Social Issues

The resurgence of Gatsby on Wall Street

Posted on by j.giglio

Gatsby mania is back with a new film adaptation of the novel, a music hall version of the book in London, last year’s off-Broadway play and several new books on the protagonist and the author. Perhaps the reason for the buzz around “The Great Gatsby” is that the book is such an accurate reflection of modem America.

Bad guys are often the most interesting fiction characters. Psychologists who claim to know about these things tell us that male readers can’t help admiring fictional bad guys because they have the minerals to go after what they want without being hung up by laws, social rules or moral constraints.

They see. They want. They take. Simple as that.

Female readers can’t help admiring bad guys either, but for different reasons. Deep down, psychologists insist, every woman is attracted to men who seem able to give them superior children. In our rarified social world, “superior” means children who can make themselves rich and celebrated.

F. Scott Fitzgerald’s Jay Gatsby is one of the classic bad guys of American fiction. He runs a successful bootlegging operation- so successful that he’s able to buy a bay-front mansion on the upscale north shore of Long Island, just east of New York City, staff it with servants and a yellow Rolls Royce, and throw enormous parties every weekend – all while circulating artfully mysterious stories about being the lone survivor of an aristocratic West Coast family.

Gatsby is different from most bootleggers. For one thing, he isn’t a standard urban-slum ethnic type like AI Capone. Instead, he grew up in a small Midwestern town and experienced the kind of semi-rural near-poverty that was the lot of so many WASPS in those days.

He burned with a desire to “improve himself’ borne of the popular copy book maxims of the day that promised upward mobility and the American Eden. He took a critical step toward achieving his goal when he became an Army officer during the First World War.

As a handsome young military officer whose down-market penury was hidden by a well-tailored uniform and Army paychecks, Gatsby found it easy to gain entry into the aristocracy’s social world in the small southern city where he was assigned for training. That’s how he met Daisy, the beautiful, callow, capricious daughter of an upscale local family who became the love of his life and personification of all his ambitions.

After Gatsby was posted to France just in time for the Armistice and found his return to the United States delayed by red tape, restless Daisy let herself be married off to the smirking son of an aristocratic Chicago family. It left Gatsby emotionally shattered and driven to make himself as rich as possible by any feasible means so he could “buy back” Daisy from what he convinced himself was a mere “marriage of convenience.”

Hence the lucrative bootlegging business, the mansion right across the bay from the one where Daisy  and her husband live and Gatsby’s made-up stories about his aristocratic background. But all to no avail. His pursuit of the American Dream fails and he is ultimately killed.

If the media is to be believed, Wall Street sharks like Ponzi schemer Bernie Madoff- one of the few who’s actually been sent to prison- are currently America’s leading bad guys. They manipulate other people’s money to serve their own ambitions, oblivious to how the resulting economic disaster has affected ordinary Americans.

Wall Street trickery helped drive America into an economic abyss from which we can’t seem to emerge, despite a Gatsby-like stock market rally. The result is disillusionment with the American dream and its promise of social and economic mobility.

“The Great Gatsby” is a reflection of our own time. The richest one percent received the preponderance of income during the Jazz Age, and the same income inequalities exist in America today. The party of the Clinton-Bush (rhymes with tush) boom years ended long ago, replaced by the Great Recession- just as the Jazz Age obsession with conspicuous consumption ended with the stock market crash in 1929.

The novel stands as an endorsement of Balzac’s comment that “behind every great fortune is a great crime.”

originally published: June 15, 2013

How (not) to address America’s transportation infrastructure

Posted on by j.giglio

Americans have been told with monotony that intelligent investment in transportation infrastructure will help grow the economy and create good paying jobs from both sides of the political divide. Still it’s plain by now that between sequestration and budget cutting to deal with America’s deficits, the country will not do the unthinkable and move aggressively to acquire the additional transportation capacity we need to grow the economy. So we have to consider other courses of action.

In simple terms, we have only three options.

Option 1: Do nothing. Forget about spending huge sums of money to build the new transportation capacity our economy needs. Learn to live with what we’ve got, and stop bellyaching about bottlenecks that diminish our mobility.

Leave earlier in the morning to accommodate a more time-consuming trip to work; have dinner an hour or two later in the evening after the kids are in bed. Make fewer discretionary trips. Spend more time at home watching TV. At least this way we’ll be able to keep more income in our own pockets instead of paying it out in higher prices and taxes to support transportation.

Of course, this assumes our incomes won’t shrink as transportation bottlenecks choke off economic activity, leaving a smaller pie to be divided among more people as the nation’s population increases.

The do-nothing option will force us to pay higher prices for consumer goods and services because of the added costs congestion imposes on their producers. Our reaction to higher prices will likely be to buy less. With consumer spending accounting for 70 percent of the nation’s economy, the result will ultimately be a lower standard of living.

Sharp entrepreneurs will exploit this decline of American society. As Rhett Butler told Scarlet O’Hara in “Gone with the Wind,” “There are as many fortunes to be made from the decline of a society as from building one.”

Let’s keep our fingers crossedthat we can be among the lucky few.

Option 2: Have the federal government move aggressively to deliberately shrink the nation’s economy to a level where its mobility needs can be comfortably met by existing transportation capacity.

The assumption here is that a formal national policy of planned shrinkage can spread the inevitable pain more equitably among the American people. The main focus of this policy would have to be the nation’s top 100 metropolitan areas because that’s where most of the economic action is. They generate three quarters of the nation’s gross domestic product and are home to two thirds of the people. Their dominance as economic engines means the effect of shrinking their economies will spill over to the rest of the nation, placing all but the very rich on a low-cal diet of reduced living standards.

On the other hand, think of the money we’ll save by not paying for elaborate new transportation programs, even if most of the savings quickly run through our fingers to pay the extra costs imposed by a society in decline.

Option 3: Convert our top 100 metropolitan areas into true 24-hour societies so we can make use of existing transportation capacity now lying idle during the hours when most people sleep.

By spreading economic activity more evenly throughout the day, we can effectively acquire new transportation capacity without spending billions to build it. Just like factories that operate three shifts per day so the money invested in their plant and equipment can generate profits around the clock.

Roughly half the people living in each of these 100 metropolitan areas would have to switch from living during the day; working, shopping going to school or religious services and seeking medical attention at night.

Of course, the social engineering needed to accomplish such a transformation would be overwhelming. Some heroic regulation and policing would no doubt be needed to assure the right balance (as defined by government planners) between the day and night-time populations.

But just think how cheaply we could obtain additional transportation capacity this way. It’s for the best, right?

originally published: March 19, 2013

Chaining seniors to poverty

Posted on by j.giglio

The latest deficit-cutting proposal in the fiscal cliff negotiations has seniors up in arms. President Barack Obama and House Speaker John Boehner have agreed to a new measure of inflation that would reduce annual cost-of-living adjustments, or COLAs, for Social Security and other government programs.

The new measure is called the chained consumer price index (CPI). If adopted, it would have far­ reaching effects because annual adjustments to many government programs are based on year-to-year changes in consumer prices.

The change is another assault on the once sacrosanct middle-class safety net. According to the Congressional Budget Office, Social Security payments would be $108 billion less over 10 years with chained CPl.

When certain products become more expensive, consumers switch to cheaper ones. Chained CPI attempts to account for that by looking at purchasing changes over time and linking, or chaining, the data together. For example, if beef prices rise faster than chicken prices, consumers will substitute chicken for beef.

So chained CPI takes spending changes into account, not just the price of goods. Nearly every conversation about using chained CPI is based on the notion that market exchanges are always voluntary, the products equivalent and that the elderly use the same goods as other Americans. They ignore how much more seniors spend on health care, the cost of which is increasing at an alarming rate.

Under chained CPI, annual increases in Social Security payments, government pensions and veterans’ benefits would, on average, be reduced by about 0.3 percentage points annually. For example, next year’s 1.7 percent COLA would be about 1.4 percent.

Changes to ·Social Security are politically delicate because the program touches so many people. Nearly 56 million people -one out of every six Americans -receive Social Security benefits. The program accounts for about 20 percent of the Federal government’s $3.7 trillion in spending.

The average annual retiree benefit is $14,800. Those with lower wages get less and those who had higher wages get more; even Warren Buffett gets a Social Security check.

It is estimated that nearly half of Americans 65 or older would be below the poverty line if not for Social Security; a quarter of the elderly get at least 90 percent of their income from the program. Given their standard of living, many retirees are already making onerous trade-offs.

For a long time, there was more money coming into the Social Security Trust Fund then going out. The surplus was turned over to the Treasury, which promptly spent it.

Still, the Trust Fund is sound until 2036. So why is Social Security even part of the fiscal cliff negotiation? It is not driving the deficit. The gap going forward between revenue and expenditures for Social Security does create problems over the long run, but they are manageable.

If we really want to protect Social Security, remove the $106,800 income cap that results in less than 86 percent of wages being subject to the payroll tax. Economists estimate that taxing incomes over $106,800 would entirely eliminate the projected Social Security shortfall over the next 75 years.

Other common-sense reforms include reducing or eliminating benefits for the wealthy and raising the retirement age to reflect longer life expectancy.

Still better, subject investment gains to the payroll tax. Hedge fund managers’ earnings are taxed at the capital gains tax rate of 15 percent instead of being treated as ordinary income taxable at 35 percent.

All these reforms could be phased in over 20 years. Finally, we have to make Social Security a real trust fund, insulating it from Washington politicians who raid it and use the money for other programs.

These are the adjustments politicians should be considering, not technical tweaks in the cost-of-living formula that are not widely understood and are easily manipulated.

We face trillion-dollar annual deficits and total debt of more than $16 trillion. But the Washington political class is talking about $2.4 trillion in new revenue and spending cuts over 10 years.

Clearly there is much to be done, but we shouldn’t do anything to Social Security right now. That should work because the folks in Washington are awesome at doing nothing.

originally published: December 29, 2012

The American Dream is now a nightmare

Posted on by j.giglio

With national unemployment still stubbornly high four years after the start of the economic crisis, the time has come to ask whether the American Dream of opportunity and increasing prosperity is now out of reach for the average worker. Economists and academics haven’t reached consensus about the underlying causes of long-term sluggish job creation, but technological change and globalization are leading candidates.

There are still 12.1 million unemployed Americans; 23 million when you add those who are working fewer hours than they’d like or are too discouraged to look for work. Include these workers and the unemployment rate remains stuck at 14.7 percent as we continue to slog through the slowest economic recovery since World War II.

Perhaps worst of all, 4.8 million have been unemployed for six months or more; over half of them have been out of work for more than a year. These people suffer not only financial hardship, but also psychic trauma.

Adding insult to injury, about 2 million long-term unemployed Americans will lose their federal benefits at the end of the year if we go over the impending “fiscal cliff.” The $600 billion package of mandatory spending cuts and tax increases that will take effect at year’s end if no deal is reached to avert it eliminates federal benefits. These benefits provide 14 weeks of additional support beyond state unemployment benefits of26 weeks and up to 33 weeks beyond that in states with especially high unemployment.

Genuine understanding of persistent unemployment is more than a numbers game. The unemployed suffer from depression, anxiety and poor self-esteem, as well as the strains financial problems place on family relations. Those with jobs worry that they could be let go at any moment.

The technological revolution has created employment opportunities for many high-skill workers. But at the same time, those who perform more routine activities have been increasingly displaced. This is one reason why there are more than three million job openings in America even as we continue to suffer through high unemployment. And as the cost of technology decreases, firms have an incentive to substitute capital equipment for labor.

Globalization has also created opportunities for some workers but displaced others. Middle-skill jobs are especially subject to this type of labor competition. Inexpensive overseas labor is a temptation many firms cannot resist.

Ironically, some firms that moved production overseas are now bringing it back to America because advanced technology is making it cheaper to produce locally. The result is rising manufacturing output without a corresponding increase in the middle-skill jobs that are the foundation of the middle class.

Taken together, globalization and the technology revolution have wiped out many middle-class jobs and replaced them with positions that demand skilled human capital. The result is increasing pay for higher-skilled workers and decreasing pay for those in the middle. As the labor market becomes more polarized, income inequality rises.

These changes may represent a tectonic shift in the nature of employment in America. As Washington resumes its conversations about how to avoid the fiscal cliff and deal with pressing economic and fiscal challenges, officials may want to give some thought as to how to train Americans for the 21st century.

If we do nothing, we might as well discard Labor Day as a national holiday. If the labor market becomes even further polarized into low- and high-income jobs, we might as well do the same to the American Dream.

originally published: December 11, 2012

The political chasm between the rich and working class

Posted on by j.giglio

We’re often told that the typical third world country is characterized by a small percentage of the population hogging a huge share of wealth and power. Everyone else, the story goes, lives in varying degrees of penury and has little political influence.

For a long time, Americans liked to think of their country as the antithesis of this cliche, but socioeconomic trends over the past three decades are changing that.

It’s generally understood that we live in a time of growing inequality. We now know, for example, that there is a large and growing gap between rich and poor. And money has corrupted our political system so it only benefits a privileged few, resulting in the concentration of political power at the top.

The presidential debates should focus on this subject, but both candidates are too busy shoring up their bases and trying to ingratiate themselves to the precious undecided voters who tip the scales in tight elections. These gladiatorial contests ignore rising inequality and the erosion of the middle class, ambiguously defined as households making an average annual income ranging from $30,000 to $90,000.

Since the mid-1970s, we have seen the living standards of most Americans stagnate. Average wages have remained flat or declined.

Today, the wealthiest 1 percent of American households has a higher total net worth than the bottom 90 percent combined. That same top 1 percent also has more pretax income than the bottom 50 percent.

Income inequality has reached the highest level since the Great Depression and shows no signs of moderating. During the first full year of tepid recovery from the most recent recession, the top 1 percent of earners realized 93 percent of all income gains.

The fruits of our economy flow increasingly to a tiny minority of corporate CEOs, top-tier symbolic analysts in the legal and financial professions, sports stars and entertainment-industry celebrities who can leverage their market power into membership in a new class of super-rich.

Meanwhile, most American families are trying to keep body and soul together, seeing little or no improvement in their living standards, despite the fact the both parents are often working. This is crazy in an economy in which consumer spending is an important source of economic growth.

New research indicates that the growing gap between rich and poor may retard future growth, shortening economic expansions by as much as one third.

The increasing concentration of income has spawned a second Gilded Age. With it comes the ever­ greater ability of the new super-rich class to buy political influence through contributions to increasingly costly election campaigns, endowments for issue-oriented think tanks and control of advertising media.

It all translates into special tax breaks, such as allowing the hedge fund manager who makes millions to treat his or her income as capital gains, or the major corporation making billions in profits to have little or no tax liability. Both are egregious examples of corporate welfare that results from the unholy marriage of big corporations and big government.

Occupy Wall Street and the Tea Party crowd share a common resentment of how big government and corporate America are in bed with each other. They see the fat cats running the show, while they’re getting hammered.

We are told that’s the way the cookie crumbles in an age of international competition, rapid technological advances and the relentless drive to cut short-term costs. Sure, capitalism is unrivaled in its ability to produce material well-being. But no economic recovery is sustainable unless we can distribute its fruits more widely.

Growth is important, but recovery is little more than an illusion unless the economy can produce a more equitable distribution of wealth. That’s why we should insist that the presidential candidates give us practical proposals to help the middle class share in any future economic recovery.

originally published: October 20, 2012

Consider a national pension system

Posted on by j.giglio

During most of our adult lives the value of the stock market and other traditional assets (including owner-occupied houses) followed a roughly upward trend. This instilled in most people an assumption that greatly influenced thinking about employer-sponsored pension plans.  But in recent years, this formula has come unwound. With no sign that conditions will return to the former status quo, it may be time to take a radically different approach.

Middle-class American employees traditionally saved a portion of their income during their working lives to build a personal retirement fund. They would leverage the savings by investing them in low-risk assets whose value would increase over time.

They could do roughly the same thing by selling their homes for a nice profit, then using a portion of the profits to buy smaller, cheaper houses in a low-cost retirement community.

Together with Social Security, these “lifetime annuities” from personal savings and employer-provided defined benefit pensions would enable middle-class retirees to enjoy something close to the same living standard they enjoyed during the later stages of their working careers.

But employers started to control their pension costs by piggy backing on the assumption that employees would save for retirement by squirreling away a portion of their salary and investing it in the growing value of assets like their homes.

This allowed employers to replace their defined benefit pensions with defined contribution pensions, under which they would contribute fixed sums to employees’ 401(k) plans.

And in recent years, several things have wreaked havoc with the traditional arrangement. Since 2008, the credibility of investing has been shattered for most middle-class employees. The stock market’s long-term upward trend has been replaced by chaos punctuated by periodic scandals. Now “safe” investments like treasury bonds, government guaranteed bank savings accounts and CDs, and money market funds pay such low interest as to be virtually meaningless as a means of leveraging personal savmgs.

So the basic mind-set of middle-class employees has returned to what it was in the 1940s and ’50s, when memories of the 1929 crash were still vivid enough to leave them with no confidence in pure financial assets. This helped fuel demand for employer-provided defined benefit pensions.

The collapse of house prices coupled with high vacancy and abandonment rates has wiped out the assumption that home ownership is a safe investment vehicle.

Over a somewhat longer period, purchasing power has stagnated, even as the prices of goods have risen. There is no longer any realistic chance that middle-class employees can offset the absence of personal savings leverage with investments or home ownership. More than likely, they will save even less in an effort to maintain their living standards.

With respect to retirement, middle-class employees face two disagreeable options: Work until you drop or accept forced retirement (from layoff or illness) and be prepared to survive on the lower living standards that employer pensions and Social Security provide.

Surely it’s only a matter of time before the AARP or another organization marshals senior citizens who vote at a high rate to tell members of Congress they must increase Social Security and Medicare benefits. If huge tides of senior citizens are directed to vote for challengers who promise to do right by seniors, is there any doubt about the electoral outcome?

Maybe it is time to create a national pension system that replaces all existing retirement plans and provides everyone with a defined benefit pension, which should be indexed to inflation. It should be fully funded by an initial debt issue and sufficient payments from working taxpayers.

This giant pool of money could then be invested in public and private projects that offer respectable returns and help rebuild America.

Many would view this as another step away from personal responsibility and toward socialism. But this Basic Income Concept was first proposed by no less of a wild-eyed socialist radical than economist Milton Friedman.

Separating employee pensions from the bottom-line pressures employers face by creating a national pension system can restore the fading promise of a comfortable retirement to millions of Americans. At the same time, money paid into the system can be invested to rebuild our country for future generations.

originally published: September 1, 2012

Pension fund safety net doesn’t protect taxpayers 

Posted on by j.giglio

The economic crash that began in 2008 is a triple whammy for ordinary Americans: their jobs, homes and retirement incomes are all at risk.

Too little money has been set aside to keep the promises made by both private- and public-sector pension plans. As a result, the American dream of a golden retirement is fading fast.

Standard & Poor’s estimates that the funding shortfall for corporate pensions and related benefits was $578 billion in 2011.

As bad as that sounds, state and local governments’ problems are even worse. According to the National State Budget Crisis Task Force, public pensions are underfunded by $1 trillion to $3 trillion.

Employers typically offer defined-benefit or defined-contribution pensions. Corporations have gradually closed their defined-benefit plans and replaced them with defined-contribution plans such as 401(k)s, though many still owe money to retirees who were part of the old defined-benefit systems. Most local governments continue to offer defined-benefit plans.

Defined-benefit plans provide post-retirement benefits that are typically a percentage of average salary during an employee’s last few working years. The employer promises to pay a fixed retirement benefit regardless of how the plan’s investment portfolio performs.

When private pension funds cannot meet their obligations, the federal Pension Benefit Guaranty Corp. steps in. This agency guarantees the pensions of about 44 million participants in about 27,000 corporate defined-benefit plans .

The Pension Benefit Guaranty Corp., which is primarily funded by investment income and insurance premiums collected from corporations, pays beneficiaries up to $54,000 annually when a company cannot meet its pension obligations. But the cost of rescuing failed corporate plans has saddled the corporation with a $26 billion deficit.

So who backstops the Pension Benefit Guaranty Corp.? Maybe it is time for the agency to set the insurance premium the way other private insurers and the Federal Deposit Insurance Corp. do. This would avoid a repeat of Fannie Mae.

There is no equivalent of the Pension Benefit Guarantee Corp. for state and local government defined­ benefit plans, which are ultimately backed by taxpayers.

One cause of unfunded pensions is the Great Recession. Pension funds invest in a portfolio of assets whose returns are expected to pay the lion’s share of the plan’s obligations.

The funds commonly assume they will earn 8 percent. With compounding, it is a handsome return. But in this environment, the chances of doing that are between slim and none without shifting portfolio composition toward higher-yielding but riskier assets.

The political class in Washington, D.C., has been less than honest in dealing with the retirement time bomb. Part of the two-year transportation funding bill that was finally signed last month updates the Pension Protection Act of 2006 by increasing the premiums the company sponsors of pension plans must pay to the Pension Benefit Guarantee Corp.

The law allows pension plan sponsors to ignore current interest rates when calculating their obligations and pretend rates are closer to their 25-year average. That means plan sponsors can make smaller pension contributions over the next I0 years.

This will exacerbate the funding crisis, but provide government with a short-term tax windfall. Since firms get a tax deduction for contributions to their pension funds, they pay more taxes if they put less money into them.

As a result, the provision is supposed to generate $9.5 billion for the Highway Trust Fund. The ploy fills the shortfall between current federal fuel tax revenue and projected transportation spending without raising the 18.4-cent federal fuel tax, which has not increased since 1993.

If the pension plan blows up, the Pension Benefit Guarantee Corp. will be the ones to pick up the shortfall. And that, of course, means you.

originally published: August 18, 2012

White-collar organized crime

Posted on by j.giglio

One, two, three strikes you’re out. The chairman, CEO and COO of Barclay’s all resigned in the wake of the bank’s manipulation of the London inter bank offered rate, or Libor. The bank agreed to pay a penalty of about $450 million.

The Libor rate is essentially how much interest banks pay to borrow money on a short-term basis from other financial firms, a process overseen by the British Bankers’ Association, an industry trade group.

Libor, a global benchmark based on a gentlemen’s agreement among major financial institutions, is a reference point for a whole range of securities, loans, mortgages and derivatives sold around the world. According to The Wall Street Journal, the total value of these financial products is as much as $800 trillion, which dwarfs the global gross domestic product of nearly $70 trillion. Libor’ s corruption means consumers, corporations and governments have been paying the wrong interest rate.

Government officials on both sides of the Atlantic are now investigating how many other big banks joined in attempts to manipulate this important interest rate for their own gain. The alleged behavior is similar to falsifying your net worth and salary on a loan application to secure a lower interest rate.

The number of banks participating in rigging the Libor ranges from 16 to 20. Their alleged behavior is reminiscent of the organized crime cartel put in place during the 1930s by managerial genius Charles “Lucky” Luciano (no one called him “Lucky” to his face) and his partners.

This cartel was based on ideas originally developed by advanced management thinkers like New York gambling impresario Arnold Rothstein and Chicago gang leader Johnny Terrio.

They believed the market for traditional criminal gang activities was so large and profitable that there was “room for everybody.” Wasteful competition between rival gangs was unnecessary, foolish and got in the way of maximizing profits.

The cartel was popularly known as the Mafia (which incorrectly implies that it was exclusively Italian). Its activities were based on the “Lansky Principle.”

Meyer Lansky grew up with Luciano on Manhattan’s Lower East Side and helped create the organized crime syndicate. His simple principle, which came from observing gambling rackets as a kid, was that the best way to make money gambling is to run the game yourself.

Isn’t that what the big banks allegedly did in conspiring to fix the Libor rate? We have a large number of firms (families) that roughly coexist within an environment of”mutual cooperation” and share broad common goals. Just like members of an organized crime cartel, these financial institutions understood how to manage a portfolio of various businesses to maximize their overall value.

Regulators are now dealing with the fallout from the alleged conspiracy. It turns out that the Federal Reserve Bank of New York learned about the rate rigging in the summer of 2007. The regulatory pursuit of this conspiracy was, to say the least, not put on the fast track.

This rate manipulation follows multibillion-dollar trading losses at JP Morgan Chase, the Facebook initial public offering debacle and the collapse of the Peregrine Financial Group just months after the failure of MF Global.

Now politicians and the Justice Department are tripping over themselves in hot pursuit of criminal wrongdoing in manipulating Libor. When it comes to pursuing the financial mafia, let’s hope they have more success this time.

Anyone with a library card knows that there have been very few recent prosecutions oflarge U.S. financial institutions and their senior executives. These days, this crowd is the untouchables.

Assuming they are successful, we should forget the tobacco settlement-sized fines, the handcuffs and multimillion-dollar settlements that represent a minuscule percentage of firm profits. The worst punishment you can inflict on these white-collar criminals is not a long prison term.

No, force them instead to spend the rest of their lives living on not more than say $75,000 a year. Too bad we don’t punish school teachers that way. But to crooked CEOs, that’s poverty. And with the multimillion-dollar lifestyles they’ve become accustomed to, it would be the worst punishment of all.

originally published: July 28, 2012

Questionable calculations keep checks small for people who have shrinking options

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As the prolific and insightful author anonymous once said: “The two things you don’t want to see being made are legislation and sausage.” The latest evidence for this same observation is how the federal government manages and calculates the Consumer Price Index.

Looking at how the CPI is calculated shows how inflation is underestimated and denies Social Security recipients full cost of living adjustments, eroding the real value of their Social Security income.

For the uninitiated, the standard CPI is the benchmark measure of inflation calculated monthly by the U.S. Department of Labor’s Bureau of Labor Statistics. Widely used and closely watched, the federal government uses it for multiple purposes. For example, the CPI is the standard means for adjusting Social Security benefits paid monthly to about 56 million Americans. The goal of this cost-of-living adjustment, first paid in 1975, is to prevent a decline in the purchasing power of retirees’ benefits.

However, 35-plus years later, elders and Social Security recipients are being hammered by how government measures inflation. Here’s how.

Let’s consider the inflation rate, a key driver of the CPl. If the federal government mistakenly underestimates the rate of inflation as part of the standard CPI, Social Security recipients receive a smaller earned benefit check than they need to stay even. From Quincy to Carlsbad, Calif., understating inflation means a substantial reduction in retiree’s standard of living. For the feds, understating inflation makes real GDP growth appear higher and makes budget deficits seem smaller.

For starters, in the turbulent decade ofthe 1970s the concept of”core inflation” was invented by the feds by subtracting food and energy in calculating CPl.

The feds argued for this changed definition of inflation because oil and food prices -two large components of the average family’s budget- were rising too rapidly, outpacing the rest of the economy.

Does it still make sense to exclude these two categories? Certainly, food and energy have been going up for quite some time. And fundamental global demand for food and fuel, in particular, have changed dramatically: surely these impact inflation on a consistent basis? Fortunately for our seniors, the core CPI is not used to set Social Security payments.

Then a few vintages ago in the mid-1990s, more changes were made in the standard CPI methodology that understates inflation. Experts argued that when consumers could no longer afford the rising price of a specific product, they would purchase a cheaper substitute. If steak, for example becomes too expensive, the consumer would switch to hamburger. Brand names give way to generics. And so on. So the CPI would reflect hamburger price for consumer meat purchases, not steak. Does this change in methodology reflect price changes? But wait- as with the Ginsu knife- there’s more! The CPI was also adjusted for “quality effects”. So if a car costs 10 percent more, but it is 10 percent higher in quality,  then presto there is no inflation to report. Same if a basic computer is 10 percent faster: a 10 percent increase in the price is not really inflation. Higher prices for gasoline subject to the government mandated use of ethanol are also left out because we get a “quality” improvement from breathing cleaner air.

We could go on but you all catch what the joke is now. When you consider how the CPI is managed and calculated, it raises the basic question never to be mentioned in mixed company: Is it a measure of inflation or is it pure propaganda? To be totally kosher, a combination of Fed policy of keeping interest rates low through the end of 2014 and the likelihood that the CPI understates inflation punishes our seniors. Many of whom are already living close to the ground; chasing certificates of deposit and other safe investment yielding less than 1 percent while their standard of living declines. Indeed, these interest rates are below the rates of inflation. Not only is their income lower but the effects of inflation have eroded their buying power.

Our economy is not just moving slowly, it seems as if it’s trying to grow with the emergency brake on. Perhaps it is time to correct the CPI calculation to give our Social Security recipients what they need for essential items such as food, shelter, clothing, transportation, and medical care. Of course, trying to explain this to our political class in Washington is like trying to explain psychology to someone who has never met a human being.

originally published: July 7, 2012

Colleges are biggest beneficiary of low student loan rates

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The political crisis dujour is U.S. student loan debt which, at more than $1 trillion, is now greater than American credit card debt, according to the Consumer Financial Protection Bureau.

This is the latest of the hardy fiscal perennials we have been dealing with since the 2008 financial crisis. These matters are like food and drink to politicians, the media and the special interests that can be counted on to describe the issue as anywhere from alarming to frightening.

We are told that student loan debt is the next calamity, comparable to the mortgages that created the disastrous housing bubble. Those in the know are “gravely concerned” about this latest “threat to our economic future.” Needless to say, our leaders must “act swiftly and decisively” to stem the tide.

The issue is front and center in Washington, D.C., because the Senate failed to agree on a plan to keep the current federal student loan interest rate of 3.4 percent from doubling to 6.8 percent on July 1. More than seven million loans could be affected by the hike. Both President Barack Obama and former Massachusetts Gov. Mitt Romney support keeping the interest rate at 3.4 percent. The change is estimated to cost the average loan holder between $7 and $25 a month.

In 2007, while we were swimming in a sea of red ink, the folks in Washington- including then-President Bush- cut the statutory 6.8 percent interest rate in half on these federal loans. This provision was to expire in five years. Time is up July 1.

A largely unasked root question is what does keeping federal student loan interest rates do? Does it lead to more student borrowing? What about its impact on costs? Since the 1980s, the cost of college has increased by more than 400 percent while the median income has only increased by 150 percent. Continuing to make federal funds freely available to students makes it easier for colleges and universities to raise their prices year in and year out.

Colleges and universities are arguably the biggest beneficiaries of student loans. In addition to making it easier for them to raise prices, they also increase revenues with no credit risk. Meanwhile, many students graduate with a toxic combination of mountains of debt and dismal job prospects.

Loan default rates are even more dismal. Nearly three of 10 student loans have past-due balances of 30 days or more.

The Senate voted twice last Thursday to keep the student interest rates low, but got nowhere. They rejected competing Democratic and Republican plans to stop rates from doubling because of – you guessed it- partisan bickering over how to pay for it. The “world’s greatest deliberative body” argues about how to pay for $6 billion in annual costs even as it is borrowing $1 trillion this year.

Is this another example of temporary largesse becoming a permanent entitlement, thanks to election-year pandering to a special voting bloc? Do we really need more of this bush league stuff when we should be raising taxes and cutting spending to deal with a $1 trillion deficit and nearly $16 trillion in public debt? The faintly good news is that given the political incentives in this general election year, senators will likely arrive at an 11th-hour bipartisan compromise to increase the federal student loan interest rate subsidies. Both parties will then do an elaborate and extended touchdown dance.

Thank goodness the Senate doesn’t have the pandering equivalent of the NFL’s penalty for excessive celebration. If they did, there might not be any senators left.

originally published: May 31, 2012