In an analysis released last week of data from the Bureau of Labor Statistics (BLS), Heidi Shierholz of the Economic Policy Institute presented figures that cast a stark light on the condition of the U.S. job market from a seldom-reported perspective.
The analysis was based on data from the Job Openings and Labor Turnover Survey (JOLTS) report from the BLS.
By comparing the number of job openings reported for March of 2.7 million to the 13.2 million workers reported as unemployed for the same month, Shierholz calculated a ratio of nearly five unemployed workers for every available job.
As if that number weren’t staggering enough on its own, Shierholz added further perspective by comparing that figure to the ratio of 1.7 unemployed workers for each job opening as of the start of the current recession, or 1.1 per opening in December 2000, the date that the BLS first released JOLTS data.
Anticipating the release of April figures in the context of already-reported jobless figures for April, Shierholz projects that the April ratio will remain at five or higher. This creates a sobering view an unemployment picture that, in spite of increasing reports of “green shoots” in the economy, remains at crisis levels and is showing, at best, signs of improvement at only a very slow pace.
“There are still millions of jobless workers with little hope of finding employment in this dramatically weakened labor market,” Shierholz wrote in the close of her analysis, which I believe adds further weight to the proposition that the Obama administration’s economic interventions, as I have argued previously, may not yet be sufficient to truly address the human costs of an unemployment crisis of this magnitude.
Sphere: Related Content
Friday, May 22, 2009
Sunday, May 17, 2009
In the Midst of Crisis, Let’s Not Lose Sight of the Good Things About Deregulation
Deregulation, at least of financial markets, has been taking some heavy hits in the news in general, and in this blog. So before I start getting accused of being some kind of big-government, tax-and-spend commie pinko, which is far from the truth, let me acknowledge that deregulation of certain industries has produced many positive effects:
1. In the airline industry, deregulation created more competition and paved the way for the lower fares, in constant dollar terms, that we see today in comparison to those of the 1960s and 1970s. Air travel changed from a luxury to something that was affordable to middle class Americans.
2. Deregulation in telecommunications opened the door to competition in such areas as long distance service which, in its earlier days, was ridiculously overpriced. And telephone bills in general are now substantially less expensive in real terms than they were thirty years ago, and often include, for a flat rate, unlimited long distance and premium services.
3. Opening up more of the spectrum of radio frequencies for commercial use made innovations such as cellular telephones and wireless data transmission possible.
What’s the lesson? Some industries need more regulation than others. And some industries need more regulation in certain stages of their evolution.
So why not take government out of the equation and let industries regulate themselves? Because it won’t work, any more than making payment of your water bill a voluntary option would work. Issues that have no effect on the short-term bottom line or that would affect it negatively tend to be ignored by businesses. This is why there was a time, for example, when factories that were not subject to environmental regulations freely polluted rivers, streams, and groundwater. Without regulation, there was no incentive to do otherwise.
The most dicey issues come up when the need for regulation of an industry emerges in mid stream. There was a time when we didn’t know that tobacco causes lung cancer, or that lead paint in homes can poison children. In this kind of situation, introducing regulations in product categories that are already widely distributed or, if necessary, transitioning them out of the market entirely, can be extremely difficult.
We’ll no doubt face similar challenges in the future. Examples include the question of whether there is a provable link between electromagnetic energy from wireless devices and cancer. In such situations, there may be no easy answer. And this is precisely why transparency of publicly accessible information, disclosure requirements on businesses when negative issues are known, openness of communication, and collaborative dialogue among industry, government, and consumers will remain essential to guiding optimal regulatory decisions and preventing abuses. Sphere: Related Content
1. In the airline industry, deregulation created more competition and paved the way for the lower fares, in constant dollar terms, that we see today in comparison to those of the 1960s and 1970s. Air travel changed from a luxury to something that was affordable to middle class Americans.
2. Deregulation in telecommunications opened the door to competition in such areas as long distance service which, in its earlier days, was ridiculously overpriced. And telephone bills in general are now substantially less expensive in real terms than they were thirty years ago, and often include, for a flat rate, unlimited long distance and premium services.
3. Opening up more of the spectrum of radio frequencies for commercial use made innovations such as cellular telephones and wireless data transmission possible.
What’s the lesson? Some industries need more regulation than others. And some industries need more regulation in certain stages of their evolution.
So why not take government out of the equation and let industries regulate themselves? Because it won’t work, any more than making payment of your water bill a voluntary option would work. Issues that have no effect on the short-term bottom line or that would affect it negatively tend to be ignored by businesses. This is why there was a time, for example, when factories that were not subject to environmental regulations freely polluted rivers, streams, and groundwater. Without regulation, there was no incentive to do otherwise.
The most dicey issues come up when the need for regulation of an industry emerges in mid stream. There was a time when we didn’t know that tobacco causes lung cancer, or that lead paint in homes can poison children. In this kind of situation, introducing regulations in product categories that are already widely distributed or, if necessary, transitioning them out of the market entirely, can be extremely difficult.
We’ll no doubt face similar challenges in the future. Examples include the question of whether there is a provable link between electromagnetic energy from wireless devices and cancer. In such situations, there may be no easy answer. And this is precisely why transparency of publicly accessible information, disclosure requirements on businesses when negative issues are known, openness of communication, and collaborative dialogue among industry, government, and consumers will remain essential to guiding optimal regulatory decisions and preventing abuses. Sphere: Related Content
Doyle Does it Again with Disingenuous Disinformation
Another Saturday night, another rebroadcast of The Jerry Doyle Show. I have to admit: as much as I might disagree with much of his politics, Jerry Doyle might just be the smartest person in talk radio today.
He’s highly articulate and urbane, and refrains from the simpleminded name calling and other cheap tactics of some of his conservative peers like Rush Limbaugh and Sean Hannity. He seems to draw callers who are more sophisticated and well spoken. And he doesn’t shout.
Doyle often cites persuasive facts and figures to back up his claims, even though he often uses them in ways that seem subtly misleading and out-of-context. He puts impressive, expert talking heads on the air to serve as seemingly credible supporters of his viewpoints. It may be lost on much of the audience that these guests may not represent a preponderance of opinion in their fields or may be affiliated with institutions that represent only a one-sided view of complex issues.
During the broadcast I caught yesterday, Doyle was commenting on a recent commencement speech from President Obama. Doyle focused on sound bites from the speech about “a poverty of ambition” that the President said has characterized the most recent chapter of U.S. history, which closed with the beginning of the current economic crisis. These ambitions, according to the President, were fueled by excessive self-interest, self-enrichment for its own sake and by any means, and superficial, status-oriented aspirations such as having the fanciest corner office.
Predictably, Doyle interpreted these statements as socialistic, anti-capitalist, and representative of a direction American attitudes that, to Doyle, is frightening. In Doyle’s interpretation, the President was attacking the self-interest that is the very fuel of capitalism, the driver of great inventions and industries. He went on to assert that the speech was just another example of the President acting as a puppet for the far left, advocating the surrender of all personal ambition in favor of ever-expanding government, all in the name of “public service.”
I find Doyle’s interpretation disingenuous. There is nothing, per se, anti-business, anti-capitalist, or even particularly “anti-ambition” about the President’s comments. In fact, I would even argue that Doyle’s interpretation depends on a fundamental error in “parsing” the phrase “a poverty of ambition.”
For Doyle, the interpretation seems to be that the President’s phrase “a poverty of ambition” is equivalent to “ambition equals poverty,” or that Obama was suggesting that ambition, as a human motivation, is impoverished in some absolute sense.
I submit, however, that the more accurate interpretation, based not only on the context in which Obama used the phrase but also on the content of the phrase itself, is that the President was referring to an impoverished form of ambition: one that pursues personal gain purely for its own sake, and by any means; that condones self-interest at the expense of others; and that seeks the reward of a superficial status defined solely in material terms, rather than striving for achievements that have the virtue of also benefiting others.
By speaking of a poverty of ambition, the President was asking the students to aspire to a higher standard, one that allows for individual gain while also benefiting society as a whole. This, in my view, is in no way incompatible with capitalism.
While monetary gain is a key incentive to innovate in business and industry, it is not the only one. The true innovators of the world are passionate about what they do and, while money is an important motivator, so, too, is the intrinsic reward of work that produces something of quality, to the benefit of society as well as the innovator.
A higher form of ambition is one that drove, for example, a Henry Ford to invent an industry that revolutionized personal transportation and created a new level of mobility for the common man. Or a Steve Jobs, who has criticized Microsoft for building “so little culture” into their products, to infuse elegance and ease of use into desktop operating systems.
An impoverished form of ambition, on the other hand, is one that drives an investment bank to recklessly trade risky, overly leveraged securities that have the potential to bring down an entire economy, or a CEO of a failing company to move forward with a seven-figure renovation to his corner office.
The case for my interpretation can be supported on a purely linguistic basis. To be correct, Doyle’s interpretation would require the phrase to have been “the poverty of ambition. But the President said “a poverty of ambition,” which can mean one of two things: (1) an impoverished form of ambition, as I have argued here, or (2) a poverty consisting of a lack of true ambition. Either one of these interpretations is in opposition to Doyle’s.
Should we give Doyle the benefit of the doubt and assume he simply erred in his grammatical perception? But if that’s the case, maybe he’s not the smartest person in talk radio after all. Sphere: Related Content
He’s highly articulate and urbane, and refrains from the simpleminded name calling and other cheap tactics of some of his conservative peers like Rush Limbaugh and Sean Hannity. He seems to draw callers who are more sophisticated and well spoken. And he doesn’t shout.
Doyle often cites persuasive facts and figures to back up his claims, even though he often uses them in ways that seem subtly misleading and out-of-context. He puts impressive, expert talking heads on the air to serve as seemingly credible supporters of his viewpoints. It may be lost on much of the audience that these guests may not represent a preponderance of opinion in their fields or may be affiliated with institutions that represent only a one-sided view of complex issues.
During the broadcast I caught yesterday, Doyle was commenting on a recent commencement speech from President Obama. Doyle focused on sound bites from the speech about “a poverty of ambition” that the President said has characterized the most recent chapter of U.S. history, which closed with the beginning of the current economic crisis. These ambitions, according to the President, were fueled by excessive self-interest, self-enrichment for its own sake and by any means, and superficial, status-oriented aspirations such as having the fanciest corner office.
Predictably, Doyle interpreted these statements as socialistic, anti-capitalist, and representative of a direction American attitudes that, to Doyle, is frightening. In Doyle’s interpretation, the President was attacking the self-interest that is the very fuel of capitalism, the driver of great inventions and industries. He went on to assert that the speech was just another example of the President acting as a puppet for the far left, advocating the surrender of all personal ambition in favor of ever-expanding government, all in the name of “public service.”
I find Doyle’s interpretation disingenuous. There is nothing, per se, anti-business, anti-capitalist, or even particularly “anti-ambition” about the President’s comments. In fact, I would even argue that Doyle’s interpretation depends on a fundamental error in “parsing” the phrase “a poverty of ambition.”
For Doyle, the interpretation seems to be that the President’s phrase “a poverty of ambition” is equivalent to “ambition equals poverty,” or that Obama was suggesting that ambition, as a human motivation, is impoverished in some absolute sense.
I submit, however, that the more accurate interpretation, based not only on the context in which Obama used the phrase but also on the content of the phrase itself, is that the President was referring to an impoverished form of ambition: one that pursues personal gain purely for its own sake, and by any means; that condones self-interest at the expense of others; and that seeks the reward of a superficial status defined solely in material terms, rather than striving for achievements that have the virtue of also benefiting others.
By speaking of a poverty of ambition, the President was asking the students to aspire to a higher standard, one that allows for individual gain while also benefiting society as a whole. This, in my view, is in no way incompatible with capitalism.
While monetary gain is a key incentive to innovate in business and industry, it is not the only one. The true innovators of the world are passionate about what they do and, while money is an important motivator, so, too, is the intrinsic reward of work that produces something of quality, to the benefit of society as well as the innovator.
A higher form of ambition is one that drove, for example, a Henry Ford to invent an industry that revolutionized personal transportation and created a new level of mobility for the common man. Or a Steve Jobs, who has criticized Microsoft for building “so little culture” into their products, to infuse elegance and ease of use into desktop operating systems.
An impoverished form of ambition, on the other hand, is one that drives an investment bank to recklessly trade risky, overly leveraged securities that have the potential to bring down an entire economy, or a CEO of a failing company to move forward with a seven-figure renovation to his corner office.
The case for my interpretation can be supported on a purely linguistic basis. To be correct, Doyle’s interpretation would require the phrase to have been “the poverty of ambition. But the President said “a poverty of ambition,” which can mean one of two things: (1) an impoverished form of ambition, as I have argued here, or (2) a poverty consisting of a lack of true ambition. Either one of these interpretations is in opposition to Doyle’s.
Should we give Doyle the benefit of the doubt and assume he simply erred in his grammatical perception? But if that’s the case, maybe he’s not the smartest person in talk radio after all. Sphere: Related Content
Friday, May 15, 2009
Economic Policy Institute Says Workers Over 45 Hit Hardest
A news brief issued today by the Economic Policy Institute (EPI) argues that the current recession has taken an unusually high toll on workers over age 45, many of whom “say their job search is fruitless.” As one of the organizations co-sponsoring the Retirement USA initiative, EPI is particularly focused on concerns of older workers.
In an April 28 post, I argue as well for the need to re-think the retirement system in the U.S., based on the big question marks, raised by that the performance of equities markets over the past 10 years, over whether we can still think of the 401(k) model as a viable retirement solution for the average worker. My post also suggests that increasing the expected retirement age may also need to be a factor in an overhauled system, with the caveat that allowances may need to be made for the fact that, in spite of longer life expectancies, the health profile of Americans past age 60 remains highly variable.
Today’s brief from the EPI, however, references a briefing paper by economist Monique Morrissey that raises valid counterpoints on the retirement age issue, at least in the context of the existing Social Security system, favoring instead an increase to the rate cap on income subject to the Social Security tax.
According to a press release announcing Morrissey’s paper, “Most of the increase in life expectancy in recent decades has been among higher-income workers. Raising the Social Security retirement age would be especially hard on lower-income and minority workers, given large and growing disparities in life expectancy and poor health and/or job prospects.”
The point is well taken and, along with the issue of the current recession impacting older workers disproportionately, makes me recall a comment I heard a few weeks ago from a guest on Bob Brinker’s Moneytalk radio program that the administration should even consider allowing displaced workers as young as 55 to begin collecting Social Security benefits, based on how poor their job prospects may be in the current economy.
However, if we buy into the concept that the 401(k) model is not delivering on its early promises as a viable model, we can’t afford to lose site of the likelihood that tweaking Social Security will not be the long-term answer. Sphere: Related Content
In an April 28 post, I argue as well for the need to re-think the retirement system in the U.S., based on the big question marks, raised by that the performance of equities markets over the past 10 years, over whether we can still think of the 401(k) model as a viable retirement solution for the average worker. My post also suggests that increasing the expected retirement age may also need to be a factor in an overhauled system, with the caveat that allowances may need to be made for the fact that, in spite of longer life expectancies, the health profile of Americans past age 60 remains highly variable.
Today’s brief from the EPI, however, references a briefing paper by economist Monique Morrissey that raises valid counterpoints on the retirement age issue, at least in the context of the existing Social Security system, favoring instead an increase to the rate cap on income subject to the Social Security tax.
According to a press release announcing Morrissey’s paper, “Most of the increase in life expectancy in recent decades has been among higher-income workers. Raising the Social Security retirement age would be especially hard on lower-income and minority workers, given large and growing disparities in life expectancy and poor health and/or job prospects.”
The point is well taken and, along with the issue of the current recession impacting older workers disproportionately, makes me recall a comment I heard a few weeks ago from a guest on Bob Brinker’s Moneytalk radio program that the administration should even consider allowing displaced workers as young as 55 to begin collecting Social Security benefits, based on how poor their job prospects may be in the current economy.
However, if we buy into the concept that the 401(k) model is not delivering on its early promises as a viable model, we can’t afford to lose site of the likelihood that tweaking Social Security will not be the long-term answer. Sphere: Related Content
Tuesday, May 12, 2009
Department of Justice Launches Initiative to Combat Stimulus Fraud
WASHINGTON — The Antitrust Division of the Department of Justice announced details today of an initiative to prepare government officials and contractors to recognize and report efforts to profit unlawfully from stimulus projects awarded under The American Recovery and Reinvestment Act of 2009.
The program aims to help government agencies insulate procurement, grant and program funding processes from collusion and fraud, and ensure prosecution of those who abuse those processes.
"It is not lost on anyone, public servants and taxpayers alike, that along with the tremendous opportunity to help revive the economy that the Recovery Act provides, comes tremendous responsibility," said Christine A. Varney, Assistant Attorney General in charge of the Department's Antitrust Division.
"Fraud, waste and abuse of these stimulus funds will not be tolerated and the Antitrust Division is committed to doing everything possible to help protect the integrity of the government funding processes that are critical to making the stimulus plan a success."
The American Recovery and Reinvestment Act of 2009 was signed into law by President Obama on Feb. 17, 2009. It is an effort to jumpstart the economy and create or save jobs.
The Antitrust Division's Recovery Initiative involves training procurement and grant officials, government contractors, and agency auditors and investigators, on techniques for identifying the "red flags of collusion" before stimulus awards are made and taxpayer money is unnecessarily wasted. The initiative makes Antitrust Division competition experts available to agencies, to evaluate procurement and program funding processes. These experts will make recommendations on "best practices" to further protect processes from fraud, waste and abuse and maximize open and fair competition. Finally, the initiative commits the Antitrust Division to a significant role in investigating and prosecuting suspected fraud.
According to the announcement, the Antitrust Division's Recovery Initiative is already making a significant impact. Since March 2009, in partnership with agency Inspector Generals handling stimulus funds, the Antitrust Division has already assisted in training thousands of federal and state procurement, grant and program officials nationwide, with thousands more scheduled to be trained in the coming months.
The Antitrust Division has also launched a Recovery Initiative Web site through which consumers, contractors and federal, state and local agencies, can review information about the antitrust laws and the Division's training programs, request training, and report suspicious activity. The Web site is located at http://www.usdoj.gov/atr/public/criminal/economic_recovery.htm.
This Web site is linked to www.recovery.gov, the official website of the Recovery Accountability and Transparency Board, which is responsible for overseeing federal agencies to ensure that there is transparency and accountability for the expenditure of Recovery Act funds. Sphere: Related Content
The program aims to help government agencies insulate procurement, grant and program funding processes from collusion and fraud, and ensure prosecution of those who abuse those processes.
"It is not lost on anyone, public servants and taxpayers alike, that along with the tremendous opportunity to help revive the economy that the Recovery Act provides, comes tremendous responsibility," said Christine A. Varney, Assistant Attorney General in charge of the Department's Antitrust Division.
"Fraud, waste and abuse of these stimulus funds will not be tolerated and the Antitrust Division is committed to doing everything possible to help protect the integrity of the government funding processes that are critical to making the stimulus plan a success."
The American Recovery and Reinvestment Act of 2009 was signed into law by President Obama on Feb. 17, 2009. It is an effort to jumpstart the economy and create or save jobs.
The Antitrust Division's Recovery Initiative involves training procurement and grant officials, government contractors, and agency auditors and investigators, on techniques for identifying the "red flags of collusion" before stimulus awards are made and taxpayer money is unnecessarily wasted. The initiative makes Antitrust Division competition experts available to agencies, to evaluate procurement and program funding processes. These experts will make recommendations on "best practices" to further protect processes from fraud, waste and abuse and maximize open and fair competition. Finally, the initiative commits the Antitrust Division to a significant role in investigating and prosecuting suspected fraud.
According to the announcement, the Antitrust Division's Recovery Initiative is already making a significant impact. Since March 2009, in partnership with agency Inspector Generals handling stimulus funds, the Antitrust Division has already assisted in training thousands of federal and state procurement, grant and program officials nationwide, with thousands more scheduled to be trained in the coming months.
The Antitrust Division has also launched a Recovery Initiative Web site through which consumers, contractors and federal, state and local agencies, can review information about the antitrust laws and the Division's training programs, request training, and report suspicious activity. The Web site is located at http://www.usdoj.gov/atr/public/criminal/economic_recovery.htm.
This Web site is linked to www.recovery.gov, the official website of the Recovery Accountability and Transparency Board, which is responsible for overseeing federal agencies to ensure that there is transparency and accountability for the expenditure of Recovery Act funds. Sphere: Related Content
Sunday, May 10, 2009
I Think I Just Heard John Galt Fart: How the Ex Fed Chairman Finally Learned That There’s Greed on Wall Street
According to a May 6 report by Kat Aaron of the Center for Public Integrity, the aftermath of the subprime mortgage crisis and the ensuing global economic meltdown have left former Federal Reserve Board Chairman Allan Greenspan utterly dumbfounded by the failure of lenders and investment firms to act on their own to prevent the crisis."Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity, myself especially, are in a state of shocked disbelief,” said Greenspan (as quoted by Aaron) in his October 2008 testimony before the House Committee on Oversight and Government Reform.
So there’s greed and irresponsibility in the financial industry? Really? Who’d have thunk?
Duh. I’m sure, Mr. Greenspan, that even my seven-year-old child could have told you that.
It’s not my intention to pick on the financial industry here, or to suggest that subprime lenders or investment bankers are inherently any more greedy than anyone else. They’re simply imperfect human beings who, like you and I, need some basic rules to keep their human weaknesses from getting the best of them.
So it seems that “the virtue of selfishness” may not be so virtuous after all. And maybe now that Ayn Rand has gone on to her reward, her protégé, Maestro Greenspan, may finally, this late in his life, get a healthy dose of the reality that those of us who choose to make our careers in private business are not inherently any more virtuous than any other human beings. We are just as prone to the human pitfalls of greed, self deception, arrogance, corruptibility, and even irrational exuberance as are, for example, all those dreaded government bureaucrats that Rand and her followers despised so much.
Self-regulation of industry is a naïve and misguided concept for the simple reason that human beings, due to their imperfect nature, need checks and balances. We can’t have business without rules any more than we can have streets without stop signs and traffic lights, football games without officials, or Scrabble without a dictionary.
This seems so obvious, really, that it’s difficult not to question the underlying motives of those who would argue otherwise. Sphere: Related Content
Saturday, May 9, 2009
That Story on Page A38 that Makes You Go “Hmm” -- Or, Why We Might be in Deep Doo-Doo if Newspapers Truly Go Down the Tubes
The idea for this post took shape as I read a copy of Michael Moore’s Dude, Where’s My Country? that my wife found in a box we never unpacked after moving a few years ago. As I read the first few pages and saw how well Moore had documented each assertion by citing newspaper articles supporting his points, I was saddened by the thought, which has been frequently on my mind of late, that the newspaper as we’ve known it for so long seems now to almost certainly be a dying medium.
Like Noam Chomsky (in his political rather than linguistic work), Moore demonstrates that, in major, page-heavy newspapers like the New York Times and the Washington Post that have extremely expansive coverage, in-depth articles are there, for the enlightenment of anyone willing to make a little extra effort to find them, that show just how much more than meets the eye is going on beneath the simplistic surface of front-page headlines and broadcast sound bites. They’re just more likely to be buried 20 or so pages in.
For instance, one of the articles Moore cites to support his assertions about the heavy influence of Saudi Arabian money on U.S. politics and policy appeared on Page A38 of the August 9, 1990 edition of the Post.
Moore’s work consists mostly of after-the-fact research and analysis, and it seems likely that he took every advantage of the power of online research to find source material to shape his ideas and support his points. But print newspapers that include those sorts of “articles that make you go ‘hmm’” in the deeper reaches of their pages theoretically provide the opportunity for people to learn about issues that, while currently receiving limited attention, may be of great concern, at a time when there is still a chance to do something about them by such means as providing feedback to politicians or changing voting decisions based on better information.
As the newspaper crisis has worsened over the past year, much has been made of the impact of Google News on the business. I haven’t looked into hard data, one way or another, on the factors behind declining newspaper subscriptions. But I’m skeptical about just how much of a role that online newspaper content has really played.
Do people really sit at their computer monitors and comprehensively scan through all of the news articles of a major daily edition the way they used to flip cover to cover through print? I know that I don’t, and I have my doubts about how many people do.
Content from newspapers, largely free of charge, has been available online for some time now, and Google News for not quite as long. But based on my unscientific, personal observations, the gradual trend toward seeing fewer and fewer morning papers on residential stoops seems to go back further. The effect of online content might be just the tip of the iceberg, or the last nail in the coffin, if you will.
The decline of newspaper reading may be generational rather than technological in origin. For the parents or grandparents of people my age, reading the daily newspaper was a much more entrenched ritual. But subsequent generations, starting with the baby boom, became increasingly accustomed to relying on the briefer news treatments of television and radio, and many perhaps came to view a newspaper subscription as an expense they could forgo.
I also think the dynamics of the online news phenomenon might be different from what people tend to assume they are, or from what they want to admit. While people might like to think they don’t need a print newspaper anymore because they are reading everything they need online, the reality may be that they’re forgoing the newspaper not because they’re reading it online, but because they know that everything they could need is available online. There’s a big difference. They’re right, to the extent that the content is there for the reading; but my doubt concerns how much they actually are reading.
I’m not being self-righteous here -- I don’t currently subscribe to a print newspaper either. I love Google News as much as the next guy, and I use it all the time. The feature that proactively builds a page of relevant content based on your past search history is quite effective. But even though I know I’m getting a good selection of relevant stuff, I don’t delude myself that I’m getting everything, or that I’m going to have as deep an understanding of the day’s news as I would if I scanned a high-quality print paper cover to cover.
My use of Google News has a “quick in, quick out” pattern. Normally I scan headlines on the main page a couple of times a day for major stories on topics that interest me. Sometimes, for certain sections like Business, I may click through to the full list. When I’m looking for stories on a specific event of the day or doing research on a particular topic, I use the Search function.
Neither the scanning nor the Search habit gleans as full a level of news awareness as does a scan of a major daily’s print edition. Google News pulls headlines into the main page from numerous sources, and what shows up on that screen is driven largely by rankings based on the popularity of stories and topics.
One could theoretically create an analogue of scanning page by page through a print edition by going to a major newspaper site like washingtonpost.com, clicking on each section (Front Page, Metro, Business, Style, etc.) of the daily edition, scrolling through all the headlines, and clicking through to the full-text of those articles that warrant reading. I never do that, however. And, although I again have no data to support this, I doubt that many other people do, either.
Ironically, even though we’re dealing with an electronic environment that has the supposed virtue of speed, the main issue that would seem to discourage people from this approach is probably time. It seems self-evident that it’s faster to flip through each page of every section of a print edition than to click and scroll through every section of an online edition.
The online medium is well suited to finding specific things, but less so to serendipitous discovery of interesting things you didn’t realize you wanted. A good analogy for those of us who’ve spent a lot of time in a university library is the difference between searching for items in an online catalog vs. browsing through books that have been shelved together in a topical section.
During my academic career, more often than not, I would find neighboring books on the shelf that would prove much more valuable than the book I originally came to retrieve from the stacks after a catalog search. This is not to say that online searching doesn’t provide its own form of serendipity, but that its dynamics are different from the serendipity of print -- for which, it seems, an effective online analogue has not yet been developed.
And therein lies the problem. As long as major papers like the Washington Post and New York Times remain in business, “stories that make you go hmm” will be published, and they will appear online. How widely they will be read, however, is a different question.
With online content, the ease of access is both the greatest strength and the greatest weakness. If I think something is there any time I need it, I have less urgency and may fall into the trap of taking it for granted. A print newspaper on the doorstep, in contrast, confronts one immediately with the force of a limited range of choices. One can read it in a reasonable timeframe and then dispose of it; or one can leave it lying around indefinitely until getting around to reading it; or one can simply dispose of it immediately, unread. Since the second two choices are inherently less appealing, the first choice carries a strong motivational force to read the newspaper promptly that, in my opinion, does not yet have an electronic analogue.
In an online environment, the stories that venture into greater depth than the basic front page items are likely to be at even more of a disadvantage than they are in print. The result will be even fewer people exposed to a deeper and more sophisticated treatment of the news and, in turn, less accountability for political leaders, who will be receiving less feedback from a constituency less informed on issues ranging from the economy to foreign policy.
To close on a less grim note, however, I believe that, with some emerging technologies, there may be some cause for rekindling (pardon the pun) our hope. While I have not yet had the pleasure of reading a newspaper on the Amazon Kindle, I have heard positive reports from others that it succeeds in delivering a much more print-like experience.
When and if newspaper publishers finally discover a sustainable electronic business model, an approach along the lines of the Kindle that maintains some strong points of the print model may be what will preserve and renew the status of in-depth written journalism. For the sake of having an informed public that truly participates in democracy and political processes, let’s hope so. Sphere: Related Content
Like Noam Chomsky (in his political rather than linguistic work), Moore demonstrates that, in major, page-heavy newspapers like the New York Times and the Washington Post that have extremely expansive coverage, in-depth articles are there, for the enlightenment of anyone willing to make a little extra effort to find them, that show just how much more than meets the eye is going on beneath the simplistic surface of front-page headlines and broadcast sound bites. They’re just more likely to be buried 20 or so pages in.
For instance, one of the articles Moore cites to support his assertions about the heavy influence of Saudi Arabian money on U.S. politics and policy appeared on Page A38 of the August 9, 1990 edition of the Post.
Moore’s work consists mostly of after-the-fact research and analysis, and it seems likely that he took every advantage of the power of online research to find source material to shape his ideas and support his points. But print newspapers that include those sorts of “articles that make you go ‘hmm’” in the deeper reaches of their pages theoretically provide the opportunity for people to learn about issues that, while currently receiving limited attention, may be of great concern, at a time when there is still a chance to do something about them by such means as providing feedback to politicians or changing voting decisions based on better information.
As the newspaper crisis has worsened over the past year, much has been made of the impact of Google News on the business. I haven’t looked into hard data, one way or another, on the factors behind declining newspaper subscriptions. But I’m skeptical about just how much of a role that online newspaper content has really played.
Do people really sit at their computer monitors and comprehensively scan through all of the news articles of a major daily edition the way they used to flip cover to cover through print? I know that I don’t, and I have my doubts about how many people do.
Content from newspapers, largely free of charge, has been available online for some time now, and Google News for not quite as long. But based on my unscientific, personal observations, the gradual trend toward seeing fewer and fewer morning papers on residential stoops seems to go back further. The effect of online content might be just the tip of the iceberg, or the last nail in the coffin, if you will.
The decline of newspaper reading may be generational rather than technological in origin. For the parents or grandparents of people my age, reading the daily newspaper was a much more entrenched ritual. But subsequent generations, starting with the baby boom, became increasingly accustomed to relying on the briefer news treatments of television and radio, and many perhaps came to view a newspaper subscription as an expense they could forgo.
I also think the dynamics of the online news phenomenon might be different from what people tend to assume they are, or from what they want to admit. While people might like to think they don’t need a print newspaper anymore because they are reading everything they need online, the reality may be that they’re forgoing the newspaper not because they’re reading it online, but because they know that everything they could need is available online. There’s a big difference. They’re right, to the extent that the content is there for the reading; but my doubt concerns how much they actually are reading.
I’m not being self-righteous here -- I don’t currently subscribe to a print newspaper either. I love Google News as much as the next guy, and I use it all the time. The feature that proactively builds a page of relevant content based on your past search history is quite effective. But even though I know I’m getting a good selection of relevant stuff, I don’t delude myself that I’m getting everything, or that I’m going to have as deep an understanding of the day’s news as I would if I scanned a high-quality print paper cover to cover.
My use of Google News has a “quick in, quick out” pattern. Normally I scan headlines on the main page a couple of times a day for major stories on topics that interest me. Sometimes, for certain sections like Business, I may click through to the full list. When I’m looking for stories on a specific event of the day or doing research on a particular topic, I use the Search function.
Neither the scanning nor the Search habit gleans as full a level of news awareness as does a scan of a major daily’s print edition. Google News pulls headlines into the main page from numerous sources, and what shows up on that screen is driven largely by rankings based on the popularity of stories and topics.
One could theoretically create an analogue of scanning page by page through a print edition by going to a major newspaper site like washingtonpost.com, clicking on each section (Front Page, Metro, Business, Style, etc.) of the daily edition, scrolling through all the headlines, and clicking through to the full-text of those articles that warrant reading. I never do that, however. And, although I again have no data to support this, I doubt that many other people do, either.
Ironically, even though we’re dealing with an electronic environment that has the supposed virtue of speed, the main issue that would seem to discourage people from this approach is probably time. It seems self-evident that it’s faster to flip through each page of every section of a print edition than to click and scroll through every section of an online edition.
The online medium is well suited to finding specific things, but less so to serendipitous discovery of interesting things you didn’t realize you wanted. A good analogy for those of us who’ve spent a lot of time in a university library is the difference between searching for items in an online catalog vs. browsing through books that have been shelved together in a topical section.
During my academic career, more often than not, I would find neighboring books on the shelf that would prove much more valuable than the book I originally came to retrieve from the stacks after a catalog search. This is not to say that online searching doesn’t provide its own form of serendipity, but that its dynamics are different from the serendipity of print -- for which, it seems, an effective online analogue has not yet been developed.
And therein lies the problem. As long as major papers like the Washington Post and New York Times remain in business, “stories that make you go hmm” will be published, and they will appear online. How widely they will be read, however, is a different question.
With online content, the ease of access is both the greatest strength and the greatest weakness. If I think something is there any time I need it, I have less urgency and may fall into the trap of taking it for granted. A print newspaper on the doorstep, in contrast, confronts one immediately with the force of a limited range of choices. One can read it in a reasonable timeframe and then dispose of it; or one can leave it lying around indefinitely until getting around to reading it; or one can simply dispose of it immediately, unread. Since the second two choices are inherently less appealing, the first choice carries a strong motivational force to read the newspaper promptly that, in my opinion, does not yet have an electronic analogue.
In an online environment, the stories that venture into greater depth than the basic front page items are likely to be at even more of a disadvantage than they are in print. The result will be even fewer people exposed to a deeper and more sophisticated treatment of the news and, in turn, less accountability for political leaders, who will be receiving less feedback from a constituency less informed on issues ranging from the economy to foreign policy.
To close on a less grim note, however, I believe that, with some emerging technologies, there may be some cause for rekindling (pardon the pun) our hope. While I have not yet had the pleasure of reading a newspaper on the Amazon Kindle, I have heard positive reports from others that it succeeds in delivering a much more print-like experience.
When and if newspaper publishers finally discover a sustainable electronic business model, an approach along the lines of the Kindle that maintains some strong points of the print model may be what will preserve and renew the status of in-depth written journalism. For the sake of having an informed public that truly participates in democracy and political processes, let’s hope so. Sphere: Related Content
Monday, May 4, 2009
The Strange History of Non-Bank Banks -- and its Link to the Origins of the Current Economic Crisis
Researching the origins of the current economic crisis makes me feel old. I’m used to thinking of the Reagan administration as a fairly recent era. But here I am reviewing policies that were put in place at the time I came of age, and I realize that what I’m doing is basically historical research.Looking back from here in the late 2000s at the administration that was in power in the 1980s is not too different from someone in the 1960s researching the Roosevelt administration. And that thought makes me feel old.
The topic du jour that sent me once again back to the 1980s is the concept of the “non-bank bank,” to which a Reuters UK article indirectly alludes in an analysis of comments President Obama made on Saturday in an interview for the New York Times magazine.
Discussing the Obama administration’s outline of expanded financial regulatory powers to prevent a future crisis of the sort that the U.S. is now currently confronting, the Reuters article says that part of the proposed strategy is to create a regulatory body “with the authority to seize large non-bank financial firms, such as insurers, hedge funds, or private equity companies, if they are deemed to threaten the stability of the financial system.”
This made me recall the concept of the “non-bank bank.” It’s a term that I suspect most of us, like me, haven’t heard in some time -- which is probably an indication of just how much of a taken-for-granted fixture this kind of institution has become since its origin in the 1980s.
Although I don’t precisely remember what year it was that I first heard the term, I do have a fairly vivid recollection of the incident. I was in the kitchen at my parents’ house, where I was still living as a commuting college student. My dad and I were going through the evening ritual of dinner among the avocado appliances, accompanied by a news broadcast from a local AM radio station on the NuTone radio/intercom console built into the wall of the eat-in kitchen.
The kitchen, wallpapered in an early-American country pattern of reddish-orange flowers, would have served as a perfect model for the set designer for That 70s Show. Mom, due to a bad back that made it uncomfortable to sit on the hard kitchen chairs, usually didn’t join us at the dinner table. She was enjoying her repast in the living room which, with its rust-colored carpet, could also have served as an exhibit of 1970s decor.
One of the stories on the news broadcast Dad and I were listening to as we dined was about non-bank banks. I don’t recall what specifically was being reported about them, but perhaps it was September 1984 when, according to an article in the January 23, 1986 edition of the New York Times, a Federal appellate court ruled that the Federal Reserve Board did not have the power, without new legislation, to broaden its definition of a bank in order to exercise regulatory authority over an emerging category of financial institution sometimes referred to as a non-bank bank.
“What in the world is a non-bank bank,” Dad wondered out loud after hearing the news story. It was a rhetorical question, of course, because neither one of us knew the answer. It was the 80s, after all, so a quick hop on to Google to find out wasn’t an option. But we did have a vague awareness that certain types of financial organizations, such as insurance companies and investment firms, were trying to get into services traditionally provided by banks. Little did we know that this news story was just one indicator within a much bigger picture of a vast wave of change in the financial landscape that, about 25 years later, would have such profound consequences for the U.S. and world economy.
The Fed appealed the non-bank banks case all the way to the U.S. Supreme court, but lost in an 8 to 0 decision on January 23, 1986. That decision was the main subject of the New York Times article referenced above. Prophetically, the article went on to say that the Court’s ruling was “likely to speed the movement toward interstate banking and the expansion of insurance, retail, securities and other companies into financial services traditionally performed by banks” and quoted Federal Reserve Board Member Charles Partee, in what reads like a warning of dire consequences to come, that “Every merchandiser in the country will have a bank” [with “have a bank” presumably meaning “operate its own bank”].
Now, do you remember who was Chairman of the Fed in 1986, when the Supreme Court made this decision? It was none other than Paul Volcker, who now happens to be one of President Obama’s top economic advisors. So in 1986, under Volcker’s leadership, the Fed appears to have been fighting what it found to be alarming efforts to expand, outside of its regulatory authority, financial activities traditionally associated with banks.
But the story gets even more interesting, because the New York Times article goes on to say that “the Reagan administration, which favors more competition and less regulation,” joined the large companies that wanted to offer financial services competing with those of traditional banks in “urging the court to invalidate the Fed’s regulation.”
So we see the Fed, under the leadership of Volcker, an appointee of President Carter, at odds with the Reagan administration, advocating for a more cautious and controlled approach to the development and growth of the financial services industry.
But the Fed did not prevail. And the rest, as we now know, is history. Interstate banking and the entry of other financial services institutions into traditional banking functions indeed expanded rapidly, paving the way for the folks who brought us such brilliant innovations as the credit default swap.
Local and community banks all but disappeared. In my home town, for example, Suburban Trust Company became Suburban Bank and then Sovran Bank, which before long was absorbed by NationsBank, which was in turn absorbed by Bank of America. My first credit card from an unsolicited, pre-approved offer -- with a whopping $5,000 line extended to me as a student in the 1980s taking home about $50 weekly from a weekend-only job -- was from an out-of-state bank I’d never heard of that ultimately became part of Chase.
In 1987 Volcker departed the Fed, not long after it lost the non-bank banks case. His successor, Allan Greenspan, was once a disciple and part of the inner circle of Ayn Rand. Rand espoused views that are perhaps among the most extreme in history on the supposed virtues of markets free of government regulation. On the subject of regulation, she believed that all that was necessary was the self-regulation of heroic captains of industry who, based solely on the motivation to protect their profitability and reputations, would never do anything lacking in integrity. In the context of the current crisis, those views look astonishingly naïve, given the reckless lack of self-regulation we have witnessed from certain key players.
There’s a certain poetic justice in the fact that Volcker is finally getting a chance to help clean up the same mess that the Fed under his leadership apparently tried to stop, during its earliest stages, in the 1980s. And it even helps put into perspective the issue I opened with of “feeling old” when I dig into the origins of the current crisis. While I was in college and still living with my parents during the non-bank bank controversy, Volcker was already old enough to be the Fed chairman. So imagine how old he must feel now.
I’m also amazed at how consistently, so far, the eye seems to fall squarely into the 1980s when one looks for the origins of the current crisis. It seems that we are truly witnessing the end and final outcome of an era that began when President Reagan, in one of the earliest and most famous speeches of his administration, proclaimed a freeze on new regulations and pledged to get rid of as many as possible. And so he did, including what appears, in effect, to have been a systematic dismantling of certain safety measures that were put in place after the Great Depression to prevent a recurrence -- to which as a consequence, we seem to have come alarmingly close. Sphere: Related Content
Tuesday, April 28, 2009
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:
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:
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.
Sphere: Related Content
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.
Monday, April 27, 2009
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
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
Thursday, April 23, 2009
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
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
Wednesday, April 22, 2009
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
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
Tuesday, April 21, 2009
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
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
Monday, April 20, 2009
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:
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:
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
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
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
Friday, April 17, 2009
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
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
Thursday, April 16, 2009
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
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
Wednesday, April 15, 2009
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.
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
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.
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.
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.
Monday, April 13, 2009
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.
Saturday, April 11, 2009
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
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
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