#1 – If you were advising President Obama, what would your #1 economic action item be? Ignore political viability, if possible.
On a “big picture” basis I would set an agenda that was clearly moving in a direction of unwinding many/all of the emergency measures that were introduced in 08. For confidence to be restored we have to get the sense that the crisis is behind us. There is nothing that can be done “tomorrow” that can magically restore home values and reduce unemployment. Bernanke will try to save the day with QE-2, but it will not work any better than QE-1 did. A short term benefit at most. Same with fiscal policy. We can have another stimulus and borrow another $1 trillion. That would give us a few quarters more of anemic growth. But after that we would fall off the shelf when the life support ends. Our policies appear to me to be a bridge to no-where. A smooth ride till the end of the ramp and then a crash.
I think the Europeans have it closer to “right” than we do. They are moving in the direction that I think is better if one is looking out five years and asking, “What do we want to look like?” We are headed in the direction of Japan. We will have 1% growth (disaster) and debt to GDP of 150% (death).
But you asked a narrow question. What would I do?
I think we do need a stimulus. But it has to be different this time. We need the private sector to pick up the slack. So let’s give them a chance. I want a one year (18 months?) Payroll tax holiday. That tax is currently 12.4%. For 2011 that tax will be equal to about $700 billion. A very big drag. I want to cut SS by 60% during the holiday. I want the reduction to be shared by workers and and their employers. I would have a ratio of 60% for the workers and 40% for the employers. I want to put $400b in the hands of the private sector. This is money that does not even get collected by D.C.. So the government can’t spend it. I believe that the 150 million American workers will make the best use of that extra $240B. They will spend some of it and they will save some of it. The companies that get a break will also spend it. I would require that the savings that the employers get have to be re-invested.
BUT. This has to be PayGo. This can be done. I estimate that a ~4 year cut of SS benefits for those who are getting checks now but also have taxable income in excess of ~$200k PA is required. I call this the Bill Gates/Warren Buffet tax. These guys do not need the extra 1500 a month SS is paying them. This is a means test. It taxes wealth. I do not like that, but it is necessary. We have to raise revenue.
The percentage of people that this would affect is small. Therefore it is politically “sale-able”. It is a significant change of the rules of SS. But those changes would be temporary. To attempt to make this “fairer” I would give those that lost benefits a tax credit. That tax credit would be available to offset (dollar for dollar) any federal estate taxes that would be due at death. What would this do? It would put more “wealth” back into the hands of the next generation. Everything we do robs from the next generation. This has the opposite impact. It puts more in the hands of our children.
Some would object to this. But my guess is that Bill and Warren and many others who would lose benefits would be happy to do so. Those that would be impacted by this have a great stake in America. These are the ones who have the most to lose if we fall into a debt spiral or a depression. They are getting the money, but only after they are dead.
Trust me. A $400b reduction in PR taxes would be a very effective stimulus. It would work. The economy would stabilize. But it must be paid for. If we just borrow and spend we will have accomplished nothing. Making it PayGo would instill confidence.If confidence is restored markets will improve and interest rates will return to more normal levels. Those that lost SS benefits would rejoice at that result.
Disclosure: I would lose my benefits if this plan were implemented.
#2 – You have written extensively about Social Security. Which aspect of this program do you feel is most misunderstood? How much of a threat are baby-boomers to entitlement programs?
Hmmm. Most misunderstood? There are so many aspect of this that are misunderstood.
The $2,500,000,000 Trust Fund has to be at the top of the list. I typed all the zeros to show just how big the number is. $2.5 Trillion. Hard to think of.
Some say there is no money or assets in the TF. That it was robbed by some prior administration. Many refer to it as a ponzi scheme. Just a fictional accounting scam.
Those on the extreme other side look at this as massive pile of AAA Treasury bonds that will mature and be available to pay scheduled benefits for the next 25 years or so. They think that SS is sound and nothing need be done about it.
Both of these views are wrong in my opinion. The bonds in the TF will be paid on time. They are legally just as sound as those held by the Chinese central bank. We exclude these debts when evaluating our current Debt/GDP ratios. We are doing ourselves a disservice, this is real money that is owed.
But to honor these debts means that the Debt Held By the Public will increase $ for $. That can’t and will not happen. Yes there are real assets, and no they can’t be used without a (my word) disastrous consequence to the bond market. There is a limit to what can be sold. I think we are dangerously close to that limit today. Adding in another 2.5t will make us lose our AAA and our financing cost will go up. We will become Greece.
On the Boomers. They have been the problem for decades. This demographic bulge is probably our most significant medium term challenge. When the boomers were born they created a housing boom. That has not stopped until 2007. 2008 is the first year of the boomers getting to 65 folks. That is not a coincidence. The mcmansions, second and third homes are coming up for sale now. The boomers are downsizing. This will go on for many years.
While the boomers did pay a lot of taxes and funded the surpluses in SS they are now going to start costing us big time. The aging of our population is accelerating. We still have a decade to peak.
If the economy were growing by 4-5% we could afford this transition. But that is the least likely thing to happen. Because of the boomers, we will be lucky to grow at 1.5%. Should that be the case the boomers will sink the economy.
Resources are are scarce. Allocations will have to be made. It will not be pretty. We have the risk of “age warfare”. We may be faced with the choice, “Who do we protect?” The health and education of people 25 and younger, or the health and well being of those over 80. If we are faced with triage we will have to support the former over the latter.
Socially, we may be looking at a bad end for the boomers.
I am a boomer.
#3 – Reports of under-funded pensions at corporate, state, and federal levels are widespread. Are you concerned?
Not my area of expertise. I read the reports as you do. I am certain they are right. We are on a train wreck with this. The problem is that there was an assumption about how quickly assets would grow (8%) and and how big future contributions will be. Both are wrong. The lines are crossing in public and private PFs all over the country.
Cuts will have to be made. But these were promises that were made in ink, so it will not be easy. To a very significant extent this is another boomer problem. I will repeat from above:
Socially, we may be looking at a bad end for the boomers.
#4 – Could you briefly sum up your thoughts on U.S. equities?
Briefly? What a tough assignment.
There are today some excellent investment opportunities in the capital markets. That will be the case every day for the next ten years. But I don’t know what they are and if I did I would not share them. Those that “share” are just selling their book. I am convinced of one thing:
THE “BUY AND HOLD” IS DEAD. DEAD. DEAD….
Thanks to Bruce for taking the time to answer my questions. He’s one of the more level-headed and knowledgeable finance bloggers out there, and has the real-world experience many of us lack.