Year: 2003

The market?

If we really catch Osama, as it seems as if we soon may, that’s the kind of great news that could easily touch off a rally – Lord knows there’s a ton of cash of the sidelines, including a gram or two of my own. And if there were some kind of good surprise with Iraq, the market could go over the moon – short term.

My own sense (and I would be first to agree my own sense is not worth a whole lot, and that timing the market is all but impossible for anyone) is that the values, for the most part, are just not yet that compelling, and that the economic challenges and uncertainties are still awfully great. So even if we get lucky, I’d be surprised if, as a general proposition, stocks, bonds, or real estate have hit bottom.

And if things should go badly in Iraq and its aftermath, as they well may, times could get tougher.

Well – you asked.

And now, on an entirely different topic . . .

Click here.

Yesterday I said I had no problem with a $300 billion or $400 billion deficit in a bad year, “or even – given the size of our economy – with, say, a $100 billion deficit every year. (That would be less than 2% annual growth in our national debt. If the economy were growing at a nominal 4% a year – between real growth and inflation – and our collective debt were growing at just 2%, our indebtedness would steadily shrink in proportion to our economy.)”

Michael Young: “I don’t think you really mean that, do you? The arguments against a $400B deficit still apply at the $100 billion level. It’s only a matter of *how soon* it catches up with us.”

Not true. Imagine a $200,000 house you buy with a $160,000 mortgage – 80% of the purchase price. Now imagine adding 2% a year to the outstanding principal (instead of paying it down) but imagine, also, that its value is increasing at 4% a year. In a century, you’d owe nearly $1.2 million on the house . . . but the house would be worth more than $10 million. So your indebtedness would have shrunk from 80% to 12%.

The problem, I argued yesterday, is when you set yourself on a trajectory, as Bush has done, for $400 billion – and higher – deficits as far as the eye can see. That is, deficits that grow the national debt faster than we can grow the economy, which increases the debt relative to the size of the economy. (That same $200,000 house, worth $10 million after a century of 4% growth, would be burdened by a $13 million mortgage if we added 4.5% a year to the principal balance instead of 2%. The indebtedness would be 130% instead of 12%.)

With $400 billion deficits, I argued yesterday, pretty soon, it mounts up . . . and the interest we have to pay mounts up with it – both because the outstanding balance is higher, but also because that higher balance is likely to be subject to higher interest rates. (When your own credit card debt begins to get out of hand, they stop mailing you those 0% interest offers – just when you need them most.)

If we were doing all this deficit spending to rescue the states from their own fiscal disasters, or to accomplish some fantastic investment to make us more productive in the future, I argued, that would be scary enough. But we are doing it to reduce the tax burden on the wealthy. With the unintended result, I think, that it will make us all less wealthy. What, I asked, could we be thinking?

Sreenivas Ikkurty: ‘I read your article on CEO pay in PARADE this Sunday. The situation [gargantuan pay even in the face of mediocre performance] is really deplorable. My suggestion is to do as Berkshire Hathaway CEO Warren Buffett does in motivating Lou Simpson. Simpson is the CEO of GEICO, part of the Berkshire empire, and manages its investment portfolio. In those years when his portfolio does worse than S&P 500, he pays Berkshire from his personal account. His salary becomes negative (not zero). If he beats the S&P 500, he receives a bonus proportional to his gains above S&P 500. What do you think?’

☞ That Buffett is a smart cookie. He has also pointed out from time to time that ‘record earnings’ are often not the triumph they are made out to be. If one owned a company that did no more than invest all its assets in a savings account and let them compound, its earnings (assuming a constant interest rate) would rise to record heights each year. The idea is to do better than a savings account – or else why go to all that extra trouble and take all that extra risk?

I’m not sure about getting many CEOs to take negative salaries when they don’t perform well, but I think it would be healthy if it were possible to attract and motivate talented CEOs without having to dangle the prospect of $100 million pay days. You can get by on $1 million or $2 million a year, plus perks. (Can’t you?) Or at least the next generation of CEOs might be able to. Yes, incentives and an ownership stake make sense. But pride and competitive drive generally motivate quality people, too. And the lower the base salary, the more modest the incentive need be to have impact. To a guy making just $1 million a year, the prospect of an extra million is a lot more meaningful than to a guy making $5 million a year.

(Of course, this all verges on the obscene in a world where most Americans make $35,000, and most of the rest of the world would be ecstatic to make $3,500. But as I argued in PARADE, I’m all for people reaping the fruits of the free market. It’s just when the market isn’t free – when the CEOs are essentially setting their own pay with the blessing of the friends they’ve put on the board, many of them fellow CEOs – that I balk.)

Jeremy Bronson: ‘Gennady S. wrote: ‘The guy who made $100 million took a lot more chances than the guy who did not, and if his risks are not rewarded, capitalism would not work. Period.’ What kind of logic says that the guy who made $100 million took a lot more chances than the guy who did not? For one thing for every one of those so-called risk-takers who made it big, there are dozens who didn’t. Why shouldn’t the lucky (yes, lucky) one bear a reasonable tax burden for his or her success? More importantly, the odds are that any person who is in a position to make $100 million in stock options has had everything in life much easier than people at the bottom end of the tax bracket. Imagine how much easier it is to take risks when you know that you have family resources (parents, future inheritance, spousal income, equity in a nice house) and/or a good education and lots of useful connections to fall back on if the venture fails. It is this terrible misconception about the difference between what we are given and what we earn that generates such conflict between America’s increasingly stratified classes. God forbid, the children of the super rich actually go to war to defend the country that rewards them so generously!’

Jonathan Levy: ‘I really like the Democratic line I have heard that Bush’s tax cut is not a tax cut but a tax postponement – to a future generation. Given that, how about an estate tax pegged to the net budget deficit run during the dead person’s adult life? Before you can pass along wealth to your own children, you have to pay your share of the debt that would otherwise go to everyone’s children. Even those people who never voted for a winning candidate built up additional wealth by paying lower taxes than were necessary to fund the government spending that actually took place. For those who may say they did not want a lot of the spending – too bad. That’s how democracy works. It is not as if you get to duck income taxes by objecting to the spending. Obviously, this is way out there and I am not necessarily completely serious. However, I think there is a point to be made. Someone has to bear the burden of the deficits, and it seems more fair for it to be someone who was 30 in 1980 than someone who would not be born for 30 years.’

☞ Well, I have no problem with a $300 billion or $400 billion deficit in a single bad year or two. Or even – given the size of our economy – with, say, a $100 billion deficit every year. (That would be less than 2% annual growth in our national debt. If the economy were growing at a nominal 4% a year – between real growth and inflation – and our collective debt were growing at just 2%, our indebtedness would steadily shrink in proportion to our economy.) The problem is when you set yourself on a trajectory, as Bush has done, for $400 billion – and higher – deficits as far as the eye can see. Pretty soon, it mounts up . . . and the interest we have to pay mounts up with it. Indeed, the interest mounts up faster, because it mounts up two ways: first, it mounts up simply because the debt is higher; but, second, because huge deficits will lead to higher interest rates to carry that debt. We could see our annual interest burden double in just a few years – a huge burden on our national finances.

If we were doing all this deficit spending to rescue the states from their own fiscal disasters, or to accomplish some fantastic investment to make us more productive in the future, that would be scary enough. But we are doing it to reduce the tax burden on the wealthy. With the unintended result, I think, that it will make us all less wealthy. What could we be thinking?

Have you seen the cover of Newsweek? It’s a story about our President and his ability to rest easy in the knowledge that he is on a divine mission. My guess is that more than one of the suicide bombers felt the same assurance; but the difference, of course, is that their faith was terribly misplaced.

Not to be missed.

Separately, I commend to you this op-ed by Lisa Bennett of the Human Rights Campaign, fresh from her word processor:

Reality Bites
By Lisa Bennett

I have an idea for a new reality show. Call it “Not Married by America” and watch what happens when same-sex couples face everyday family challenges, like, say, birth, accidents and death. It may not be quite as funny as Fox’s new “Married by America,” where Americans get to vote on who should marry whom. But it might be refreshing to see a reality show about something… well, real.

Here’s episode one. Susan and Mary, a happy couple in their 20s, are entertaining their parents at their home in Florida. As they sit down to dinner, Susan announces, “I’m pregnant!” Smiles and tears appear on every face. Then Mary drops the bombshell. “But we have to move to Pennsylvania.” Cut to commercial. Pennsylvania, the women later explain, is the nearest state that will guarantee same-sex couples access to second-parent adoption, or the right of both to be legal parents of the child they will raise together.

Episode two. Joe and Brandon, a 40-something couple, are driving to the supermarket one morning when they pull over to help a stranded motorist on the side of the highway. A passing car hits Joe and he’s rushed to the hospital. Although Joe and Brandon have been together for 14 years, the hospital won’t let Brandon visit Joe, let alone make medical decisions on his behalf. Hospital officials say he is not considered “family.” Instead, they telephone Joe’s parents, to whom he hasn’t spoken in years.

Laughing yet? Wait. Here comes episode three. It’s morning and Jonathan, age 5, is in his pajamas playing with his mother, Kathy. After a few minutes, she kisses him and says it’s time for her to go to work. “Have fun with Mommy, sweetie,” she says, nodding toward her partner, Sharon, who enters the room. “I’ll see you tonight.” Foreboding music. Later that afternoon, Kathy, who was born with a hole in her heart, has a fatal heart attack. Her son and his stay-at-home mom are left to fend for themselves, without even the cushion of Social Security survivor benefits because Kathy was denied the right to become Jonathan’s legal parent.

OK. Now here comes the fun part. At the end of each episode, the American public can dial in to vote on what might have been a more fair ending, which might be something really surprising like equal rights under law. Polls have shown, after all, that 71 percent of Americans support hospital visitation rights for same-sex couples; 70 percent support employer-sponsored health insurance; 68 percent support Social Security coverage; and (note to network execs) 68 percent of high school seniors support adoption rights.

Or we could avoid putting the country through this whole saga and do something really radical and simply grant all families equal rights under law – by ridding discrimination based on sexual orientation and gender identity from marriage and adoption laws, and bringing equity to retirement, Social Security and tax laws.

Until this day becomes a reality, gay, lesbian, bisexual and transgender people can take steps to protect themselves with some important legal documents, such as domestic partner agreements, durable powers of attorney, hospital visitation authorizations, last wills and testaments, living wills, and, if appropriate, co-parenting agreements.

None of these documents will provide them with the same rights and responsibilities that the strangers united on “Married by America” will receive when they say, “I do.” But it could help keep their stories from appearing on “Not Married by America.”

Lisa Bennett runs the Human Rights Campaign Foundation’s FamilyNet.

ANOTHER GAME YOU CAN PLAY

Colin Ramsey: ‘Do you know this nice link? [2009 UPDATE: SITE HAS DISAPPEARED; SORRY] I just reduced the national deficit by almost half, and did so while raising spending in almost every important area, including both military spending, and education and social programs. I simply didn’t go to war in Iraq, and didn’t do Bush’s current tax plan. It was that easy.’

I’M PAYING $99 FOR A $275 ROOM

Paul McKittrick: ‘Found a site called biddingfortravel.com on which people reveal what they paid for a Priceline Hotel. After several information gathering visits, I bit the bullet and ended up with 3 rooms in London for $85 a night each ($100 with VAT) at the County Hall Marriott. Then cancelled our long-standing reservations. Not the Dorchester, but with a six foot five brother-in-law and 2 pre-teen neices in tow, the space, pool and extra room will be great. The biddingfortravel.com ezboard is helpful for novices. Especailly those who refuse to follow your advice without question.’

☞ Heck – even I don’t follow my advice without question.

WHAT NOBEL-PRIZE WINNING ECONOMIST JOSEPH STEIGLITZ THINKS

If you like the Bush tax cuts, click here.

TO HELL AND BACK

It started when my Compaq screen died in my hotel room in mid sentence. All else was working fine, but hard to do much when you can’t see the screen. Solution: plug into an external monitor . . . but not so easy to carry one around. Eventually got back to home base and made the switch-for-real, finally, to my IBM Thinkpad. But, but, but . . . well, it seems AOL 5.0 won’t work with Windows XP. You get a message giving you only two more sessions before it simply will not work until you upgrade to AOL 8.0. But I can’t upgrade because my address file is too big and the upgrade installation always crashes. So I have to use 8.0, but I can’t use 8.0. I will spare you the hours on hold. Suffice it to say that if you right-click any program icon in XP and select the Compatibility tab, it lets you run that program as if you were still using Windows 98 whenever you launch it. So AOL thinks I’m still using Windows 98. (I know, I know.)

CEO PAY

If you have yesterday’s PARADE sitting around with your Sunday paper someplace, you can see my little jab at excessive CEO pay. It’s not on PARADE’s website, but there’s a place to sign up if YOU want to be on PARADE’s cover next year . . . and a quick ‘salary game’ that’s actually kind of fun to play. (I thought I had it aced but lost big time.)

WHAT TO DO, WHAT TO DO

Joe F: ‘Since reading your books, I have erased all my delinquent credit card debt (I only have three cards now with no more than about $150 combined debt at any one time). I still have student loans (about $25,000 which I just consolidated to 3%). I saved up $6000 in an emergency fund by moving back with parents in September. Now that you have a little background, the simple question: Should I just continue to pay off my student loans? Or do I take half of the saved nest egg and deposit it into to an IRA? Or do I take that half and start investing? (I was looking at index funds and spiders, no stocks just yet.)

☞ Do put $3000 into a Roth IRA for 2002 (you have until April 15) and then again for 2003 (any time between now and 4/15/04) . . . assuming you have some 2002 and 2003 ‘earned income’ that will allow you to do this.

I think the market still has considerable risk, but less, obviously, than when it was much higher. At worst, you start buying index funds or spiders for your Roth IRA now and buy more next year even cheaper. If you keep putting $3,000 a year into a Roth IRA all your life, you should do fine. I don’t see a lot of point in rushing to pay off a 3% student loan.

(“Investing” is not a separate choice from contributing to a Roth IRA; a Roth IRA is just a way to shield your investment returns from ever being subject to federal – and, in many states, local – income tax.)

As for emergencies . . . well, just work harder and plan to fall back on your folks. They’ll be thrilled. And actually, you can withdraw money you’ve put into a Roth IRA at any time without penalty (you just can’t withdraw its growth) … so in an emergency, if you really had to, you would still have a $6,000 emergency fund, unless you had lost a chunk of it in a falling market.

Virtually anyone who qualifies for a Roth IRA (with income under $95,000-$110,000 single, $150,000-$160,000 joint) should take full advantage of this nifty tax shelter.

WHAT BILL GROSS THINKS

Alan Atwood: ‘Until I came across your references and links to Bill Gross and PIMCO, I’d never really heard of him. Since reading about him here I have made it a point to keep up with what Mr. Gross has to say each month. His accuracy has been uncanny when compared to many others who like to hold themselves out to be gurus of the markets. But it’s what he just posted to the PIMCO March 2003 Investment Outlook that I want to talk about.

‘A month or so ago I had what amounts to a small internet ‘war’ with someone who holds himself out to be a ‘guru.’ (Last October he told us that the Dow would be at 11,000 in March 2003 and that his models were basically never wrong.) This ‘guru’ was advising people to get on board with the ‘rule the world’ plans of the Bush administration because the only thing that mattered was profits. If ‘shock and awe’ means bombs rain down on civilians in Baghdad, well, that’s too bad. It’s still a profit opportunity and besides, if he were to speak out about the moral aspects of war, he’d alientate some of his subscribers . . . they’d cancel and he’d lose some bucks.

‘Now comes Bill Gross today.’

I am still in computer hell, just a different circle.

Not that life isn’t very good — e.g., I got to sit next to Paul Volcker on the Delta Shuttle yesterday. Dr. Volcker was the Fed Chairman pre-Greenspan who, I believe, was hugely important in keeping our economy from spinning off the tracks. He is a great American hero and the best kind of public servant.

I had spent a day with him in August, 1982, under the aegis of the New York Times, when the Dow was 777 and our economic problems, intractable. I came away feeling that maybe the world would not end, after all.

Wish I felt as optimistic today, but I think we have some more tough times to go through first. (I left Dr. Volcker alone for most of the flight, but did get the sense that he thinks a good bit of the current game plan — e.g., getting rid of the estate tax — is nuts.)

I’ve been more or less gloomy about stocks since the first of these columns (this is the 1,746th, so it’s been quite some time now) . . . and have for the last year or so been worried about real estate prices . . . and long-term bonds are a scary bet these days, with massive budget deficits and a war that will be financed with tax CUTS (???), suggesting possibly higher interest rates ahead (which hurt long-term bonds) . . . so it’s hard to know where to put your money these days.

I’ve made some suggestions in the past, some of which have worked out, some of which have tanked, and with several of which the jury is out. I owe you an update, and if I ever ascend from computer hell, you might get one.

But for now, lest you assume we have for sure hit bottom, I offer you this sobering piece by Dr. Laura D’Andrea Tyson, former key Clinton economics advisor, currently dean of London Business School, in the February 24 Financial Times. (I would just link to it, were I not in the twice aforementioned very, very hot place.) Imagine it nicely indented, and in a different color.

Dr. Tyson writes:

“The Bush administration is poised to unleash war in Iraq as the first demonstration of its muscular new foreign policy. According to the “Bush doctrine”, military force can be used pre- emptively to attack nations judged to pose significant future threats; and to replace despots with freedom-loving democrats who espouse those moral values George W. Bush assures us are “the same in every culture, in every time and in every place”. His bold agenda is made possible by America’s overwhelming military power. But it also reflects a moral certitude where none should exist and lacks a financial strategy where one is essential.

“Predictably, Mr Bush’s most recent budget calls for another huge increase in military expenditure. But initially it did not include money to honour his commitment to help rebuild Afghanistan. Only when this omission was exposed was $300m added for this purpose. Nor does the budget cover the costs of war in Iraq or of occupation, humanitarian aid and reconstruction. According to William Nordhaus of Yale University such postwar costs could reach $100bn-$600bn over the next decade. No wonder some officials are already claiming Iraq must pay for its own reconstruction. And no wonder Turkey is sceptical that Washington will honour its offer of a $26bn aid package in exchange for its support for the war. After all, that package is also missing from the Bush budget.

“What is in the budget is another round of massive tax cuts worth $1,500bn over the next decade. Even excluding long-term Social Security and Medicare liabilities, the budget projects a large deficit that will persist long after a war in Iraq is over and the economy has recovered. Based on the administration’s own questionable assumptions about economic growth and lower real per capital spending on almost everything other than defence and homeland security, this budgetary imbalance is likely to reach $2,000bn over 10 years. This is exactly when the federal government should be building surpluses to cover its promises to future pensioners. A more responsible set of assumptions would make the shortfall substantially larger.

“How does the administration plan to finance these mammoth deficits? Notwithstanding its unilateralist claims that America’s destiny should not depend on decisions made by an “illusory international community”, the White House is implicitly assuming that the rest of the world will foot a sizeable share of the bill. The US already absorbs about 5 per cent of the world’s savings. It borrows about $200m from the rest of the world each day to cover its savings gap. The Bush budget will increase that gap to as much as 9 per cent of gross domestic product by the end of the decade. Will the rest of the world be willing to cover a gap of this size and, if so, on what terms? There is no reason to think the US will find itself in a buyer’s market.

“Indeed, there are already worrying signs that foreigners are beginning to reduce their massive holdings of dollars and dollar-denominated assets. As this adjustment takes hold, the dollar is beginning to weaken. It declined briefly during the last Gulf war and rallied when the war was over. But at that time, the US current account deficit was less than 2 per cent of GDP. President George Bush Snr had already been forced to break his promise not to raise taxes so as to reassure global capital markets that the US was acting to reduce its structural budget deficit.

“Now, with the US much more reliant on foreign savings, his son clearly intends to increase these deficits. Meanwhile, the president’s economic advisers are trying to convince the markets that deficits do not really matter. However, this time the costs of war, together with the Bush budget and foreign policy agenda, may well trigger a sustained decline in the dollar and a reduction in America’s ability to borrow from the rest of the world.

“Americans face painful choices. Structural deficits will mean more expensive imports and higher interest rates. These will depress private sector spending to make room for financing Mr Bush’s budgetary priorities. The result will be lower national investment and living standards. Or, confronted with the deleterious effects of structural deficits on the dollar’s value, on interest rates and on growth, the US might face deep cuts in education, healthcare and retirement benefits.

“Such cuts may be the only way to fund Mr Bush’s imperial ambitions and his munificent tax relief for the wealthy. Indeed, many in Mr Bush’s inner circle are ideologically committed to reducing the government’s involvement in such social programmes. But because the programmes are popular with voters, it is politically advantageous to undermine them in an indirect manner. The administration has already signalled its desire to privatise Social Security and, more recently, Medicare. The prospect of looming structural budget deficits can be adduced as a justification for doing so, even though those deficits are self-inflicted and avoidable.

“The US is the world’s only military superpower. It may indeed have the might to pursue a pre-emptive foreign policy that is breathtaking in its audacity and arrogance. But the US is also the world’s largest debtor nation. It will need a sound financial plan to convince the rest of the world that helping to finance its global ambitions is a good idea. Right now, none exists.”

Life will of course go on. We will muddle through. But it certainly has — and in barely two years — become quite a muddle. Time, I guess, to propose another tax cut for the best off.

Greetings from computer hell – but that’s another story.

A recent Molly Ivins column I referred you to knocked guys for trying to avoid tax on their $100 million stock option windfalls. What’s so wrong with having to pay $40 million in tax on a $100 million in income, it asked.

Answered Gennady S, with some heat: ‘The guy who made $100 million took a lot more chances than the guy who did not, and if his risks are not rewarded, capitalism would not work. Period.’

–> Yet I would argue that somehow capitalism worked in the 1950s, when the top federal income tax bracket was (a ridiculous) 90%. And worked rather well in the 60s and 70s when it was (a still ridiculous) 70%. And from 1980 through 1986 when it was 50%. (Still too high, in my view).

Lowering the top rate all the way to 28% in 1986 did not lead to any kind of boom in the Reagan/Bush years, only to an explosion of debt for future generations to service. Indeed, the economy was in a pretty bad rut by 1991-92.

Did notching the top rate back up to 39.6% in 1993 kill the economy? Did it shut off access to capital and discourage risk taking? Quite the contrary; over the next eight years we added 22 million new jobs, capital was plentiful, and risk takers were going wild.

The evidence would seem to suggest that taxing $100 million windfalls at 39.6% does not kill capitalism (or lottery ticket sales). Neither does taxing $100 million estates. Neither, even, does taxing dividends and capital gains.

We would all love to live in a world where, per Leona Helmsley, only the little people paid taxes. But our need for revenue is too great. For the foreseeable future, sadly, the super-rich will have to pay taxes, too. At least that is the Democratic view.

LONG URLs

Marc Fest: ‘Perhaps the best of the programs to help you keep from breaking extra-long URLs is . . . snipurl.com.’

WHERE DO E-MAILS GO TO HANG OUT WHEN THEY’RE GOOFING OFF?

John Kasley: ‘I occasionally send myself an e-mail with a URL in it, as a reference to something I may want to investigate later. I just sent myself such a note, and it took 9 minutes to get back here. I’m on a cable connection. Where did the message go and what did it do? I hope it had a good time. Your readers seem to know everything in the world. One of them will surely know this.’

RELAX – IT ONLY SEEMS REALLY SCARY

Did you see Gregg Easterbrook’s piece in the New York Times a couple of Sundays ago? It is filled with more-or-less reassuring facts about the chemical, biological, and even nuclear, terrorist attacks we might face.

‘In 1989,’ it notes, for example, ‘workers at an American government laboratory near Washington were accidentally exposed to Ebola, and it was several days before the mistake was discovered; [yet] no one died. A coordinated anthrax attack in the fall of 2001 killed five people, a tiny fraction of the number who died of influenza during the time the nation was terrified by the anthrax letters.’

‘Your risk of dying in a car accident while driving to buy duct tape likely exceeds your risk of dying because you lacked duct tape,’ the piece concludes.

(I doubt there’s any connection, but it’s interesting to note that 46% of the duct tape sold in America is reportedly manufactured by an Avon, Ohio, outfit whose founder, Jack Kahl, gave more than $100,000 to the GOP in the 2000 election cycle.)

Then again, Easterbrook tells us, the Japanese effectively used fleas to spread Bubonic plague among the Chinese, so I am not ready to let my anxiety go altogether. Our missile shield, when it is completed, will surely not have the accuracy to knock plague-ridden fleas out of the air – at least not without doing a lot of collateral damage around the house.