Are the Best Investment Practices Still the Best Practices? Examining a Model Retirement Portfolio’s Performance from 1999 through 2008

In the 1980s, as pension-based retirement models began to disappear in favor of investment-oriented plans like 401(k)s, more and more everyday Americans began participating in the stock market.

In parallel, doctrines on effective investment practices emerged to guide investors in managing their retirement portfolios. The theory was that, by contributing regularly throughout their careers to a tax-privileged portfolio and following a simple asset allocation strategy, everyday American workers could hope not to “get rich quick” but, rather, to accumulate net worth slowly, end their careers with enough of a nest egg to ensure a comfortable retirement funded by their personal savings and investments rather than corporate pension plans and, eventually, “die rich,” with a decent financial legacy to pass on to their heirs.

Underlying these ideas were some basic assumptions and principles that, starting in the 1980s and continuing into the tech stock boom of the 1990s, were disseminated widely by increasingly popular personal finance gurus in books, television programs, and radio broadcasts:

• Based on its historical performance, it was reasonable to expect that the stock market, over a long period of years, such as a 30-year working life of a middle-class investor saving for retirement, would deliver a rate of return exceeding inflation and outperforming most other investment options available to the average person.
• A repeat of a financial catastrophe of the magnitude of The Great Depression was nearly impossible due to the regulatory measures that had been put in place and the methods, such as monetary policy, that the government had available to respond to an emerging financial crisis.
• Sound investment practices such as dollar-cost averaging and a strategy for allocating investments between equities vs. current income instruments like bonds would give investors good odds of achieving slow-and-steady growth while minimizing risk and smoothing out the volatility of the equity market. According to the theory, an asset allocation strategy would create a disciplined, built-in approach to the old “buy low, sell high” model. When stocks do well, some are sold into cash-like holdings to permanently preserve a portion of the gains. And when stocks drop more shares are purchased at a “value price,” increasing the benefit from an eventual recovery.
• A good way to invest in equities is through a highly diversified instrument such as an S&P 500 index fund, which follows the overall trends of the stock market, smoothing out the volatility and risk of investing in individual stocks or more aggressive mutual funds and, over the long run, outperforming actively managed mutual funds.
• Equities are an appropriate part of an investment mix for a goal, such as retirement or children’s college, that is more than five years out.

These principles seemed to work well for a while, but there were warnings of trouble ahead. The market crash of 1987 brought to an end “the fat years” of the Reagan 80s, shutting down the “yuppie party” fueled largely by defense-oriented technology companies that benefited from the administration’s deficit spending on military projects.

As the economy recovered in the early-to- mid 1990s there were more warnings, such as the drop in the stock market that followed Alan Greenspan’s infamous “irrational exuberance” speech. And at least a couple of television documentaries presented evidence that the stock market could be overvalued, and spotlighted examples from the past of long periods of economic malaise that, if repeated, could easily eat up a substantial portion of the working years of one person saving for retirement. These historical precedents included “The Long Depression” of the 19th century and the imposing stretch of years it took for the stock market to return to its previous highs after The Great Depression of the 20th.

But once the tech bubble started to form, around 1997, most of us seemed to forget these warnings. We were caught up in irrational exuberance yet again, buying into the story that we had entered “a new paradigm” in which rising stock prices didn’t need to be linked to tangible earnings. Then the tech bubble burst, and the market tanked again after 9/11. Since then, throughout the 2000s, the market has been sluggish and tentative. The Dow struggled for several years to get back to the important 10,000 benchmark, and it wasn’t until June 2007 that the S&P 500 finally exceeded its March 2000 high. Yet by December 2008, in the midst of the financial sector’s meltdown, the market had abruptly fallen back to levels close those of the fall of 2002, effectively erasing all the gains of the decade.

In view of this abysmal performance, we must ask whether investment principles like those listed above still hold true -- if, indeed, they were ever true. To gain insight into this question, I created a model retirement portfolio for a fictitious investor who starts out in 1999 at age 50 with a $100,000 investment and manages the portfolio according to the following guidelines:

• Maintain an allocation of the investment in equities based on the formula “100 percent minus your age.”
• Invest the equities portion in an S&P 500 index fund and the remainder in a Ginnie Mae Fund. Ginnie Maes are bonds consisting of pooled, government-guaranteed mortgages. They are recommended by finance gurus such as Bob Brinker as a low-risk instrument with a favorable rate of return compared to inflation and other types of bonds.
• Rebalance annually to adjust the allocations for market fluctuations and for the yearly change in the “100 percent minus age” formula.

So what happens during the 10 years? As the chart above shows, by the end of 2008, the portfolio has indeed grown, from $100,000 to nearly $124,000. But that total is down from a high of nearly $140,000 as of the end of 2007, leaving the total growth for the 10 years at 23 percent, which translates to an anemic annual growth rate of 2.3 percent. The asset allocation formula worked to the extent that it helped preserve growth in spite of the sharp equity drops at the end of 2008. But our fictitious investor, now 60 years old, is faced with a portfolio that has not accomplished much for the past 10 years -- which, after all, could be one-third or more of an investor’s earning life -- toward achieving retirement goals.

Granted, this simple model leaves out much of what the full picture would likely be for a real-world investor who, between the ages of 50 and 60, would hopefully be at the peak of earning power, regularly making dollar-cost-averaged contributions to the fund at an aggressive rate of, say, $10,000 or more per year, and rebalancing more frequently. This would significantly increase the capital base, and the dollar-cost averaging would help smooth out equity fluctuations and allow the investor take better advantage of gains when stocks were up. One could also envision different asset allocation schemes that could have produced greater growth.

In this real-world scenario we would, in spite of the poor performance of stocks, be looking at a portfolio that is much closer to a level at which, if reinvested at retirement in an income-oriented, capital-preserving instrument, it could provide a reasonable supplement to social security and other assets and income sources during retirement.

Nevertheless, the model does demonstrate that, during the current recessionary period and the 10 years that preceded it, equities have not been an exceptional driver of the kind of value growth investors need to build a retirement portfolio that would provide a level of security comparable to that of the pension plans of the past that 401(k) plans are ostensibly intended to replace.

The recommended practices listed above were not sufficient to ensure a growth rate significantly above inflation and other investment options, and the “more than five years out” rule of thumb for investing significantly in equities did not hold true. The results suggest the possibility that we are in a long-term secular bear market of the sort that some of the contrarian voices in the 1990s told us could occur, even though there have been some short-term bubbles and rallies within the period.

It was nice, while it lasted, to think that we everyday Americans could succeed as miniature Warren Buffetts, building our own little investment empires within the tax-privileged confines of our retirement accounts. But, based on what we have learned from the market’s performance over the past 10 years, perhaps it is time for us to push our collective Rethink button with regard to what constitutes an appropriate retirement system. Having existed for under 30 years -- less than the typical span of working years for one individual -- 401(k) plans are too new to be thought of as having any kind of track record, and the confidence we placed in them was based solely on our understanding at the time of what we could expect from equities markets -- an understanding that, based on the past decade, could be highly flawed.

If 401(k) plans are not the answer, then what is the solution? The old system of pensions administered by individual companies faded away for a reason. It is unlikely to return due to its inherent pitfalls, such as the question of what happens to the pensions of retirees when a company goes bankrupt or is acquired, and the inefficiencies of innumerable individual companies managing investment pools to fund their pension plans. But a huge and Byzantine system administered solely by the government is not likely to be a good solution either. With Social Security already in a precarious position, we don’t need an even larger and more lumbering species of the same animal.

The eventual solution will likely lie in a public-private partnership that, benefiting from economies of scale and time, can viably pool and invest pension contributions from numerous employees and the companies they work for. In this scenario, a highly diversified and balanced mix of investments could be made in a variety of instruments, including those that are oriented toward current income as well as equities. The timeline for deriving returns on investments could be much longer in such a model, far exceeding the period of earning years of a particular worker or even the successful lifespan of a typical business.

Taking the longest, big picture view, such as the seven decades since The Great Depression, it would be fatuous to try to argue that the equities market hasn’t performed extremely well. Its flaw simply lies in the fact that the three-to-four-decade earning life of an individual worker may not be enough time to allow long-term gains to compensate for significant short-term losses. But in a large, long-term system designed to serve the needs of multiple generations of retirees, equities would almost certainly have an important role to play as one of a number of instruments in the investment equation.

Such a system would also create the added benefit of portability. Workers moving among jobs with different companies would not need to be concerned about moving their retirement accounts, about waiting periods to become vested in a new employer’s plan, or about the fate of their funds should a former employer become insolvent or cease to exist.

A new system will also almost certainly need to include a re-thinking of what is an appropriate retirement age for the average worker. Since the Social Security system was first conceived, life expectancies and the level of health of older people have increased enough, in the aggregate, that the current 62 to 67 timeframe needs to be reevaluated. For many people today, an expectation of working to age 70 may be not at all unreasonable.

But any reevaluation of retirement age will need to be in a context that provides stronger protections for older workers against discrimination in hiring practices and workplace environments, and to make allowances for the fact that, in the current state of healthcare and medical technology, the health and fitness levels of individuals in their 60s and 70s remains highly variable.

And, of course, all this is easier said then done. The devil will be in the details. A new retirement system will not be quick in coming and, understandably, does not appear to be among the immediate high priorities of the Obama administration as it faces crisis situations on several fronts.

Unfortunately, there may be no easy answer in sight to address, in the near term, the pain that many individuals are feeling now as they face heavy losses in retirement accounts that included significant investments in equities. But it is good to at least see signs of an emerging consensus that a re-evaluation is needed, and the beginning of a serious dialogue on the subject through forums such as the recently launched Retirement USA initiative.

Finally, for average individual investors, hopefully a more sober and realistic understanding of the role of the stock market will emerge. There is nothing inherently wrong with widespread participation of ordinary Americans in the stock market. Having a healthy level of exposure to the stock market is a good thing, as long as we return to a mindset that the stock market is a place to go with “risk capital” that one can afford to lose, and if we learn the fundamentals of how the stock market works and how to evaluate individual equities, or if we use the services of competent professionals who are pursuing realistic growth objectives rather than lucrative sales commissions or impressive but unsustainable short-term returns.

But recent experience suggests that the stock market may not be such a good place to wager one’s entire retirement future.

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• $2.8 trillion lost in market turmoil so far (money.cnn.com)

Sphere: Related Content

Economist Says We're Losing the Private Sector in the U.S.

During a broadcast of The Jerry Doyle Show Saturday evening, I heard Richard Ebling of the American Institute for Economic Research comment on the recently emerged allegations that Fed Chairman Benjamin Bernanke and former Treasury Secretary Henry Paulson strongarmed Bank of America CEO Kenneth Lewis into the acquisition of Merrill Lynch. Ebling said that this incident was a frightening indication that we have lost the private sector in the U.S.

Clearly the full story here has not yet been revealed, so in my judgement conclusions are premature. But, in the meantime, let's play devil's advocate for a moment and flip the argument around.

Given the widely held view that the crisis that made the acquisition of Merrill Lynch necessary in the first place was the result of extreme deregulation that allowed the financial sector to run amok, perhaps the correct view is that, since the Reagan administration, it has been the government rather than the private sector that, in effect, ceased to exist -- in terms of imposing any reasonable level of control over the parameters in which the financial sector could operate.

In other words, due to the extensive influence of business and financial interests over government policies (or non policies) during the past 25 years, government had become, in effect, an extension of the private sector, an instrument to further the interests of those with the resources to influence policy through lobbying, campaign contributions, and so forth.

So one could argue that the incident was one of government taking a measure, however drastic, to compensate for the effects of having surrendered regulatory authority that should never have been relinquished in the first place.

Whether this drastic measure may have constituted any wrongdoing on the part of the government remains to be seen as the facts continue to emerge, and perhaps this story gives further weight to the calls for an independent panel, with subpoena power, to investigate the origins of the financial crisis and the government's initial attempts to manage it. Sphere: Related Content

Department of Labor Reports Seasonally Adjusted Unemployment Claims Up, 4-Week Moving Average Down

The Department of Labor issued a report today showing an increase in seasonally adjusted initial unemployment compensation claims, a decrease in the 4-week moving average for initial claims, and a continued trend of increases in ongoing claims.

In the week ending April 18, the advance figure for seasonally adjusted initial unemployment compensation claims was 640,000, an increase of 27,000 from the previous week's revised figure of 613,000. The 4-week moving average was 646,750, a decrease of 4,250 from the previous week's unrevised average of 651,000.

The advance seasonally adjusted insured unemployment rate was 4.6 percent for the week ending April 11, an increase of 0.1 percentage points from the prior week's unrevised rate of 4.5 percent.

The advance number for seasonally adjusted insured unemployment during the week ending April 11 was 6,137,000, an increase of 93,000 from the preceding week's revised level of 6,044,000. The 4-week moving average was 5,944,000, an increase of 142,500 from the preceding week's revised average of 5,801,500.

For further details, see the full news release. Sphere: Related Content

Progressive Group Says Lending Decline Continues Despite Favorable Bank Earnings Reports, Calls for Independent Investigation

In a statement issued yesterday, the Campaign for America’s Future, which presents itself as a progressive political group, asserted that major banks have employed accounting rules “to obfuscate losses” in recent favorable earnings reports.

The announcement also called for the government to step in and investigate the causes and scope of the financial crisis. While supporting the Congressional Oversight Panel chaired by Harvard Law Professor Elizabeth Warren as “a step in the right direction,” the announcement warned that a more forceful investigation with subpoena power is needed.

“These major banks are carrying toxic paper that they don’t want to mark down, for fear it would reveal just how insolvent or close to insolvent they are,” according to Robert Borosage, Co-Director, Campaign for America’s Future, in a statement in the organization’s news release. “They understandably will do what they can to hide the reality. In recent weeks, we’ve seen accounting standards diluted to aid them in that effort, and now we see accounting dodges to suggest they are on the way back. Meanwhile, actual lending continues to decline.” Sphere: Related Content

Goolsbee’s Comments on C-SPAN Reveal Themes Underlying Obama Administration’s Policies

During a C-SPAN broadcast on Sunday, reporters interviewed Austan Goolsbee, staff director and chief economist of the President’s Economic Recovery Advisory Council, eliciting comments that, both directly and by implication, highlighted key themes driving the Obama administration’s economic policies.

In an a possible attempt to spotlight a contradiction between administration policy and Goolsbee’s past scholarship as an economics professor at the University of Chicago, Associated Press reporter Steve Scully asked Goolsbee to comment, in the light of the Obama administration’s current deficit projections, on a paper Goolsbee published two years ago. The paper asserted that deficit reductions are an important “insurance policy against global economic shocks and over-reliance on foreign lenders.”

Goolsbee clarified that the current policy does not contradict his past scholarship on the role of deficits during emergency situations.

“This economic crisis would warrant large deficit spending by any measure,” Goolsbee said. “The two-year window in which we are in the middle of crisis is absolutely not the time to try to balance the budget. That was one of the terrible mistakes that Herbert Hoover made….”

The view that deficit spending is a crucial government tool in emergency situations is held widely among economists, as is the converse principle that budget surpluses are advisable during a strong economy.

Although responses to questions about the Obama administration’s tax policies were not directly linked during the broadcast to Goolsbee’s past scholarship, the proposal to increase taxes on households earning over $250,000 annually as part of the strategy to reduce the deficit in the coming years is also consistent with his published research.

While many conservatives continue to assert the supply-side doctrine that tax increases on households with higher incomes impact the economy negatively by discouraging investment and “taxing the job creators,” Goolsbee’s research has included findings that policies reducing the tax burden on higher-income groups may not have the desired effect.

For example, a Brookings paper Goolsbee authored with Mihir A. Desai makes the case that the Bush administration’s tax cuts were not effective in stimulating increased capital investment.

Goolsbee has also tied such research findings directly to a refutation of basic supply-side theories, including a column last year in the New York Times in which he asserts that the consensus of academic research makes the Laffer curve look like “a fleeting figment of economic imagination.”

This apparent grounding of administration policies in solid research gives an all the more hollow ring to the shrill voices of many conservative pundits as they continue to blast the administration’s stimulus package and budget, assert incorrectly that government spending created the current crisis, and support a misguided “Tea Party Movement.” Sphere: Related Content

Has Declining Mathematical Literacy in the U.S. Contributed to the Economic Crisis?

The idea that students in the U.S. are behind other major nations in math and science has been discussed widely, and it’s backed up with hard data. For example, a study by the Program for International Student Assessment (PISA), administered by the Organization for Economic Cooperation and Development (OECD), found that 15-year-olds in the U.S. ranked 24th among other countries in math literacy and 26th in problem solving.

It’s telling that the math and science performance of students in the U.S. seems to decline as they progress through school and as the expected skill-set advances with age group. Elementary students test about on par with international peers, but in middle school they fall behind, culminating in the troubling results for the 15-year-olds in the PISA study.

Talk of problems with math and science education in the U.S. is nothing new, having emerged as a topic of attention in the media at least as far back as the 1970s. As a long-term issue, it raises the question of what has happened as students with inadequate mathematical literacy and problem solving skills have advanced into college and on to professional life.

I don’t currently have data to back this up, but it would seem that the students who do come out of high school with a strong grounding in math would gravitate toward the more math-intensive subjects like science, engineering, and biomedicine. For the rest, that leaves the less mathematically rigorous majors like business and liberal arts, in which students can struggle through the most basic required college math courses and then move on to advanced coursework in their chosen majors.

By extension, this would mean that some graduates less skilled in mathematics may have moved on to careers in fields like financial services, which, in turn, is problematic when you consider the increasingly complex nature of the financial instruments that have emerged over the past 20-30 years.

One such instrument is the securitized pool of subprime mortgages, which, now infamously, investors were allowed to purchase at 30-to-1 leverage. What does this mean, mathematically, and what level of math does it take to understand it?

As one of my math professors was fond of saying, the best way to understand something is to take “the simplest example,” so that’s what we’ll do. Let’s say I have $10 to invest, and I am allowed to invest it at “30-to-1 leverage.” Leverage is really a euphemism for debt. If I can invest my $10 at 30-to-1 leverage, it means essentially that I can use my $10 as collateral to borrow $300.

So let’s say I do that, and I use the borrowed $300 to buy a security consisting of 300 $1 loans (as I said, this is a simple example). For each year it’s outstanding, simple interest of 5 percent is payable on each $1 loan. Thus, for the first year, I can expect a profit of $0.05 on each of the loans, or $15 -- a handsome return, made possible by 30-to-1 leverage, of 150 percent on the 10 dollars of my own cash that I put up as collateral. My budget for the year is based on that expected return, including payments on the $300 I borrowed to buy the security, along with any other expenses -- after which, hopefully, I will retain a decent profit margin.

However, let’s assume everything doesn’t go quite as planned. I receive my interest payments on 285 of those loans, for a return of $14.25. But 15 of the borrowers, or about 5 percent, default. Here are the consequences:

• I’ve incurred a shortfall of $0.75, or 5 percent, on my budgeted revenue for the year, from which my expenses and profit margin were to have been derived.
• I’m now on the hook for the $15.00 in bad debt. If I can’t collect, the first $14.25 of that loss eats up the interest revenue I received, and the other 75 cents adds to the loss on my original $10.00 cash -- now 7.5 percent -- and that’s before paying my expenses, including the payments on the $300 I borrowed to buy the security.
• I would now do my best to mitigate this devastating loss, laying off staff and cutting other expenses, and filing claims with any company that may have insured me against losses. And so the cycle of crisis begins, with losses passed through the system from one stakeholder to the next.

This is a very simple model of what happened in the subprime mortgage crisis, and it illustrates how leverage has as much power to magnify losses when things go wrong as it does to magnify profits when things go right.

For the current discussion, it’s noteworthy that the math I used here is very simple -- using ratios and percentages to calculate expected interest, returns, etc. No advanced math is required -- no algebra, certainly no calculus. It’s elementary-school or at most middle-school stuff. It’s the sort of math that the cohort of fifteen-year-olds in the PISA study should have mastered well.

So how could this crisis have been allowed to happen? Did too many people in the financial community -- not to mention the grass-roots consumers who were taking out mortgages, negotiating home prices, and investing in the stock of banks that were issuing risky mortgages -- lack the math skills to comprehend the possible consequences? Or were they blinded to the magnitude of danger by the lure of potential profit?

While only simple math is required to see the inherently questionable risk in such a highly leveraged investment, there are other factors to consider when evaluating an investment, such as:

• How accurate are the valuations of the assets underlying the security -- the accuracy and stability of home prices, in this case
• How accurate are the assessments of the ability of the borrowers to repay, and of their default probability

These two considerations require somewhat more complicated math. Analyzing valuation accuracy, risk of loss, and default probabilities enters the realm of actuarial science and is highly vulnerable to any flawed assumptions or inaccuracies in the input data (garbage in, garbage out). Among such data flaws could be widespread misrepresentation of borrowers about their incomes, or prices that have been distorted by a speculative bubble. The results of an actuarial analysis should price the level of risk into the cost of the security and measure the risk, in terms of factors like expected default rates, against the expected return. But any inaccuracies in the original data or assumptions can lead to a misinformed decision.

If we look in this context at how the subprime mortgage crisis could have been allowed to occur, we see only a couple of explanations: (1) not enough people understood the math well enough to see what could go wrong, and/or (2) those who saw the potential for disaster (and, yes--there were a few lonely, expert voices crying in the wilderness) didn’t speak up loudly enough or act decisively enough.

Or, perhaps more plausibly, the explanation could lie in some combination of the two factors. If so, the level of math literacy throughout society is even more important. If enough everyday homeowners, mortgage underwriters, investment bankers, and others throughout the population of stakeholders understand the math, they are more likely to make better decisions that would counteract the impact of those who may be capable of understanding the danger but, out of whatever motivation, are at best in denial or at worst deliberately ignoring it.

This is why it’s good to see that math and science education are among the priorities of the Obama administration. Combined with the greater public attention the crisis is generating to finance and economics, an increased level of mathematical sophistication throughout the country could lead to a future of better financial decisions by all stakeholders, from the boardrooms of the financial sector to grass roots consumers on Main street. This would make future crises of this magnitude far less likely. Sphere: Related Content

Small Business Lending Indicators Rising, Analytics Firm Reports

SAN DIEGO (April 17, 2009) — Increased activity in an online service that connects business borrowers and lenders indicates that the small business loan market may be showing signs of recovery.

Edgeware Analytics, a provider of analytics and marketplaces for small business credit, reports an increase of 60 percent in applications from banks for membership in its Small Business Loan Exchange (SBLX) platform since President Obama’s March 16 speech on financing for small businesses.

Another sign that a turnaround may have begun in the small business credit crunch, a major factor in layoffs in the current economy, is that loan approval indications in the SBLX platform increased more than 300 percent.

For further details, see the full press release from Edgeware Analytics. Sphere: Related Content

Deep-Rooted Fear of “Freeloaders” in American Culture May Have Shaped Our Economic Safety Net Policies

When you contemplate the number of American families that have been affected by job losses in the current economic crisis, it’s staggering to consider that, at the beginning of the Great Depression, the nation had no unemployment compensation system to minimize the suffering created during the down-ticks of market cycles.

The reasons why such social policies are relatively recent developments can in part be understood in the relatively simple context of a gradually evolving enlightenment within our society of how working class people should be treated. In this view, social programs like assistance for the unemployed emerged over time for the same reasons as did other protective measures, such as child labor laws, overtime payments, occupational safety regulations, and environmental protections.

As societies shifted away from a primarily agrarian way of life to a more commercially and industrially centered culture, and as the scope of organized business and large markets expanded, awareness gradually increased of the potential harm, as well as good, that organizations and markets could do when left to their own devices. It’s fitting that Adam Smith’s metaphor for the market mechanism was “The Invisible Hand” rather than, say, “The Invisible Mind,” because the metaphor can be extended to help us understand an important fact about markets: a hand, unlike a mind, has no conscience.

So it took time for society to come to grips with “the Dickensian aspects” of the industrial revolution and realize that the impersonal machinations of the market required some prosocial checks and balances. In this view, it’s not too surprising that we were already nearly one third of the way through the 20th century before there was a federal unemployment compensation system.

However, another dimension worth considering is that, in the United States, an additional factor may be at work that has influenced why our safety nets protecting citizens from the vagaries of business cycles are arguably more limited than in some other countries: a fear of “freeloaders” that dates to our colonial origins here in “The New World.”

Many of us can recall, from our elementary school history lessons, the stories of problems in early colonial outposts like Jamestown and Plymouth with people who did not want to pull their fair share of the weight in dealing with the harsh conditions that an unforgiving climate and environment imposed on the settlers, leading to the implementation of strict “no work, no eat” policies.

Given the conditions, the mindset is entirely understandable. But, in or relatively young nation, the mindset appears to continue as a salient component of our cultural memory. Fear of freeloading remains strong even today, evidenced by continued hostility toward groups such as welfare recipients, who, at least in some demographic segments, are still demonized as the cause of a supposedly excessive tax burden, in spite of the fact that such social programs comprise a relatively small proportion of the federal budget. Hostility toward the so-called welfare state may in fact be the result of a political straw-man created during the Reagan era, but the resulting attitude persists among many people.

In “The Old World,” on the other hand, cultural memory of a life as raw and “close to the elements” as that experienced by the initial North American colonists is far more distant. Could this partially explain why, in certain European countries, for example, the social safety net is more extensive, and the reality more accepted as a “necessary evil” that a certain percentage of the population may take advantage of the system and “live off the dole,” so to speak?

The current economic crisis may call for a closer look at this issue, in keeping with the ideas of some thought leaders in economics who, like the Nobel Laureate Paul Krugman, favor markets that are as free as realistically possible while also advocating more robust social safety nets than those that currently exist in the U.S. Sphere: Related Content

Beyond the Official Unemployment Numbers: Rutgers Survey Finds Wide-Ranging Distress

A new Work Trends survey by the Heldrich Center for Workforce Development at Rutgers University finds the American worker in a state of deep distress due to the economic downturn. Nearly a third (32%) of those in the labor force believe the United States economy is in a depression, and half (53%) think the economic problems indicate the economy is undergoing fundamental and lasting changes.

Job losses are widespread. Nearly one quarter (23%) of workers say they have been laid off from a full- or part-time job in the past 3 years. Four in ten workers (42%) have watched co-workers get laid off over the last three years. Nearly a third of workers (29%) expect layoffs to occur in their workplace in the next 12 months. Only 11 percent say they have a great deal of confidence in the American banking system.

“Americans are experiencing the severity and depth of this recession on a daily basis,” says Carl Van Horn, Ph.D., Director of the Heldrich Center for Workforce Development and Professor at Rutgers University. “And they are not optimistic about the future job market either.”

Since the last Work Trends survey conducted in May 2008, perceptions of economic conditions have significantly declined and workers express significant concerns. Compared to the 2008 Work Trends survey, The Anxious American Worker, Americans in the labor force have become significantly distressed about keeping their jobs and are pessimistic about new job prospects.

Nearly 7-in-10 (67%) workers are now very concerned with the unemployment rate, compared to 5-in-10 (46%) workers in 2008. Nearly half of the labor force (49%) is now very concerned with job security for those currently working, compared to a third (32%) in 2008. And nearly 7 in 10, or 68% of respondents, say they are very concerned about the job market for those looking for work, up 20 percentage points since last spring (48%) .

The national survey was conducted March 19-29, 2009, among 700 adults in the labor force, defined as those working full- or part-time jobs or unemployed and actively seeking employment. Amid the stress of layoffs, lack of job security, loss of retirement savings, and the dismal job market, the survey depicts American workers stunned by the direness of the country’s economic situation.

For further details, see the full press release.

Sphere: Related Content

Greed Reconsidered

Two threads of thought that might at first blush appear to be unlikely bedfellows converged in my mind yesterday as I scanned the latest news and commentary on the economy. And their convergence drove me to take a look at the current crisis from a more overtly moral perspective than I had previously.

The first thread came from President Obama’s remarks at Georgetown University, in which he made the most direct and wide-ranging moral pronouncements about the crisis that I have heard from him to date (although it’s quite possible that he has done so before and I just missed it). He said that the current recession “was caused by a perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main Street.”

Those are strong words, and they reflect a courage that, in my opinion, is one of the markers of a true leader: the courage to tell people — especially people who have the power to determine one’s continued status as a leader — things they may not want to hear.

By openly pointing to Main Street’s share of the blame, rather than foisting it all on easily demonized targets like overcompensated AIG executives, the President is telling the very rank-and-file voters who elected him that they share in accountability for the crisis. That takes courage, and if anyone can cite an example of a President showing that kind of courage in recent memory, I would certainly like to hear about it.

President Obama went on to recount the widely-reported story of how the crisis all started in the housing market, with people from all levels of the financial food chain — from the everyday homebuyer fudging income figures to take out a so-called “liar’s loan,” all the way up to the investment bankers that bought the securitized mortgages — succumbing to the temptations of easy credit and easy profit.

One could argue that greed, per se, wasn’t necessarily the motivation at all levels of the food chain. For example, one might say that, for homeowners, wishful thinking rather than greed was the driver — wishful thinking that there really was legitimate underlying value behind the run-up in housing prices. Or gullibility in believing all the financial pundits who told us that the housing bubble wasn’t a bubble, and that the increasing prices were driven by a true scarcity in real estate markets.

But after thinking it through, I concluded that to deny the role of greed, even in these scenarios, is to misunderstand and underestimate what greed really is. In everyday life, greed is more subtle than we may consciously realize. It’s not as blatant as the melodramatic, wicked-grin and hands-rubbing-together image that the word greed can evoke. Greed in everyday life isn’t Gordon Gecko greed. Rather, it’s the more subtle lure of gain without pain, the part of us that’s always on the lookout for that one get-rich-quick scheme that might really work, the part of us that might really want to believe that there could be a way, after all, to earn huge profits stuffing envelopes in our spare time.

The second thread of thought came from an article by Al Mohler of the Southern Baptist Theological Seminary, republished yesterday by ChristianityToday magazine: “A Christian View of the Economic Crisis: Is the Economy Really Driven by Greed?”

Mohler prefaces his comments with the qualification that the profit motive driving economic markets is not, in and of itself, a greed-driven motive. Rather, he writes that greed enters the picture “when individuals and groups … seek an unrealistic gain at the expense of others and then use illegitimate means to get what they want.” Among the manifestations of this scenario are the motivations that drive investors, in the midst of an emerging bubble, “to take irrational risks.” And that, of course, is what the current financial crisis is all about.

The comments from both Obama and Mohler are sobering and suggest that many of us who might initially have thought of ourselves as innocent victims rather than causative agents of the crisis might be due for a little soul searching, such as middle-class homeowners who experienced, from the housing bubble, a windfall that is now being counterbalanced by recession-driven losses elsewhere. Markets are collective entities, and their behavior, in the aggregate, can seem impersonal. But we must never forget that they are, ultimately, driven by the decisions and actions of individuals.

As Mohler writes, more individuals, from more walks of life, are participating in investment markets today than at any other time in history. That means more of us should probably take some time out for a period of self-examination of our own accountability for what has happened.

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Rethinking the U.S. Retirement System

For most Americans currently in the private-sector workforce, pension-based retirement models are now all but non-existent. Though certainly not without flaws, pension plans provided many retirees a level of security that is now, for most workers, a distant memory of something that was available to their parents' or grandparents' generations.

Yet the current recession is putting the spotlight on serious pitfalls of 401(k) programs and similar investment-based retirement plans in which workers for the past three decades have been staking their future hopes. And Social Security, which was never intended in the first place to be more than a bare-bones supplement, may also be headed for a crisis.

In this context, the possible need to re-think the retirement system in the U.S. is emerging as an important issue. So important, in fact, that four major nonprofit organizations — the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, the Pension Rights Center and the Service Employees International Union (SEIU) — have joined forces to launch Retirement USA, an initiative advocating for a new retirement system that, in conjunction with Social Security, would provide universal, secure, and adequate income for future retirees.

Ross Eisenbrey, vice president of the Economic Policy Institute, said, “The current private retirement system is failing most Americans. More than half have no employer-provided retirement plan and most of those who do are woefully unprepared as they near retirement. 401(k)s can’t do the job.”

Launched last month, the Retirement USA initiative centers on a set of core principles that include such concepts as:

• Shared responsibility among employers, employees, and the government
• Pooled assets that are professionally managed
• Payouts only at retirement
• Benefits that are portable from job to job

The organization is currently collecting proposals, which will be examined at a conference this fall, for a new retirement system. Retirement USA has also published a working paper that reviews problems with the current retirement system in the U.S. and outlines principles for a new system. To establish a comparative framework, the working paper also examines retirement systems in other countries.

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Samuel Hutchison Beer, Harvard Political Science Scholar, Dies at 97

Samuel Hutchison Beer, a noted Harvard University political scientist, died at the age of 97 on April 7, 2009.

For years, Beer was the world's leading expert in British politics, but he also studied the American political system, and was active in American politics as a lifelong Democrat and chairman of Americans for Democratic Action from 1959 to 1962. He worked on the staff of the Democratic National Committee and as occasional speech-writer for President Franklin D. Roosevelt in 1935 and 1936. He was a reporter for the New York Post in 1936 and 1937 and a writer at Fortune magazine in 1937 and 1938.

After his wartime duty as captain in artillery, Beer served in the U. S. military government in Germany in 1945. While at Oxford he traveled to Germany and noticed the rising threat of Nazism; after the war he was able to pursue his interest in the question of how so civilized a country, governed as a democracy, could lose so much.

When he returned to Harvard to teach in 1946, he gave a course on that topic and became the leader of an approach to comparative government that made sense of facts through the ideas of political, social, and economic theory. He began a Harvard course, "Western Thought and Institutions," that was as much history as political science, and as much political theory as comparative government. He continued this famous course for over 30 years, to the benefit and admiration of thousands of Harvard students.

Beer's first book was The City of Reason (1949), a study in the tradition of Oxford idealism that sees the reason inherent in human things rather than hovering above and critical of irrationalities. Avoiding the vague complacency of such a view, he launched the thorough study of British politics that made him celebrated in Britain as the man who knew their politics better than they did. In 1965 he published the book that secured his reputation, British Politics in the Collectivist Age, combining an analysis of postwar British socialism with the hard facts of political parties and pressure groups.

His study of American politics was crowned by the publication of his major work To Make a Nation: The Rediscovery of American Federalism in 1993. In it he stressed the original national purpose behind the idea of states' rights, often abused to diminish the American nation.

Always a partisan outside but never inside the classroom, Beer took a leading role in opposing the student rebellion of the late sixties at Harvard, criticizing the politicization of universities. In 1998 he also criticized the politicization of impeachment, testifying to the House of Representatives in the case of President Bill Clinton. Sphere: Related Content

The New Austerity: How Long Will It Last This Time?

According to a column in the Washington Post, “a growing number of Americans have acquired a voracious appetite for tips on, among other things, how to slash grocery budgets, or how to throw a child's birthday party for under $25, or how to save thousands annually by changing one's own oil, hanging clothes to dry, carrying bag lunches to work, and other everyday lessons in leaner living.”

Before quoting that column, however, I left out one vital piece of information: it was published more than 16 years ago.

You see, those of us who are old enough to have experienced more than, say, one or two recessions that occurred before the current one, can remember (or at least should remember) that something like this, though perhaps not quite of this magnitude, tends to happen around once each decade.

Some big financial catastrophe, like an energy crisis, a savings & loan crisis, or a speculative bubble, causes the stock market and the underlying economy to tank and, suddenly, conspicuous consumption is shunned; frugality becomes hip; coupon queens appear as guests on daytime talk shows, demonstrating techniques that supposedly sometimes even allow them the pleasure of receiving rather than giving money at the grocery checkout; numerous books with titles like How to Live on Nothing materialize from the ether and roll off the presses; and pop-finance gurus suddenly start saying things like “No, silly -- you should never view your home as an investment. It’s a lifestyle choice.”

Yes, folks. Although, due to youth or other factors, not all of us may realize it, what we’re watching right now is a rerun. And the original airdate was not even from last season, by a long shot.

But we Americans, unfortunately, are often viewed as being infamous for our short memories. Just a short time after the years in the 1970s of waiting in line for hours at gas stations and rationing based on whether your license plate number ended with an odd or even digit, here we were driving ginormous SUVs as if OPEC had never existed. For around 25 years, gas prices in the U.S. fluctuated inside a relative comfort zone between $1.00 and $1.99 per gallon, and everyone was happy until the big psychological threshold of two bucks started to break.

And just a few short years after the recession of the early 1990s that ushered in, along with a buyer's market in real estate, “the new frugality” referenced in the Washington Post column I quoted, the conspicuous consumption party was on again. Twentysomething entrepreneurs were spinning lame online business concepts into multi-billion-dollar IPOs, and suddenly the homebuilding industry couldn’t throw up enough fiberboard McMansions to keep up with demand. The guy delivering your pizza was making money day-trading telecom stocks. And no one thought it was a bubble until it was too late.

Is the current recession deep enough, different enough, painful enough, and scary enough to make our memories longer and change our habits, for the better, for the long run? Next time around, will enough of us, finally, be sufficiently savvy to spot the signs of an emerging bubble before it has a chance to destroy trillions of dollars in capital and vaporize millions of jobs? Or will we once again fall victim to the fallacy that “it’s different now -- this is a new economic paradigm?”

Only time will tell, of course. But history teaches us that, unfortunately, like students who manage to ace exams by cramming the night before, we’re not very good at long-term retention of our lessons. Sphere: Related Content

Experts Say Jumping the Gun on Layoffs Could Hurt Companies During Recovery

Like cutting marketing budgets, layoffs are one of the most common, immediate responses of businesses to an economic downturn. The negative impact on companies of reducing marketing budgets during a recession has been well documented in the business literature. And now, experts are weighing in with assessments that workforce reductions, too, may do companies more harm than good.

Quoted in an April 7 story from the Associated Press (AP), University of Central Florida economics professor Sean Snaith, who also heads the Institute for Economic Competitiveness at the university, cautioned that workforce reductions during the recession could handicap the ability of companies to benefit from the recovery once it begins.

The AP story also reports that, although more than 70 percent of companies have resorted to layoffs during the current recession, more companies than in the past are pursuing alternative cost-saving measures due to the known negative impacts of layoffs.

Among examples cited in the AP story of companies that are avoiding layoffs is Costco Wholesale Corp. (NASDAQ:COST) which, in spite of a more than 25 percent decline in profits, has not pink-slipped any permanent employees. Sphere: Related Content

Obama Administration Should Take More Direct Action to Reverse the Layoff Tsunami

The March jobless report, which shows no sign of a letup in the increasing monthly pace of job elimination, is alarming. Even more alarming are the recent comments by some experts that we may be nowhere near the peak of the layoff tsunami. This suggests, to me, that more action by the Obama administration is called for to target the layoff problem directly.

While the administration should be commended for the fast pace of immediate action it has taken, in its early months, on the overall effort to turn the economy around, several more months of layoffs at the current pace could impose tremendous human and financial costs from which it could take years to recuperate, and could retard the pace of the overall economic recovery when it finally begins.

Granted, this is easier said than done. We all understand that the layoffs are a dramatic sign of the measures businesses are taking to preserve precious cash in an environment of declining sales and still-tight credit. It’s also well known that, in recessions, the worst waves of layoffs often occur after the overall economy has already started to recover. Layoffs are a “lagging indicator,” reflecting events businesses experienced several months back. The March numbers likely reflect dismal results that were showing up for many businesses as they prepared to report their first-quarter financials.

Obviously the administration doesn’t have the power to control layoffs directly. But there may be certain interventions that could help. Here are just a couple of top-of-the head ideas, the administrative and financial viability of which, of course, would need to be evaluated:

• Tax breaks, perhaps in the form of a limited-time waiver of Federal Unemployment Tax payments, for each employee a business calls back from a layoff
• A tax break or partial federal guarantee to banks on any increase to a company’s credit line needed to return a laid-off employee to the payroll

I am sure that the likes of Paul Volcker, Austan Goolsbee, and the other great minds on the President’s economic team could come up with even better, more creative ideas. And it also seems logical that an incentive-based program to put employees back to work quickly at what they were doing previously could help the recovery by creating an efficiency advantage, compared to displaced employees churning through a slow-moving job market, only to face learning curves after finally securing new positions.

But regardless of what form any specific actions might take, the numbers seem to be warning us that action is needed, and soon, to intervene more directly in the layoff crisis.

Sphere: Related Content

MIT Economist Compares Dialogue from Right to Andrew Mellon

Watching a re-run of Crash: The Next Great Depression on The History Channel last night, I got a good refresher on the Great Depression and the tragic mistakes the U.S. government, under the leadership of the staunch free-market apostle Andrew Mellon, made in responding so slowly to the crisis.

According to Ricardo J. Caballero, head of the economics department at MIT, those on the conservative side of the equation today don't seem to have learned very much since. In an opinion piece from today's Washington Post, Caballero writes that it is "scary to hear the right regurgitating the untimely liquidationist claims that Treasury Secretary Andrew Mellon made."

He goes on to suggest that the best sign of promise in the recent economic news is President Obama's recent pledge of "persistence" in the effort to get the economy out of the hole it's currently in.

Well put. We'd all do well to make sure we think beyond politics and ideology and persist in "doing stuff," because ultimately it's our actions and efforts, as individuals, as businesses, and as a nation, that will turn the situation around. Not every effort will succeed. We can't expect to get everything right the first time. But, as the lessons of the Great Depression teach us, inaction is the greatest enemy, and the actions taken by the Roosevelt administration, however imperfect, were what finally moved things in the right direction.

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Life in a Nearly-Monopolized Radio Market

Maybe this makes me some sort of geek, but I have to admit it -- I’m a talk radio junkie. I suppose it’s symptomatic of some larger issue of being an information junkie.

My talk radio habit first developed during an interval between my undergraduate and grad school days, when I had a nighttime job that involved a lot of time in the car. Talk radio, especially the all-night broadcasts on NPR, helped keep me sane and prevented my neurons from atrophying during those long, dull hours.

The habit has stuck with me. I don’t have as many long blocks of uninterrupted, solitary time to listen as I did back then, but when commuting, and in other situations ranging from washing dishes to blogging, I’ll use talk radio as my background soundtrack, when many other people would listen to music. A little weird, maybe, but, like I said -- it’s sort of an addiction.

When there are many options, I’m choosy about what I listen to. But when choices are limited I’ll listen to almost anything. Having been born and raised in the Washington D.C. area, and lived most of my adult life there, I grew accustomed to a lot of choice. Like Alice’s Restaurant, you can truly get just about anything you want from Washington radio. Both the A.M. and F.M. bands offer plenty of variety in news, talk, and information programming. There’s something to appeal to virtually any segment of the political and demographic spectrum.

On the far left side of the F.M. dial, you could find plenty of programming appealing to those of the left-leaning political persuasion, from the lefty yet still largely conventional NPR to the outer fringes of the Pacifica network. On the A.M. dial you’d of course find the usual suspects -- Sean Hannity, Rush Limbaugh, Michael Savage, and the like -- but plenty more to choose from as well, including centrist and liberal talk shows and a wide variety of business and finance programming.

NPR was usually my first choice when I was looking for a political talk fix, but I’d tune into the conservative shows on the A.M. side for a reality check on what the opposition was thinking. To satisfy my interest in finance and investing there was always the likes of Bob Brinker and the Motley Fool. And when I was in the mood for a little weirdness, there was Coast-to-Coast A.M.

But just a few years ago I made a pretty drastic geographic relocation, moving into a much less populous and more rural area with very limited radio offerings. There isn’t a single truly all-news station in the market. On the A.M. dial, you have basically two stations to choose from that are strong enough to cover most of the region. One is owned by Clear Channel Communications, the other by Cumulus Media, two examples of the few large conglomerates that have come to control such a large share of local radio markets around the country.

Nominally, both stations have a news/talk format, but in reality the news coverage is limited on both. One is all-news during morning and afternoon drive time, but carries major syndicated talk for the rest of the day -- Limbaugh, Savage, Hannity, etc.

The other starts the morning with a local news/talk show, but it’s much more talk than news. And it’s light talk, a more sedate version of a “morning zoo” type of program, slanted toward a quite conservative middle-aged male demographic. After the morning drive comes a local talk show that’s a bit more substantive in its political dialogue but decisively right-leaning, running until the Rush Limbaugh show starts. The rest of the Post-Rush day is filled by Hannity, Savage, and Coast-to-Coast.

On the FM side there’s an NPR affiliate, but the NPR programming it carries is actually very limited. Most of the day after Morning Edition consists of locally programmed classical music, with a short and somewhat quirky local news/talk show sandwiched in. The classical music takes a break starting at 3:00 p.m. for Fresh Air and resumes after All Things Considered. An alternate broadcast of all-day NPR talk is also available, but only to those with an HD Radio receiver.

When I first moved into this market in 2006, I started tuning in to Hannity and Savage during my evening commute home. I’d had some prior exposure to them back in Washington, but not much.

I didn’t end up paying a whole lot of attention to Hannity. He was easy to figure out, very “what you see is what you get” -- a fairly simple guy who, like me, came of age in the Reagan era but, unlike me, idolizes Reagan, looks back on his administration as some sort of golden age, and wants to get take our country’s politics back to the basics of Reagan’s principles.

Savage, on the other hand, was another matter -- a strange bird, in a class by himself, with a strange kind of charisma. It was easy to get drawn-in by the wry writ. And I found that there was a somewhat sympathetic dimension to his worldview. Think of Archie Bunker with a higher IQ and a PhD, looking back fondly at a simpler time when “girls were girls and men were men,” a time when immigrants who came to the country legally were welcome but expected to learn English.

Yes, I could take the point of his “borders, language, and culture” rubric. Secure borders are indeed important to our national security. And embracing the diversity of a nation that, after all, has from the beginning been a nation of immigrants, is not mutually exclusive with a reasonable expectation of an effort to learn the official language; with the idea that there is a core set of cultural values that, transcending ethnicity, defines what it means to be an American. Yes, I could take the point that more Americans should be offended by the some of the decadent elements of our popular culture that are so offensive to much of the Islamic world. Yes, I see the shallow hypocrisy of a celebrity like Sean Penn, who has benefited so richly from our free enterprise system, embracing Hugo Chavez.

But as I listened more I observed more areas of Savage’s rhetoric that venture into hatred. By characterizing an entire generation of liberals with such one-dimensional, caricature-like stereotypes as “red-diaper-doper-babies” and saying that “liberalism is a mental disorder,” he is encouraging a world view that dehumanizes a substantial portion of the population. And even worse, he is engaging in a kind of thinking that is itself characteristic of mental disorders. If you carry this far enough, you enter a realm of thinking, of simplistic derogatory labeling of groups, that has contributed to some of the greatest atrocities of history.

Yet in spite of all of this, I continue to listen now and then to Savage, Hannity, and the other conservative voices available to me in this market, because there is basically little else to listen to. And, yes -- I must admit that at times I have felt a rightward tug of their voices on my political thinking. No one is entirely invulnerable to the power of repetition, especially in an environment in which there is little chance for an alternative viewpoint to be heard. No, they certainly haven’t converted me, but the fact that I have even felt their tug is, for me, strong evidence of just how much power they indeed exert. So it’s troublesome to contemplate the reality that, in so many markets, they may be the only voices to be heard on talk radio.

I don’t have a problem, per se, with the power of these voices. I’m not a proponent of the return of “The Fairness Doctrine,” and was relieved when the Obama administration came out against it. Especially in a environment in which the executive and legislative branches are controlled by one party, there would be too few checks and balances on the potential for partisan abuse of a reincarnated Fairness Doctrine. As much as I disagree with much of what the likes of Savage, Hannity, and Limbaugh say, I wouldn’t want their voices silenced. I want to be able to hear them myself, at least as a reality check, and I want others to be able to hear them. But I want alternative voices, with alternative perspectives, to be available for the hearing as well.

There is also serious question in my mind as to whether the previous incarnation of the Fairness Doctrine was ever very effective, anyway. To my recollection, radio stations didn’t really need to do all that much to fulfill their obligations under the old requirement -- they could, for example, simply allocate 30 seconds at 3:00 on a Sunday morning for a quick rant by some local Lyndon LaRouche supporter.

There are other mitigating factors as well. In an environment that now includes cable television and the Internet, radio has been bumped down a few notches on the media food chain. Nevertheless, conservative talk radio seems to exert a powerful influence on certain demographic groups.

And that’s the problem. Moving into this kind of market made me realize how limited the information choices of much of the country outside of major metropolitan areas may be. Certainly the deregulation of the media has been a part of the story. When a very small number of large corporate owners are able to control so much of the radio market, there’s less room for competing voices to enter the dialogue.

But I also realize that radio markets outside major metropolitan areas were probably already quite limited before the deregulation and the demise of the original Fairness Doctrine. In most radio markets throughout the country, the diversity of population to support the incredible range of voices one can find in a market like Washington D.C. just isn’t there.

That, too, is troublesome, and in that context we should feel even more fortunate that there are now so many alternative media choices today to counteract the one-sided perspective that a monopolistic talk radio market is presenting to so much of the country. Sphere: Related Content

Treasury Department Announces Build America Bonds and School Bonds

WASHINGTON (April 3, 2009) -- 1n an effort to counteract challenges facing state and local governments in the current economic climate, the U.S. Department of the Treasury today announced two new bond programs to help states pursue capital and infrastructure projects and fuel job creation.

Under the American Recovery and Reinvestment Act of 2009, the Build America Bond program will to provide funding for state and local governments at lower borrowing costs for such projects as work on public buildings, courthouses, schools, roads, transportation infrastructure, government hospitals, public safety facilities and equipment, water and sewer projects, environmental projects, energy projects, governmental housing projects and public utilities.

Supplementing the existing tax-exempt bond market market, the Build America Bond program is designed to provide a federal subsidy for a larger portion of the borrowing costs of state and local governments than traditional tax-exempt bonds in order to stimulate the economy and encourage investments in capital projects in 2009 and 2010.

Also announced were two tax credit bond programs for schools, known as Qualified School Construction Bonds and Qualified Zone Academy Bonds. Created under new or expanded authorizations in The American Recovery and Reinvestment Act of 2009, these programs allow state and local governments to finance public school construction projects and other eligible costs for public schools with interest-free borrowings.

For details of the two new bond programs, see the full news release from the Department of the Treasury. Sphere: Related Content

Blogger Presence at G20 Reflects Changing Journalistic Landscape

The G20Voice, a coalition of NGOs (non-government organizations), reports that news coverage of this year’s G20 summit has broken with convention, with live and direct reporting from the event by bloggers allowed for the first time.

According to the announcement, 50 bloggers covered the summit, giving them, and their audiences, the chance to engage with and influence world leaders on issues including development, climate change and women’s rights. In a process backed by the British Government, the bloggers were nominated by the public, with more than 700 nominations received in 12 days.

The organizations behind G20Voice are OxfamGB, Comic Relief, Save the Children, ONE and Blue State Digital. G20Voice is a collaborative effort demonstrating the breadth of commitment to ending world poverty and inequality.

The 50 include a broad range of bloggers from the G20 countries and the developing world, including:

• Sokari Ekine, from Nigeria
• Jotman – a blogger focused on human rights issues in Thailand and Burma
• Daudi Were – an organizer of African bloggers
• Dr. Kumi Naidoo – head of GCAP and contributor to the Huffington Post
• Cheryl Conte from Jack and Jill Politics
• Enda Surya Nasution – a noted leader in the Indonesian blogging community
• Rui Chenggang – an economics broadcaster from China with an audience, according to G20Voice, of 13 million viewers every evening on CCTV
• Richard Murphy – a blogger specialized in Tax Havens

Karina Brisby, G20Voice project founder and Digital Campaigns Manager, Oxfam GB said: "The G20Voice project was inspired by the articulate, engaging and often outraged posts, tweets, podcasts and videocasts from bloggers all over the world about the current economic crisis and how that affects the issues they are passionate about such as poverty and climate change.

"We are seeing a huge increase in the number of people around the world using digital tools to inform themselves and then contribute to debates about the issues that affect their lives. G20Voice recognizes the importance of bloggers and gives them a unique opportunity to report back to their audiences direct from the G20 Summit itself."

Sphere: Related Content

Support for Obama Remains Strong Despite Negative Coverage from Some Pundits, Media Watchdog Group Says

WASHINGTON - April 1 - Watchdog group Media Matters for America released a comment today in response to a recent Washington Post/ABC News poll showing that only 26 percent of the public blames the Obama administration for the country's economic situation:

"This poll shows that despite what they are hearing from the media, the public overwhelmingly blames banks, business, and the Bush administration, not President Obama," said Erikka Knuti, a spokeswoman for Media Matters. "The media have repeatedly attached Obama's name to the economic crisis and all but erased the role of the previous administration from their coverage. The American people aren't falling for it."

The Washington Post/ABC News poll, released on March 31, asked respondents who they thought "deserve[d]" the most "blame" for "the country's economic situation." Results for who deserved a "great deal" or "good amount" of blame are as follows:

-80 percent said banks and other financial institutions
-80 percent said large business corporations
-72 percent said consumers
-70 percent said the Bush administration
-26 percent said the Obama administration

In their news release, the watchdog group also cites their documentation of how media figures, in their reporting of economic issues, have blamed Obama for the economic recession by disappearing the Bush administration's role and repeatedly referring to the "Obama recession."

Specifically, according to Media Matters, beginning in early November 2008, conservative media figures such as Rush Limbaugh, Sean Hannity, Dick Morris, and Hugh Hewitt have asserted that Obama is to blame for the decline of the stock market since the election and have promoted the myth of an "Obama recession," in spite of the finding from the National Bureau of Economic Research that the recession began in December 2007.

Media Matters also claims to have documented numerous media outlets declaring the existence of an "Obama bear market," and charges MSNBC with using, in numerous reports, misleading charts to suggest that the Dow only began dropping after Obama's election or inauguration, despite the fact that the Dow was on a downward trajectory months before the election, dropping 3,738 points from May 2, 2008, to November 3, 2008.

The watchdog group cites the phrase "Obama bear market" as just one example of a pattern of the media allegedly leaving out relevant information about the role of Bush-era policies in discussing the current state of the economy. According to Media Matters, among the examples is a March 8 Associated Press analysis, in which Tom Raum suggested that Obama is to blame for job losses since he took office and even before he did so -- an argument the watchdog group asserts has been rejected even by conservative CNBC host and National Review Online economics editor Larry Kudlow.

Sphere: Related Content

Call for Author Contributions

Are you an expert on economics or other topics and issues covered in Undismalization? Would you be interested in contributing content ranging from brief comments to full-length articles? We want to hear from you. We’re not currently able to pay guest contributors, but you’ll benefit from increased publicity and exposure as a subject-matter expert. Please e-mail your queries, pitches, manuscripts, etc. to the editor at haywardwc@gmail.com. Sphere: Related Content

Credit and Its Distortions

A common thread running through the dialogue on the current economic crisis is the role of excessive debt levels, for government, businesses, and consumers, in the United States. Joe Scarborough, for example, commented recently on MSNBC’s Morning Joe program that we are witnessing the consequences of “25 years of leverage,” leverage being just a fancy word for debt. And numerous pundits have commented that, collectively, we are experiencing a terrible hangover as a result of a massive debt binge over the past several decades.

It doesn’t take a rocket scientist to understand the effects that excessive debt can have on the economy. When goods and services can be purchased with debt rather than bought outright for cash, two things happen: (1) middlemen are introduced into the process, which creates markups that may be in excess of any objective added value, and (2) suppliers who know that their customers do not have to make an immediate, out-of-pocket payment-in-full know that they can charge higher prices.

When access to credit is easier, demand also increases, which in turn has an inflationary impact on price that, again, can create prices in excess of objective asset values. Among the empirical studies that have demonstrated this is one by Nada Mora of the American University of Beirut, whose paper “The Effect of Bank Credit on Asset Prices” found that, in the Japanese real estate market of the 1980s, a one percent increase in real estate lending correlated with a 14-20 percent increase in land inflation. In hindsight, we see that this example was prophetic of what happened in the recent housing bubble in the U.S.

Common-knowledge examples of this effect are legion in other industries as well, higher education among them. It’s well known that college tuitions have increased well beyond the rate of inflation over the past several decades. This is undoubtedly due in no small part to the understanding among the institutions that many students and their families are not paying tuition out of pocket but are relying on loans and other forms of financial aid. In the higher education domain, the increased role of credit has helped create an environment in which the concept of “working one’s way through college” is a distant memory.

Credit of course has an important, legitimate role to play in the economy, but a market correction of excesses of the past several decades is undoubtedly a major factor in our current situation. However painful the experience may be, many businesses and families are being forced to learn to live with less credit, and perhaps in the long run that will be a good thing. Moderation of the use of credit, and a retooling of the role of credit in transactions, will hopefully smooth out some of the distortions that have been created and drive prices toward a more accurate reflection of objective asset value. Sphere: Related Content

Can We Learn Something from the Aussies?

Early in 2008, I was chatting with a colleague from Australia on my way to a sales meeting in Asia. I don’t quite recall how the conversation got started, but apparently signs of trouble in the U.S. economy had already started to spread in the international news, and my colleague asked me about it. Somehow the subject of unemployment came up.

“You don’t have services in the States for people who are unemployed, do you?” she asked.

I was a bit surprised to hear that, and clarified that we do indeed have an unemployment compensation system to help people who have lost one job through no fault of their own get through until they find a new one.

“But it’s very limited, isn’t it?” she replied.

“Well, yes,” I said. “It’s normally around three months, but in a particularly bad economic situation it’s sometimes extended.”

“It’s indefinite in Australia,” she said. “Some people even live off the dole.”

The conversation then, understandably, switched around to taxes, and she said that their heavy tax rate was what they sacrificed in exchange for a measure of security in Australia. She said that she understood that we don’t pay very much in the way of taxes in the U.S., but I responded that, when you add up our sales taxes, income taxes, fuel taxes, property taxes, state and local taxes, etc., our tax burden ends up being pretty heavy. I told her about our “Tax Freedom Day” concept which, last I heard, held that we all have to work until sometime in May before we can finally call our income our own.

“My tax bracket last year was 47 percent, by the way,” she said, which does translate to somewhat more than 5/12 of the year … but not a lot more.

It makes you wonder. Australians pay somewhat more in taxes than we do, but perhaps not a whole lot more. But seemingly they provide a better safety net for those who are having trouble. Is it a good tradeoff? Conservatives in the U.S. would argue that a huge social welfare system in the U.S. would be devastating to the economy.

But if the compared GDP growth rates for the past five years in Australia vs. the U.S. (see chart, data source indexmundi) are any indication, maybe this isn’t the case. Although Australia recently declared that its economy, as a result of the global crisis, is projected to shrink this year, they are doing better than we are on the unemployment front, with a jobless rate of 7 percent. And for the last five years, they beat us by a small margin in average annual GDP growth – 3.24 percent for Australia as opposed to 3.18 percent for the U.S.

Maybe a “welfare state” isn’t such a bad thing economically as the conventional wisdom in the U.S. leads us to believe. Is it possible that a larger and more expensive social safety net amounts to a form of “permanent stimulus?” Here in the States many of us don’t like the idea of handouts, and that’s understandable. But perhaps giving the poor a consistent level of money to spend and a reasonable minimum standard of living can have a beneficial and stabilizing effect on the economy, and a moderating effect on fluctuations driven by the booms and busts of business cycles.

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