardt of Princeton, author of a competitor to inflation that posits the clash of a pair of universes as the cause of genesis, said that if true, the Bicep result would eliminate his model, but he expressed reservations about inflation.
Lawrence M. Krauss of Arizona State and others also emphasized the need for confirmation, noting that the new results exceeded earlier estimates based on temperature maps of the cosmic background by the European Space Agency’s Planck satellite and other assumptions about the universe.
“So we will need to wait and see before we jump up and down,” Dr. Krauss said.
The Bicep2 telescope, in the foreground, was used to detect the faint spiraling gravity patterns — the signature of a universe being wrenched violently apart at its birth. CreditSteffen Richter/Associated Press
Corroboration might not be long in coming. The Planck spacecraft will report its own findings this year. At least a dozen other teams are trying similar measurements from balloons, mountaintops and space.
Spirals in the Sky
Gravity waves are the latest and deepest secret yet pried out of the cosmic microwaves, which were discovered accidentally by Arno Penzias and Robert Wilson at Bell Labs 50 years ago. They won the Nobel Prize.
Dr. Kovac has spent his career trying to read the secrets of these waves. He is one of four leaders of Bicep, which has operated a series of increasingly sensitive radio telescopes at the South Pole, where the thin, dry air creates ideal observing conditions. The others are Clement Pryke of the University of Minnesota, Jamie Bock of the California Institute of Technology and Dr. Kuo of Stanford.
“The South Pole is the closest you can get to space and still be on the ground,” Dr. Kovac said. He has been there 23 times, he said, wintering over in 1994. “I’ve been hooked ever since,” he said.
In 2002, he was part of a team that discovered that the microwave radiation was polarized, meaning the light waves had a slight preference to vibrate in one direction rather than another.
This was a step toward the ultimate goal of detecting the gravitational waves from inflation. Such waves, squeezing space in one direction and stretching it in another as they go by, would twist the direction of polarization of the microwaves, theorists said. As a result, maps of the polarization in the sky should have little arrows going in spirals.
Detecting those spirals required measuring infinitesimally small differences in the temperature of the microwaves. The group’s telescope, Bicep2, is basically a giant superconducting thermometer.
“We had no expectations what we would see,” Dr. Kovac said.
The strength of the signal surprised the researchers, and they spent a year burning up time on a Harvard supercomputer, making sure they had things right and worrying that competitors might beat them to the breakthrough.
A Special Time
The data traced the onset of inflation to a time that physicists like Dr. Guth, staying up late in his Palo Alto house 35 years ago, suspected was a special break point in the evolution of the universe.
Physicists recognize four forces at work in the world today: gravity, electromagnetism, and strong and weak nuclear forces. But they have long suspected that those are simply different manifestations of a single unified force that ruled the universe in its earliest, hottest moments.
As the universe cooled, according to this theory, there was a fall from grace, like some old folk mythology of gods or brothers falling out with each other. The laws of physics evolved, with one force after another splitting away.
That was where Dr. Guth came in.
Under some circumstances, a glass of water can stay liquid as the temperature falls below 32 degrees, until it is disturbed, at which point it will rapidly freeze, releasing latent heat.
Similarly, the universe could “supercool” and stay in a unified state too long. In that case, space itself would become imbued with a mysterious latent energy.
Inserted into Einstein’s equations, the latent energy would act as a kind of antigravity, and the universe would blow itself up. Since it was space itself supplying the repulsive force, the more space was created, the harder it pushed apart.
What would become our observable universe mushroomed in size at least a trillion trillionfold — from a submicroscopic speck of primordial energy to the size of a grapefruit — in less than a cosmic eye-blink.
Almost as quickly, this pulse would subside, relaxing into ordinary particles and radiation. All of normal cosmic history was still ahead, resulting in today’s observable universe, a patch of sky and stars billions of light-years across. “It’s often said that there is no such thing as a free lunch,” Dr. Guth likes to say, “but the universe might be the ultimate free lunch.”
Make that free lunches. Most of the hundred or so models resulting from Dr. Guth’s original vision suggest that inflation, once started, is eternal. Even as our own universe settled down to a comfortable homey expansion, the rest of the cosmos will continue blowing up, spinning off other bubbles endlessly, a concept known as the multiverse.
So the future of the cosmos is perhaps bright and fecund, but do not bother asking about going any deeper into the past.
We might never know what happened before inflation, at the very beginning, because inflation erases everything that came before it. All the chaos and randomness of the primordial moment are swept away, forever out of our view.
“If you trace your cosmic roots,” said Abraham Loeb, a Harvard-Smithsonian astronomer who was not part of the team, “you wind up at inflation.”
One of my favorite things about there being a “New Year” is that people get a feeling that they can better themselves, and start over somewhat. In order for the yearly reset button to be worth anything at all there must be need for change, and thus we have a reason to ask ourselves about the past and what should stay the same, as well as what needs to change. This article by Steve Rattner addresses our nation with plenty of wonderful words, but even better he also does so with charts! I hope that you enjoy this, and if you don’t I beg of you to kick yourself.
Looking back on 2013, many of the economic and political themes seemed familiar: a weak economy. Growing income inequality. Gridlock in Washington. Partisan wrangling over fiscal policy. But others, like the disastrous rollout of the Affordable Care Act HealthCare.gov website and the government shutdown, were new or at least revivals. Below are 10 charts to illustrate a depressing first year of President Obama’s second term:
Not only did trends of recent years continue in 2013 – particularly the diverging fortunes of the rich and everyone else — but in some ways they accelerated. The stock market, as measured by the Standard & Poor’s index, was up a stunning 32 percent (through Dec. 27). Corporate profits rose to a record $2.1 trillion. Meanwhile, incomes remained nearly flat and jobs tallies grew slowly. Through Oct. 30, earnings were up just 1.4 percent, an even smaller increase than in 2012. The only relative bright spot for the average American was housing; thanks in part to the aggressive efforts by the Federal Reserve to hold down interest rates, sale prices of homes were up by 13.3 percent in September, compared with a year earlier.
Economic growth — a likely increase in gross domestic product of just 1.8 percent in 2013, after adjusting for inflation — was also unbalanced in other ways, particularly the impact of the government. The nation’s quickly falling deficit (it dropped from $1.09 trillion to $680 billion in a single year) cost dearly in economic activity. Spending by cash-strapped consumers and investment by skittish businesses both grew at slightly below customary rates. A flat-lining Europe dented President Obama’s pledge to double American exports by 2015. On the other hand, home building and related residential activity, depressed since the onset of the financial crisis, provided a second annual lift to the economy.
Employment remained an overarching problem. While job growth has picked up steam in the last few months, the fall’s higher pace of job creation – around 200,000 per month – would still not be nearly enough to bring unemployment down to pre-recession levels. According to calculations by the Brookings Institution’s Hamilton Project, even if the 200,000 jobs per month rate were maintained, the unemployment rate would not fall to the November 2007 level of 4.7 percent for another five years.
Not only has the job recovery been sluggish, but also a disproportionate number of those that have been created have been in lower wage occupations, such as retail clerks and fast-food workers. And that trend is projected (by the Bureau of Labor Statistics) to continue; using a simple average, the 10 job categories expected to add the most jobs during the current decade boasted a collective median wage of $32,386 in 2010, roughly $15 per hour and far below the United States median of $51,892 at the time. Seven of the 10 categories pay below this average. Note the conspicuous absence of manufacturing; it may be recovering, but it isn’t what is driving new jobs.
Wage increases haven’t been paltry because the efficiency of the American worker has flagged; indeed, productivity has continued to chug along. But those productivity gains have simply not been passed on to workers. Between 2000 and 2012, productivity rose by 22 percent while wages increased by 7.7 percent. The divergence was particularly great over the last three years of that period – productivity up 4.6 percent and real wages down 1.1 percent. For this failure of the American worker to be rewarded for his growing output, blame a variety of factors, perhaps most important, globalization, which has allowed companies to move production to whatever part of the planet offers the lowest cost labor. In that respect, American workers remain in a race to the bottom.
The troubles with the Affordable Care Act’s HealthCare.gov rollout sure grabbed daily headlines this fall. But throughout the commotion, little mention was made of the most fundamental aspect of the law: the way in which it raises nearly $2 trillion over the next decade — mostly from wealthy individuals and health care providers — and uses the money to fund the largest expansion in insurance coverage since Medicare was created nearly 50 years ago. As shown above, the end result should be better health care options for those closer to the bottom end of the income scale, through the Medicaid expansion and creation of exchanges with subsidies for most participants. The intended result: 25 million fewer uninsured Americans. Yes, this is redistribution on a grand scale, and we should all be very proud of it. But as evidenced by Obamacare’s consistently poor poll numbers, most Americans are not feeling charitable toward the less well off.
Trust in many American institutions has been declining, but few institutions have fallen so far out of grace as Congress. Last year, I showed that the previous Congress was the least productive Congress in modern times, including the famous Do-Nothing Congress of 1947-48, passing just 238 laws, 37 percent of the average of the 32 Congresses that preceded it. In 2013, the first year of this Congress, the number of new laws passed fell further, to 55 (as of Nov. 30), seven fewer than during the same period in 2011. As a result, Congress now stands dead last in approval rating among key American institutions – far below other braches of government, below news outlets, below banks and even below big business.
Congress well deserves that poll standing, in significant part because of the damage that it has done to the federal budget. The combination of Republican determination to cut spending and Democratic insistence that none of the entitlement programs (such as Medicare and Social Security) be meaningfully affected has resulted in the utterly inane policy of starving key domestic programs, including education, infrastructure and research and development. The recent budget fight and subsequent agreement did nothing to change that trajectory. As shown by the red line above, all that resulted was avoiding the worst two years of forced budget cuts to these programs; for the 10 years beginning in 2008, this important spending will rise slightly in nominal numbers but will fall by 5 percent, after adjusting for inflation.
The dysfunction in Washington has taken its toll in other important ways. Not only has business confidence been shaken, but each new political battle has also been terrifying for consumers. Back in the summer of 2011, when the United States had its AAA credit rating removed by S.&P. after it flirted with default, consumer confidence recorded the second biggest two-month drop ever, behind only the aftermath of Hurricane Katrina. A smaller decline occurred at the end of 2012 when Congress nearly went over a fiscal cliff. Beginning this past July, consumer confidence dropped to its lowest level in nearly two years as a result of the government shutdown, the A.C.A. problems and related battles. Now, a two-year budget nearly in hand, Americans’ moods seem to have improved. At a time when we need consumers to spend (prudently), these periods of faltering confidence have real economic consequences.
In contrast to the mood in most of the country and the still slow economy, Silicon Valley is partying again, albeit not quite like 1999. The Facebook initial public offering in May 2012 helped usher in a resurgence of excitement among investors for anything that looks like a sexy new high-tech service. This year’s poster child I.P.O. was Twitter, which set a new record of one kind among recent major technology I.P.O.’s: its valuation of more than 28 times its revenues. That didn’t daunt investors; the stock promptly more than doubled and now trades at 65 times revenues. (Of course, there are no profits.)
David Brooks is my favorite news paper columnist. He is a very thoughtful conservative who speaks as few do. I actually don’t know of any other authors or columnists who have such a thought provoking approach to life and politics. He has been gone for a few months, which I was actually thinking about this weekend, and here he is again with yet another wonderful article.
In an act of amazing public service, I have not written a column in three months. In the course of that time, I’ve stepped back from politics, a bit, and thought about other things. That naturally raises the question: How much emotional and psychic space should politics take up in a normal healthy brain?
Let’s use one of President Obama’s favorite rhetorical devices and frame the issue with the two extremes.
On the one hand, there are those who are completely cynical about politics. But, as the columnist Michael Gerson has put it, this sort of cynicism is the luxury of privileged people. If you live in a functioning society, you can say politicians are just a bunch of crooks. But, if you live in a place without rule of law, where a walk down a nighttime street can be terrifying, where tribalism leads to murder, you know that politics is a vital concern.
On the other hand, there are those who form their identity around politics and look to it to complete their natures. These overpoliticized people come in two forms: the aspirational and the tribal. The aspirational hope that politics can transform society and provide meaning. They were inspired by the lofty rhetoric of John F. Kennedy’s Inaugural Address. The possibilities, he argued, were limitless: “Man holds in his mortal hands the power to abolish all forms of human poverty.”
The problem with this lofty rhetoric is that politics can rarely deliver, so there is a cynical backlash when the limited realities of government reassert themselves. This inevitable letdown is happening to a lot of President Obama’s supporters right now.
Then there are those who look to politics for identity. They treat their partisan affiliation as a form of ethnicity. These people drive a lot of talk radio and television. Not long ago, most intelligent television talk was not about politics. Shows would put interesting people together, like Woody Allen with Billy Graham (check it out on YouTube), and they’d discuss anything under the sun.
Now most TV and radio talk is minute political analysis, while talk of culture has shriveled. This change is driven by people who, absent other attachments, have fallen upon partisanship to give them a sense of righteousness and belonging.
This emotional addiction can lead to auto-hysteria.
So if politics should not be nothing in life, but not everything, what should it be? We should start by acknowledging that except for a few rare occasions — the Civil War, the Depression — government is a slow trudge, oriented around essential but mundane tasks.
Imagine you are going to a picnic. Government is properly in charge of maintaining the essential background order: making sure there is a park, that it is reasonably clean and safe, arranging public transportation so as many people as possible can get to it. But if you remember the picnic afterward, these things won’t be what you remember. You’ll remember the creative food, the interesting conversations and the fun activities.
Government is the hard work of creating a background order, but it is not the main substance of life. As Samuel Johnson famously put it, “How small, of all that human hearts endure,/That part which laws or kings can cause or cure.” Government can set the stage, but it can’t be the play.
It is just too balky an instrument. As we’re seeing even with the Obamacare implementation, government is good at check-writing, like Social Security, but it is not nimble in the face of complexity. It doesn’t adapt to failure well. There’s a lot of passive-aggressive behavior. In any federal action, one administrator will think one thing; another administrator will misunderstand and do something else; a political operative will have a different agenda; a disgruntled fourth party will leak and sabotage. You can’t fire anybody or close anything down. It’s hard to use economic incentives to get people moving in one direction. Governing is the noble but hard job of trying to get anything done under a permanent condition of Murphy’s Law.
So one’s attitude toward politics should be a passionate devotion to a mundane and limited thing. Government is essential, but, to switch metaphors ridiculously, it’s the stem of the flower, not the bloom. The best government is boring, gradual and orderly. It’s steady reform, not exciting transformation. It’s keeping the peace and promoting justice and creating a background setting for mobility, but it doesn’t deliver meaning.
I figure that unless you are in the business of politics, covering it or columnizing about it, politics should take up maybe a tenth corner of a good citizen’s mind. The rest should be philosophy, friendship, romance, family, culture and fun. I wish our talk-show culture reflected that balance, and that the emotional register around politics were more in keeping with its low but steady nature.
I have been posting articles and charts from Steve Rattner for a while now, and I’m glad that he compiled the most influential and compelling charts of this past year for me. If you feel like you don’t know much about politics or economics I think that Steve Rattner would be a good guy to check out, he knows things…
These charts tell multiple stories which fit within a narrative that belongs to all of us. Things are complicated, and this world has many moving parts. It’s very easy to reconfirm assumptions you might already have, but I would like to ask you why that will benefit you. I would offer to you that believing in the importance of framing ideas with genuine curiosity will limit your anxieties and frustrations, and help you live a happier life. The key word is Nuance. What I mean is this: the charts below have a lot of information, and I can look at them and become fearful of what’s ahead, or I can make sure that I process the information and ask what our options are rather than assume the apocalypse.
I challenge you to look at these charts, and read Mr. Rattner’s commentary and do your own research about the questions that they might inspire. They tend to tell a story of mixed political talking points. They address tax revenue, entitlements, personal wealth in America, and much more. Having moved and made a job change recently I have been in somewhat of an introspective process where I question my life and purpose. I would like to make sure that I’m being fair with my posts, so I’m asking that if you read this to hold me accountable. I will try to provide information that I come across that seems of value, but please believe me when I say that my purpose for posting on here is sincere and based in honesty. Ok, enjoy the charts, they are all pretty fascinating to me.
The weak economy, widening income inequality, gridlock in Congress and a presidential election: Those were perhaps the dominant economic and political themes of 2012. To supplement the torrent of rhetoric, I offer charts to help provide facts and context for the debate around these important issues. Below are nine of my favorites from the past year.
In 2012, the slow recovery dominated both the economic news and the worries of most Americans, but the underlying components of the weak job market were not always fully dissected. In fact, job growth was so paltry in large part because it was so unbalanced. Since the recession ended in June 2009, three key sectors – government, construction and information – that together account for 22 percent of all employment lost more than 1 million jobs. Equally significantly, two of them, government and construction, generally add a disproportionately large share of jobs during a recovery. With government contracting and construction stalled, that did not occur.
The economic boom that peaked in 2007 represented the first time that median real (that is, inflation-adjusted) incomes did not recover to their previous peak before declining into the next recession. More ominously, family incomes have yet to recover, even though the recession ended three and a half years ago. That has brought the total decline in real incomes to nearly 9 percent since 2000. So where has the economic growth from the recovery gone? Much of it has gone to corporate profits, as companies took advantage of the high unemployment rate and the ability to shift production globally to hold down wages in the United States.
The rise in income inequality has exacerbated the decline in median incomes. In 2010, a stunning 93 percent of all income gains went to the top 1 percent of Americans. Also astonishing: just 15,000 households received 37 percent of all of those income gains. In no other period in recent American history have economic gains been concentrated so disproportionately in an elite sliver. (The red bars indicate recessions.)
The explosion of the federal budget deficit since the turn of the century stems from multiple causes, including huge tax cuts in 2001 and 2003 and rapid spending growth in many areas like defense, and later, the stimulus to combat the recession. But no budget-busting factor looms larger than the soaring cost of government-financed health care, particularly Medicare and Medicaid. In addition to driving current and projected deficits, the rise in spending has squeezed the resources available for other domestic programs. Often dismissed as wasteful government spending, these “discretionary” programs include important areas of investment, such as infrastructure, research and development and education. In reducing such investments, we are eating our seed corn.
Large deficits have driven a key ratio – government debt to gross domestic product – to 72.8 percent, from 36.2 percent in 2007. But without new policies, that’s just the beginning. Under realistic assumptions, the debt-to-G.D.P. ratio will rise to more than 80 percent over the next decade. The recommendations of the Simpson-Bowles Commission, if adopted by President Obama and Congress, would have brought this ratio down to 65 percent by 2022. But that plan never was adopted. Even if one of the proposals being debated by the White House and Congressional Republicans, very similar in the impact on the deficit, were put in place, it would only manage to drive down this ratio to 72 percent and stabilize it there – a minimally acceptable goal.
The debate over budget-cutting has touched off fierce emotions on all sides, sometimes at the expense of facts. Take, for example, the proposal to change the cost-of-living adjustment used to calculate Social Security benefits. Rarely discussed in that context is the fact that the current adjustment formula has delivered benefit increases to Social Security recipients that are larger than the wage increases of average Americans – a difference of more than $2,500 over the past 12 years.
That Congress has ceased to function effectively has become an article of faith for most Americans. But the extent of the gridlock on Capitol Hill may not be fully appreciated. Over its two-year life span, the 112th Congress that just adjourned passed just 200 laws, 31 percent of the average of the 32 Congresses preceding it. Even the bills that were passed were mostly housekeeping measures, like laws to name post offices or extend existing laws. Now, some may say, “That’s great. I don’t want Congress to do anything anyway.” I have a different view. I believe that our country has many problems and that our federal lawmakers are paid to help address them.
Another article of faith is that Congress has become far more polarized. That general perception is well supported by a number of academic studies. For example, one researcher, Keith T. Poole, assigned a score to each member of Congress based on his or her voting record. He then calculated an average for Democrats’ and Republicans’ scores and used the difference to create an index. His conclusion was that the House has become more polarized than at any time since at least 1879, and the Senate nearly so.
Nate Silver was not the only statistically based political prognosticator to cover himself with glory during the recent presidential election. The online betting service Intrade did nearly as well. Throughout the ups and downs of a hard-fought campaign season, it remained solidly confident that President Obama would be re-elected. (The October surge in the probability of an Obama victory probably resulted from Mitt Romney’s notorious “47 percent” remark; the subsequent decline for Mr. Obama followed his poor performance in the first debate.) Intrade also predicted correctly the winner of 49 states and 31 of 33 Senate races. Mr. Silver, who writes for The New York Times, relies on statistical analysis of polling data; Intrade is a prediction market, and its electoral forecast is grounded in the widely accepted belief that the views of thousands as to who they think will win (as opposed to whom they support) provides more accurate forecasts than polls do.
I still have my questions about bailouts in general, but I tend to sympathize with the auto bailout much more than the bank bailout, mostly because we’re talking about an actual product rather than financial/imaginary products that are much more subjective in valuation. I mostly recommend watching this because it is about the Auto Bailout, and it’s written by the man who has been in charge of monitoring the whole bailout (Steve Rattner). Please feel free to tell me what you think about this, or any other bailout.
Like Willy the whale, General Motors has finally been freed – or nearly so.
Today’s announcement that the Treasury Department had agreed on a process to extricate the government from its ownership stake in G.M., the world’s largest automaker, is welcome news.
For General Motors, the separation will conclusively remove the appellation of “government motors,” a stigma that the company had argued affected the buying decisions of a meaningful segment of consumers.
The divorce will ultimately also liberate G.M. from a number of government-imposed restrictions, importantly including those relating to executive compensation. These restrictions adversely affected G.M.’s ability to recruit and retain talent. Now, compensation decisions will be made by the company’s board of directors, just as they are in every other public company in America.
From Washington’s point of view, divesting its remaining shares will end an uncomfortable and distinctly un-American period of government ownership in a major industrial company.
Neither the George W. Bush nor the Obama administrations volunteered to bail out G.M., Chrysler and other parts of the auto sector. Both subscribed firmly to the longstanding American principle that government should resolutely avoid these kinds of interventions, particularly in the industrial sector.
However, in this case, that was simply not possible, as Mr. Bush and Mr. Obama both concluded. I and the other members of the Obama administration’s auto task force determined that the industry’s crisis was caused not only by the financial and economic meltdown but, equally, by poor management that had run these American icons into the ground and exhausted their cash resources.
We were faced with a classic market failure: Not a penny of private capital was willing to provide the financing essential for these companies to keep running. Those (like Mitt Romney) who contend that G.M. and Chrysler could have been restructured without government involvement simply don’t understand the facts.
The only alternative to government stepping in would have been for the companies to close their doors, terminate all their workers and liquidate. That would have led to huge failures and layoffs among the suppliers. Even Ford would have had to shut down, at least for a time, because of the unavailability of parts.
Here’s another important lesson of the auto rescue: It would not have been possible without the existence of the much-hated $700 billion Troubled Asset Relief Program.
Without TARP, we could not have provided the $82 billion to these companies without Congressional approval. And given the dysfunction of Congress, I don’t believe there was any chance that the legislature would have acted within the few weeks that we had before the companies would have collapsed.
In a perfect world, I would not be a seller of G.M. stock at this moment. For one thing, the company is still completing the reworking of its sluggish management processes in order to achieve faster and better decisions and lower costs.
For another, G.M.’s financial problems slowed its development of new products during 2008 and 2009. Now, a passel of shiny new models offering great promise is about to hit showrooms.
And in my view, G.M. stock remains undervalued, trading at about 7 times its projected 2013 earnings, compared with nearly 13 for the stock market as whole.
But as my former boss in the White House, Lawrence H. Summers, kept reminding us in 2009, this intervention needed to be the opposite of Vietnam: We wanted to have as small a footprint as possible while the government was a shareholder and to get out as quickly as practicable.
While the government still retains (temporarily) a majority stake in Ally, G.M.’s former finance arm (formerly known as GMAC), the scorecard for the auto rescue is nearly complete.
Of the $82 billion that the two administrations pumped into the auto sector, Treasury is likely to recover all but about $14 billion.
No doubt, bailout haters will focus on this loss of taxpayer money. But remember two key points:
First, the $17.4 billion initial round of bridge loans that was provided at the end of 2008 was necessary only because GM and Chrysler had been utterly derelict in not preparing for restructurings through bankruptcy that were clearly inevitable. G.M., in particular, wallowed in an irresponsible state of denial. Had the companies been properly prepared, the loss of that $17.4 billion could have been avoided.
Second, for $14 billion – 0.4 percent of the government’s annual expenditures – more than a million jobs were saved at a time when unemployment in the Midwest was well above 10 percent.
The auto industry has not only survived but it is flourishing. Car sales, which had sunk as low as 10.4 million in 2009, are now running at an annual rate of more than 15 million. As many as 250,000 new workers have been added. Disastrous past industry practices – from bloated inventories to excessive sales incentives – have been curbed. As a result, G.M. earn more in 2011 than in any year in its 104-year history.
Finally, let’s keep well in mind the most important lesson of the auto rescue: While government should stay away from the private sector as much as possible, markets do occasionally fail, and when they do government can play a constructive role, as it did in the case of the auto rescue.
Well, long story short, I agree with Mr. Rattner again. I think that he’s right that neither side has had a sufficient plan, but that doesn’t make their proposals equal (that would be just too convenient for the Ralph Nader’s of the world, who I actually do like). I think that in the middle of these debates it would have been wonderful to watch real reforms take place. Let’s look at it from a health stand point, as if our nation was a human body – we are having a very hard time trying to stop the bleeding from our wounds after having fallen on our face in a drunken stupor, but we don’t seem willing to stop the drinking that is causing our wounds inside and outside of our body… Does that make senses? We have a broken system, and it can’t get better until we have a discerning decision making body that wants to live and thrive. I have plugged this group multiple times before, but maybe it takes some outside ideas to get things working again, and I think No Labels might be our 12 step program… If for no other reason I encourage you to check out their plans for reform that would help us move forward, especially their plan to Make Congress Work.
– Grady
From All Sides, Fiscal Plans Fall Far Short of What’s Needed
We don’t yet know whether our economy will take the icy plunge off the fiscal cliff, but do we know this: At present course and speed, any budget deal that emerges from the intense brinkmanship now under way would fall short of every sensible ambition for fiscal reform.
Forget about balancing the budget. Forget about paying down any of the government’s $11 trillion of obligations (the debt owed to the public). Nor will the package currently being discussed achieve the minimal target of centrist deficit hawks (myself among them), that of stabilizing the rate in which the national debt is growing in relation to the economy.
Battered by four years of trillion-dollar-plus deficits, this “debt-to-G.D.P.” ratio has climbed from 36 percent in 2007 to 73 percent at present. Halting its rise would require at least $4 trillion of revenue increases and spending reductions (including the nearly $1 trillion of savings enacted last year) over the next decade.
President Obama has put on the table a package that should be commended for its willingness to both increase taxes on the wealthy and at least dent the mushrooming costs of entitlement programs, most importantly Medicare.
But “scored” fairly, the Obama plan would contribute about $3 trillion to lower projected deficits, at least $1 trillion short of what’s needed.
The Republicans are much further from the mark, having not yet even put forward a formal plan. However, none of the intimations from their leaders suggest that their plan will exceed the White House’s in size.
While the Republicans have importantly conceded on the need for tax increases, they’ve vociferously objected to Mr. Obama’s proposed $1.6 trillion in added revenue as excessive. On Sunday, the House speaker, John A. Boehner, said that he would support around $800 billion of new revenue over the next decade, similar to what he offered during budget negotiations with Mr. Obama in July.
And on the spending side, while criticizing Mr. Obama’s proposals as too timid, the policy changes that the Republicans have endorsed – such as raising the Medicare retirement age and slowing cost-of-living increases for Social Security – fall well short of Mr. Obama’s.
Both sides appear more interested in reaching an understanding that avoids the cliff than in achieving the full range of necessary reforms.
And forget about the huge overhaul of our Rube Goldberg tax system and government spending priorities dreamed about by fiscal reformers. What’s likely to emerge will be better described as tweaks, and maybe not so many of those.
The bible of deficit hawks – the report of the Simpson-Bowles commission – now feels quaint, with its talk about rewriting the tax code to eliminate loopholes and lower rates, not to mention its call to revamp federal spending to emphasize investment programs that will aid American competitiveness and growth.
Perhaps a surge of courage will inspire Congress and the White House to embrace more sweeping change.
But the brutal process of stabilizing America’s fiscal problem is so charged with political peril, for Congress and the White House alike, that the willingness to go big and to go bold seems likely only to diminish as the cliff steadily approaches.
I am tempted to write a lot about this article, but I’m going to limit myself. I appreciate that this column addresses that there are many sides of taxation. The biggest debate between Republicans and Democrats on revenue (tax money) increases to close the deficit/debt is whether we should raise rates (possibly not addressing loopholes), or only closing loopholes and not changing any rates. And the battle over the rates is a battle over the rates of a very small portion of people . The Republicans have been suggesting closing tax loopholes to raise revenue, but my biggest question is which loopholes they would close and who would be affected. The Democrats have mostly been suggesting a raise in rates because they don’t think that closing loopholes in our dysfunctional congress is very feasible. I tend to be very skeptical that closing loopholes alone would raise the levels of revenue (probably around 1.2 trillion dollars) that we would necessarily need.
I was very glad to hear Mr. Rattner highlight a few of the main loopholes that have caused room for debate on tax fairness for the extraordinarily wealthy: capital gains/dividends, and the carried interest loophole. I posted the other day about Obama’s Tax Plan (via Steve Rattner) and here is an image to visualize that a little bit before you read the article:
Almost lost in the tug of war over whether the top income tax rate should be 35 percent or 39.6 percent is another consequential tax issue: the proper rate for capital gains and dividends.
It was the absurdly low rate on those forms of income – just 15 percent – that yielded Mitt Romney’s embarrassingly small tax payments. And that’s what also led to Warren E. Buffett’s lament that his tax rate was lower than his secretary’s.
So as we scurry around looking for new revenue to help address the yawning budget deficit, let’s zero in on this special preference.
President Obama has proposed much of the needed adjustment, including eliminating the special treatment of dividends and raising the tax on capital gains to 20 percent for the rich.
Personally, I would go further and raise the capital gains rate to 28 percent, right where it was during the strong recovery of Bill Clinton’s first term, and grab hold of a total of $300 billion of new revenues over the next decade.
Inevitably, a chorus of outrage would greet any such increase. Capital investment would be severely impaired! Some of the wealthy might decamp from America! With a new 3.8 percent Medicare tax on unearned income about to take effect, this would exacerbate the disincentives for investment!
Put me down as skeptical about such dire forecasts. During my 30 years on Wall Street, taxes on “unearned income” have bounced up and down with regularity, and I’ve never detected any change in the appetite for hard work and accumulating wealth on the part of myself or any of my fellow capitalists.
Remember also that corporate leaders have pretty much convinced policy makers of both parties that business taxes should be reformed to allow them to compete more effectively around the globe. Providing this relief makes sense, but since the benefits would flow to shareholders, this is yet another argument for higher taxes on dividends.
Increased revenues, meaning higher taxes, will be a central element of any successful long-term budget plan, and President Obama is right to insist that the wealthy – the slice of America that has come through the recession in by far the best financial health – should provide those funds.
Here’s the math: We need at least $4 trillion of long-term deficit reduction, with a substantial portion – on the order of $1.2 trillion – coming from new revenues.
That means other veins belonging to the wealthy will need to be tapped. Raising the tax rates for American households with incomes above $250,000 per year, as President Obama has proposed, would certainly be a productive and welcome step.
But viable alternative measures are available. At a minimum, we need to implement the “Buffett Rule,” the concept that Americans making more than $1 million a year should pay at least 30 percent of their income in taxes. This wouldn’t raise a huge amount of money – between $47 billion and $160 billion depending on what else is done to rates – but it would reinforce the responsibility of the wealthy to pay their fair share.
The New York Times
Sources: Treasury Department; Tax Policy Center; Joint Committee on Taxation
Another important step toward tax fairness would be to address the indefensibly low 15 percent tax rate on the famous “carried interest,” the fee received by private equity and certain hedge fund investors.
As a beneficiary of the carried interest loophole, I’ve seen firsthand the lack of any difference between the work involved in generating a carried interest and the work done by millions of other professionals who are taxed at the full 35 percent rate.
Another productive area for raising revenue would be limiting deductions available to the wealthy. The highest-income Americans don’t need tax-free health insurance, mortgage interest deductions or deferred taxation on retirement funds.
Mitt Romney himself proposed an efficient and effective approach: just limit the total amount of deductions. Even excluding charitable deductions from this limitation – as I would personally advocate – capping deductions at $25,000 would raise large amounts of revenue, an estimated $885 billion over the next 10 years.
While Mr. Romney called for applying the limitation to all Americans, a fairer approach would be to impose it only on the wealthiest.
These types of tax changes would have the ancillary benefit of defusing a specious argument that conservatives love to make: that raising the top rates on ordinary income would hurt small business.
Certainly no small business can claim to be damaged by a higher rate on dividends or capital gains or by the proprietor’s losing some tax deductions.
So I’m all for raising rates as President Obama has proposed. But in a divided government, compromise is needed, and happily there are other chips that can be put on the table as we bargain over how to raise the needed revenue from the wealthy.
“Until there is a conception of participating in a democratic society, and a conception which is real – not just words and it means that we really are participating in a democratic society, until that’s the case discussion of taxes is fiddling with technicalities, and missing the point.” – Noam Chomsky, ‘An Inconvenient Tax’ (Film)
First of all I have to admit to having added to the title of this article. I added “A Whisper in the Storm” as an homage to how much I enjoyed this article.
Before you go any further I want to encourage you to read the article below… If you don’t have too much time, or you know that you might get bored with me please skip down to Mr. Brooks, I really doubt you’ll regret it.
Believing in something, or being defined by one’s background can often be a point of comfort and belonging. Having identity and individuality can be a very fulfilling thing, but people seem to perceive their individuality as reasoning why they can’t cooperate with others. This is The United States of America’s great identity crisis.
Americans want to be individuals, but they want to do it together, until it’s inconvenient… We have common cause and purpose in this nation, and in this world. Seeking commonalities seems like the best way to coexist. But finding out who you are can be just as important to a persons sense of purpose and worth. I like to classify myself as a social libertarian – which I think is actually much more in-line with the American electorate than either party, but you’d never know it from the 24 hour news cycle or the political gamesmanship we can’t seem to escape. One of the reasons I classify myself as such (as of right now) is that I believe in liberty based on a balance of a very democratically monitored and limited republic, while aiming to not allow my brothers and sisters of this nation and this world to live a forgotten and tragic life.
I don’t agree with Noam Chomsky all of the time, but I do have great admiration for him. His quote above symbolizes part of our struggle in my mind. Bill Maher is also someone who identifies as a social libertarian, regardless of how offensive he can be (I’m particularly don’t like how he makes fun of the middle of the country as he does). This post isn’t about my political philosophy so much though. Instead of going into petty politics (which is what happens anytime you put a face/name to any ideas) I would rather talk about the importance of sticking to talking about ideas.
David Brooks has my complete political admiration in his firm moderate grasp… I know I just said we should talk about ideas and not people, but David is one of the few people who knows how to talk about ideas so clearly that it can’t be personal. He’s good at his job… Before I really knew who he was I actually had the opportunity to meet him at the No Labels national launch, and I actually didn’t recognize him until after I’d spoken with him. He was incredibly kind, even though it was kind of my job at the time to know who he was… Well, this article moves me, and inspires me. Mr. Brooks is critical, and fair about the tone of today in my opinion. He is a moderate Conservative (which seems to be a rare bread in the mainstream anymore), and his words seem to lack all of the talking points that you hear in the main stream of the politics of today. I won’t attempt to explain what he’s trying to say, there’s a reason why he is so revered, he is good at using his own words. So, I would just like to remind you that this is a conservative man who has put into exact words how I feel about this election… I only say that because being from Oklahoma, and living in Arkansas it’s not all that difficult to be accused of being radically liberal, and I don’t think that I am (sorry for making it about me…).
Please, please share this article with your friends or family who are voting angrily (regardless of ideology), or who are seemingly lost in trying to understand what is happening in our country. I hope you enjoy the read, and I’d love (as usual) to get your feedback by whatever means you’d like.
Oh, one last thing. If you are ready to start hearing some voices that want to get our nation to get passed some of our shameful bickering I urge you to check out the wonderful organization No Labels. Perhaps you’ll enjoy their “12 Ways to Make Congress Work”, especially the No Budget – No Pay portion of their proposal.
Jan. 20, 2009, was an inspiring day. Barack Obama took the oath of office and argued that America was in a crisis caused by “our collective failure to make hard choices and prepare the nation for a new age.”
It was time, he said, to end the false choices between the orthodox left and the orthodox right. He called for “an end to the petty grievances and false promises, the recriminations and worn-out dogmas that for far too long have strangled our politics. … In the words of Scripture, the time has come to set aside childish things.”
Obama acknowledged that some people questioned the scale of his ambitions, the scope of his grand plans. But, he continued, “What the cynics fail to understand is that the ground has shifted beneath them, that the stale political arguments that have consumed us for so long no longer apply.”
In some ways, President Obama has lived up to the promise of that day. In office, he has generally behaved with integrity and in a way befitting a man with his admirable character. Sure, he has sometimes stooped to the cynical maneuver. Contemptuous of his opponents, he has given himself permission to do the nasty and negative thing. But politics is a rough business and nobody comes out unsullied.
In moral terms, he hasn’t let us down. If he’s re-elected, his administration would probably remain scandal-free. Given the history of second terms, that is no small thing.
Moreover, Obama has been a prudent leader. He’s made no rash or disastrous decisions. He’s never acted out of some impetuous passion. His policies toward, say, China, Europe and Iran have had a sense of sober balance. If re-elected, he would probably commit no major blunders, which also is no small thing.
But the scope of Obama’s vision has contracted over the years. It has contracted politically. Four years ago, Obama won over many conservatives and independents. But he’s championed mostly conventional Democratic policies and is now mostly relying on members of his own party.
It has contracted managerially. Four years ago, Obama went to the White House with a Team of Rivals — big figures with big voices. Now the circle of trust is much smaller and political.
The mood has contracted. The atmosphere of expansive hope has often given way to a mood of aggrieved annoyance. He seems cagier, more hemmed in by the perceived limitations of his office. The man who ran on hope four years ago is now running one of the most negative campaigns in history, aimed at disqualifying his opponent.
Most of all, the vision has contracted. The arguments he made in his inaugural address were profoundly true. We are in the middle of an economic transition, a bit like the 1890s, with widening inequality, a corrupt and broken political system, an unsustainable welfare state, a dangerous level of family breakdown and broken social mobility.
The financial crisis exposed foundational problems and meant that we were going to have to live with a long period of slow growth, as the history of financial crises makes clear.
If Obama had governed in a way truer to his inauguration, he would have used this winter of recuperation to address the country’s structural weaknesses. He would have said: Look, we’re not going to have booming growth soon, but we will use this period to lay the groundwork for a generation of prosperity — with plans to reform the tax code, get our long-term entitlement burdens under control, get our political system working, shift government resources from the affluent elderly to struggling young families and future growth.
When people say they wish Obama had embraced the Simpson-Bowles deficit-reduction plan, they don’t mean the specific details of that proposal. They mean the largeness that Obama’s inauguration promised and the Simpson-Bowles moment afforded. They mean confronting the hard choices, instead of promising more bounty for everyone with no sacrifice ever.
But the president got sucked in by short-term things — the allure of managing the business cycle so that the economy would boom by re-election time. Instead of taking the midterm defeat as a sign he should move to the center, or confound the political categories, he seems to have hunkered down and become more political. Washington dysfunction now looks worse than ever.
Sure, House Republicans have been intransigent, but Obama could have isolated them, building a governing center-left majority with an unorthodox agenda. Instead he’s comforted the Democratic base and disappointed sympathizers who are not in it.
One final thing. No one is fair to President Obama. People grade him against tougher standards than any other politician. But his innate ability justifies that high standard. These are the standards he properly set for himself. If re-elected, he’d be free from politics. It’d be interesting to see if he returns to his earlier largeness.
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