Author: A.T.

It looks as if a balanced budget looms. Treasury Secretary Rubin noted on a talk show this past weekend that from November to November, Uncle Sam actually took in as much as he laid out.

But looks can be deceiving.

First, the bad news. The day Washington starts slapping itself on the back for balancing the budget — slapping that’s already begun — we’ll still be running a deficit well in excess of $100 billion. That’s because of how we account for the Social Security Trust Fund and scores of other, much smaller, trust funds. The surplus Social Security taxes we’re supposed to be piling up for our old age are actually counted as “revenue” by Uncle Sam. We’re spending, not saving, it. In 1998, the Social Security surplus is expected to be around $100 billion. So whenever you hear a federal budget number, just subtract $100 billion. If you hear that the budget’s balanced, then you’ll know we’re running a $100 billion deficit. If you hear we’re running a $35 billion deficit, then in truth we’re running a $135 billion deficit. A $50 billion surplus? No, a $50 billion deficit.

Imagine your own household budget. You spend $1,000 a week. You take in $940 — plus $60 that your daughter gives you every week for safekeeping. She’s saving up for college. Would you say your budget is balanced? You take in $1,000 a week, spend $1,000 a week. Yet, clearly, you are running a $60-a-week deficit, embezzling $60 a week from your daughter. About $3,000 a year. The day will come when your daughter presents you with the bill for Dartmouth and expects you to pay it with all that money she earned mowing lawns, sitting babies, designing web sites.

In Uncle Sam’s case, it’s not $3,000 but upwards of $100 billion (though still just 6% or so of annual revenues).

The further bit of bad news is that if we do achieve a balanced budget — which is to say a $100 billion deficit — we will have done it in a prosperous economy. Imagine how the deficit might swell in a recession.

So before you rush out to spend the hoped-for surplus now much in the news, please bear in mind — and tell all your friends — it’s not a surplus at all.

Or is it?

Here’s the good news. Because of the way Uncle Sam accounts for what any ordinary business would term “capital spending,” things may not be nearly as bad as they seem.

When a business buys a machine or a county builds a road, it amortizes the cost over the life of that machine or road. (I’m oversimplifying, but this is the general idea.) When Uncle Sam buys a machine or pays much of the cost to build a road, it “expenses” the full amount then and there, just as if it were paying the phone bill.

So just as we’re shortchanging our children by the way we account for the Social Security surplus — spending the money we should be saving — so are we shortchanging ourselves in their favor by treating as a current expense the cost of projects that will benefit them many years into the future.

You will be forgiven for wondering why we don’t just do the accounting properly. Why not exclude the Social Security surplus from the budget numbers? And why not charge to future years a sensible portion of the capital investments we’re making, as any business would? Hello? Is anybody home?

The first part — excluding the trust fund surpluses from budget revenue — would be easy. But the second is tougher than you might imagine. Clearly, building a road or a bridge is an investment. How about a tank or a fighter plane? Funds for education? Midnight basketball? All these are investments in our future. (The goal isn’t the basketball game per se, but helping to steer kids down the path to productive citizenship, working and paying taxes, rather than the path that leads to crime and incarceration, absorbing taxes.) Yet where would it end? One can imagine Congress sorely tempted by the lure of this kind of accounting. Could all education expenditures be written off over 50 years rather than “expensed” all at once? You can just see the free-for-all.

So in an odd sort of way, our irresponsible Social Security accounting may be more or less balanced by our conservatism in expensing our capital expenditures.

In a sense, one might argue, our accumulated national debt — the sum of all those annual budget deficits we’ve been running, now up to about $5.5 trillion — is like the long-term debt of a company that’s been making investments in the future. At a bit under 70% of our Gross Domestic Product, it’s higher than we’d like, but by no means insupportable. It’s been higher, it’s been lower.

Especially in prosperous times, we should lean against the wind to lower that 70% ratio. Gradually reducing it to the 30% or so it was before the Vietnam war would improve our fiscal health. But here’s the thing many people miss: It is the relative size of the debt, not the actual dollar amount, that matters. A $100 million debt would swamp most small businesses but mean nothing to an enterprise like Intel. Our $5.5 trillion debt would swamp Germany or France but is not the end of the world for us. It’s that 70% ratio, not the $5.5 trillion, we need to focus on and reduce.

If — with honest accounting for the trust fund surpluses — we ran a $110 billion deficit this year, we would expand the national debt by 2%. But if at the same time the economy grew by 5% — say, 2% inflation and 3% real growth — then the national debt would actually have shrunk relative to the economy as a whole. Keep this up for 50 years — 2% growth in the debt, 5% growth in the economy — and you have a $90 trillion economy and a $15 billion debt. At which point the debt, far from approaching 70% of the gross domestic product, would be not quite 17%.

This is not to deny the symbolic importance of a “balanced budget,” however oddly it is calculated. But it does give one a somewhat more sanguine feeling about our fiscal affairs.

Less important than a zero deficit, let alone paying down the debt, is making the money that we do lay out count. Six hundred dollar hammers are obviously out; welfare payments to those who don’t need them only breed dependency and cost self-esteem; unneeded pork barrel projects deserve the line-item veto.

In years of high tax revenues and low unemployment, we should be paying down the debt. But in most years, it’s enough to have it grow slower than the economy as a whole.

This is not the stuff of stirring slogans, bold goals, or calls to action. For that you need something simple: Balance the budget. Pay off the debt. But even if “perception is reality” — an important point for investors to bear in mind — the reality is, nonetheless, somewhat more complex. We haven’t balanced the budget, and we certainly shouldn’t spend the “surplus.” But neither need we pay back that $5.5 trillion.

I know for some of you it’s a nightmare, but here’s the way it plays out:

1. The President leaves office January 20, 2001. History winds up rating his performance higher than many expect. Peace, prosperity, a balanced budget, an emphasis on inclusion and education, a vision for the future — not a bad eight years! (The fact that he lost some money decades ago in a real estate tax shelter called Whitewater turned out not to be tremendously relevant to most Americans’ lives after all.)

2. He plays a year of golf and then, too restless for the Supreme Court, becomes junior senator from Arkansas — and through his intellect, energy, people skills and standing, essentially winds up running the Legislative Branch. Not literally running it, of course, but then when did a president entirely run the Executive Branch either? I’m told that in any large organization, the CEO has to lead more than dictate.

2. Then, around age 72, finally tiring of the endless hubbub, he is appointed Chief Justice by President Gore, so he gets to head the third branch of government as well — the ultimate hat trick.

Now, you’re thinking, Whoa! Unless they repeal the two-term amendment to the Constitution, how could President Gore appoint him Chief Justice in 2018?

The answer is — and this surprised me as much as anybody — Al Gore, in some last minute convention maneuvering, actually agrees in 2000 to be Bill Bradley’s running mate.

“After all,” Bradley tells him, “you’ve been the most productive and effective vice president in American history. And after 16 years in the post, you’ll be irresistible. Anyway, the country needs you.”

“Vice President — again?” Gore moans. But, patriot that he is, he signs on, does another great job, and then, finally (after a four-year hiatus when Newt briefly captures the White House), becomes president himself and appoints Bill Clinton Chief Justice. (Bradley, meanwhile, goes on to coach the Knicks.)

No, wait. That’s not right. Who’s kidding whom? It’s Gore/Bradley, not Bradley/Gore. The reason President Gore gets to appoint Bill Clinton Chief Justice in 2018 can be explained in a single word:

Tipper.

Wallace gave me this. Wallace is one of those terrific whirlwinds who stirs up everything around him — cajoling, energizing, shouting (but with a Southern accent, so it’s impossible not to be charmed) — and I think of this as Wallace’s prayer, though in truth someone just gave it to him and he passed it on to me.

Perhaps there’s a Wallace in your life.

Perhaps you’re a Wallace.

In any event:

Dear Lord,

So far today, God, I’ve done all right. I haven’t gossiped, haven’t lost my temper, haven’t been greedy, grumpy, nasty, selfish, or over-indulgent. I’m really glad about that. But in a few minutes, God, I’m going to get out of bed, and from then on I’m probably going to need a lot more help.

Amen.

Bonds are “in” these days, perhaps with good reason. If we have a recession, interest rates could fall further (i.e., bonds will rise — it’s two ends of the same see-saw) and earnings could fall, which could be bad for stocks.

Normally, I shun bonds. Not enough excitement. And I certainly shun long-term bonds when interest rates are low. Too much interest-rate risk. But as I wrote in Worth a while back, there are some long-term bonds I’ve bought — very long-term bonds, backed by a very good credit (well, we’ll see about that), selling at an extraordinary discount.

Specifically, these bonds are the “fives of eighty.” Not the 5% bonds of 1980 or even 1880 but, verily, the fives of 1780, backed by the full faith and credit of the United States. By now, I have a whole bunch of these little suckers, many of them bought for the price of a nice dinner. That’s really about all they’re worth if they’re canceled, as, according to Alexander Hamilton’s report in 1795, all but $90,000 of the approximately $3 million issued were. Most of my bonds, however, issued in denominations between $1 and $20, are among the $90,000 that remained unredeemed. Arguably, they have been accruing interest for 218 years.

On a $20 bond — one of which I managed to buy from a dealer for $45 — the interest comes to $832,333.

“Hello, I’m here,” I have visions of myself saying to the teller at the Federal Reserve Bank in Washington, handing him one of my $20 bonds for redemption.

“Just a minute, Sir,” the teller would say, nonplussed. And while that “minute” would doubtless stretch into decades of litigation — look how long it took the Eskimos in Alaska — my little bonds would be accruing interest at 5% a year all the while.

Then again, they’re only worth what someone will pay for them, which these days is typically a few hundred dollars each.

To do this justice, I have to ask you to back up a second and picture it. There we were, this pathetic little fledgling country trying to fight the British Empire. Any little kid learns the basics — the shot heard round the world, George Washington and the terrible privations of the winter at Valley Forge. You know. But how did we finance all that? Who paid the soldiers? Who paid for the salt petre?

The answer, oversimplified to be sure, is that the Continental Congress printed paper money. It quickly lost value, as paper money printed to finance wars so often does. By 1780, Continental Currency was trading for about a fortieth of its initial value — about two and a half cents on the precious-metal dollar. At that point, Congress officially exchanged a couple hundred million dollars of the near worthless paper money for just a tiny fraction as much sound paper money, guaranteed both by whichever state issued them (each state issued a portion) and, for extra safety and to inspire extra confidence, by the United States of America, and hand-signed on the back by an authorized agent thereof.

Will the U.S. government ever make good on this obligation? I have no idea. Needless to say, I’m not holding my breath. But Hamilton does use words like “absolute obligation” on which “interest is due perpetually until paid” in his report, and the precedent of compound interest is fairly clear. So who knows. The scale of the thing is enormous, but not so enormous as to be impossible. If all $90,000 were presented at full accumulated value (and I like to think a lot of these bonds have been destroyed in fires or lost to floods or tossed out with old newspapers), Uncle Sam would have to fork over about $3 billion — $20 million of it to me — and then take back perhaps $1 billion in income tax on the interest. A lot of money, but not much to maintain the creditworthiness of the United States of America. Of course, at simple rather than compounded interest, I’d be getting about $5,000 instead of $20 million. And if I ever did get any meaningful portion of that $20 million (I don’t want to tip my hand here, but I just might be willing to settle for twenty cents on the dollar), I’d be consumed with guilt — the primary means by which bleeding hearts react to good fortune — and would presumably give most of it away. Still, it’s fun thinking I have $20 million for which I paid about $30,000.

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salt petre: This substance, rumored to have been put into our milk at summer camp to keep us from getting too restless, was an important component of gunpowder in the eighteenth century. For $260 I purchased at auction a Salt Petre Inspection certificate dated June 11, 1776. Back to Text

“Quite a few years ago I read a book by you in which you recommended Mutual Shares. I was finishing my MBA at the time. I began to invest in it and never stopped. I’m 42 now, earn $60K in salary and have never earned more. I am nearing millionaire net asset status and will most probably achieve it long before age 50 — even with the expected attenuated gains from the market in coming years. Compound interest and understanding taxes can take one a long way. A little good advice helps too. Thanks. Please withhold my name if you choose to use this note in your column.”

Listen: I take no credit for this. Almost none of my advice is original; I got it from people like Aesop and Ben Franklin and Charles Dickens. From Mark Twain and Tolstoy. But at this time of New Year’s resolutions, I think it’s worth pointing out that this stuff — slow but steady common sense stuff — really does work. And needless to say, it’s gratifying to see the results.

Live beneath your means today, make a plan for tomorrow, work hard, and, with any luck, you’ll be a millionaire before too long, also.

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Aesop: “Slow and steady wins the race . . . . A crust eaten in peace is better than a banquet partaken in anxiety . . . . It is thrifty to prepare today for the wants of tomorrow.” Back to Text

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Ben Franklin: “Necessity never made a good bargain . . . . There are three faithful friends — an old dog, an old wife, and ready money.” Back to Text

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Charles Dickens: “Annual income twenty pounds, annual expenditure nineteen six, result: happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result: misery.” Back to Text

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Mark Twain: “October. This is one of the singularly most dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August and September.” Back to Text

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Tolstoy: “Buy term insurance and invest the difference . . . pay all your credit card balances in full within the grace period . . . investing 20% or 25% of your portfolio in non-US stocks can actually reduce the risk of your portfolio slightly while at the same time slightly increasing its expected long-term return.” Did you know Tolstoy was actually a financial planner in the Sevastopol office of Shearson, Lehman, Hutton, American Expressski, as it was known back then? No? OK, well did you know he actually did write these words, in 1892: “The more is given the less the people will work for themselves, and the less they work the more their poverty will increase.” Money advice any parent should recall at allowance-negotiation time with the kids. Back to Text

I know a guy who recently spent $1,200 on a scarf. (His rationale? “It was reduced from $3,000.” He actually said this.) Here’s what I recently got for $1,200:

• One blue Fioravanti suit
• One gray Ungaro suit
• One brownish-gray Nino Cerutti suit
• One black Ungaro suit
• Two belts
• Free alterations
• Eleven hundred thirty-six frequent flier miles
• $63.38 in change

Yes, I got a little carried away. I can’t honestly tell you I sit here typing all day in a suit.

And, yes, when I got them home, one of the suits was not a hit. “I don’t like black suits,” said Charles, who, to my relief, liked the others.

But here’s the great part. I had forgotten to buy a tux — that’s what I needed, a tux! — and after squinting at the situation for a minute with a designer’s eye, Charles told me to give him the black suit. Next thing you know, it had black satin stripes on the pants and the collar — voilà! My new tuxedo.

Now, you may think I got all this fine loot so cheap because, having given Men’s Suits a plug or two over the last year, Men’s Suits wanted to do me a favor. Not so. I actually make a point of trying to avoid that sort of thing. When out of the blue two ostrich eggs arrived unsolicited from the ostrich people a while back, one broken, I did not return them — who has time to be that incorruptible? — but I’ve paid for every pound of ostrich meat I’ve consumed, paid for every fat-free cheesecake, paid for all my suits. The alterations were free because, it seems, with even the suggestion of negotiation, all the alterations at Men’s Suits wind up being free.

Indeed, it was not until he had run my credit card through the cruncher that — displaying a copy of my book — I asked (couldn’t resist):

“Have you seen your plug?”

“What plug?” the manager asked.

“Page 159,” I allowed, handing him the book.

“Hey, Harry! Come look at this!” he called to someone who almost surely wasn’t named Harry but whose real name I forget.

“You should give a free book with each suit,” I suggested helpfully.

“Hey, Raoul! Come look at this!” he called animatedly to someone who almost surely wasn’t named Raoul, wisely ignoring my suggestion.

So, OK; when they connected the face on the book to the face with the credit card they threw in free delivery. But that’s as far as it went. And inasmuch as I now have enough suits and tuxes for at least five more years, it’s not likely to go further any time soon.

#

And now for an unrelated but important Public Service Announcement:

Please: Drive VERY carefully tomorrow night. (And at all other times as well.) I need all the healthy readers I can get. Seat belts save lives; driving defensively saves more; plastic surgery is no fun; there are tens of thousands of tragically serious accidents each year — and not a single one was expected by the drivers involved.

Don’t drive too fast, leave PLENTY of room between you and the car in front of you, NEVER drive when you’re too sleepy or have been drinking.

Dave Allman: "I’m 46 with a $250,000 zero basis IRA and the Roth conversion numbers absolutely make sense, if I can meet the $100,000 AGI cutoff. My concern is the "tax risk" of assuming that today’s law will control in 20, 30 or 40 years. It wasn’t long ago that Social Security wasn’t taxable (okay, special case, but point is the same). Any speculation on the risk of paying taxes today only to have to (perhaps) pay them again someday?"

It’s a real risk, though there will be lots of senior voters by then to keep Congress from daring to do it directly. The Roth would never be taxable per se, I suspect. But if they decided that income from your Roth IRA should be counted in determining your eligibility for Social Security or other benefits, say, or in figuring some 21st century alternative minimum tax, it would amount to much the same thing.

The best you can do is make some educated guesses, comfortable in the knowledge that, by and large, whatever choice you make is secondary in importance to the fact that you’re saving in the first place. That’s the big decision, and either way you go — traditional IRA or Roth IRA — you’re making it right.

I wish you a Merry Christmas, I wish you a Merry Christmas, I wish you a Merry Chrissssssssssst-mas — and a Happy New Year!

I would also point out that if you never quite get to itemize your deductions — or if you do itemize, but for barely more than the standard deduction would have entitled you to anyway — you might want to think about the old bunch-things-up-every-second-year strategy. Stop! Don’t send out those charitable gifts this week — send them January 1, 1998. Stop! Don’t pay your property tax this week — pay it January 1. Then at the end of 1998, do make your charitable gifts and pay your taxes before the end of the year. For 1998, you’ll have double the deductions you normally have and might thus get more of a tax break. In 1999, you’d take the standard deduction. In 2000, you’d double-bunch again. And so on. (Naturally, you wouldn’t delay paying property or state income taxes where penalties would be involved.)

Let me be quick to say this idea does society no good whatsoever. But it seems harmless enough, and if it ultimately saved you $1,000 in taxes every second year, I say: Merry Christmas.

And this just in from someone with a cryptic AOL address. Today being the first day of Chanukah, I thought it might bring a smile to faces Jewish and gentile alike. In these politically-correct times, I feel I should preface it by saying I am a trustee of the Shoah Foundation, and it didn’t offend me. So I trust no one else — including aviary-rights advocates — will be offended either. It’s a joke:

Meyer, a lonely widower, was walking home one night when he passed a pet store (perhaps a PetSmart — PETM?) and heard a squawking voice shouting out in Yiddish, “Quawwwwk … vus machst du … yeah, du … outside, standing like a schlemiel … eh?”

Meyer rubbed his eyes and ears. He couldn’t believe it. The proprietor sprang out of the door and grabbed Meyer by the sleeve. “Come in here, fella, and check out this parrot.”

Meyer stood in front of an African Grey that cocked his little head and said, “Vus? Ir kent reddin Yiddish?”

Meyer turned excitedly to the store owner. “He speaks Yiddish?”

In a matter of moments, Meyer had placed five hundred dollars down on the counter and carried the parrot in his cage away with him. All night he talked with the parrot in Yiddish. He told the parrot about his father’s adventures coming to America, about how beautiful his mother was when she was a young bride, about his family, about his years of working in the garment center, about Florida. The parrot listened and commented. They shared some walnuts. The parrot told him of living in the pet store, how he hated the weekends. Finally, they both went to sleep.

Next morning, Meyer began to put on his tefillin, all the while saying his prayers. The parrot demanded to know what he was doing, and when Meyer explained, the parrot wanted to do it too. Meyer went out and handmade a miniature set of tefillin for the parrot. The parrot wanted to learn to daven, so Meyer taught him how read Hebrew, and taught him every prayer in the Siddur with the appropriate nussach for the daily services. Meyer spent weeks and months sitting and teaching the parrot the Torah, Mishnah and Gemara. In time, Meyer came to love and count on the parrot as a friend and a Jew.

On the morning of Rosh Hashanah, Meyer rose, got dressed and was about to leave when the parrot demanded to go with him. Meyer explained that Shul was not a place for a bird, but the parrot made a terrific argument and was carried to Shul on Meyer’s shoulder. Needless to say, they made quite a sight when they arrived at the Shul, and Meyer was questioned by everyone, including the Rabbi and Cantor, who refused to allow a bird into the building on the High Holy Days. However, Meyer convinced them to let him in this one time, swearing that the parrot could daven.

Wagers were made with Meyer. Thousands of dollars were bet (even money) that the parrot could NOT daven, could not speak Yiddish or Hebrew, etc. All eyes were on the African Grey during services. The parrot perched on Meyer’s shoulder as one prayer and song passed – Meyer heard not a peep from the bird. He began to become annoyed, slapping at his shoulder and mumbling under his breath, “Daven!”

Nothing.

“Daven … feigelleh, please! You can daven, so daven … come on, everybody’s looking at you!”

Nothing.

After Rosh Hashanah services were concluded, Meyer found that he owed his Shul buddies and the Rabbi over four thousand dollars. He marched home quite upset, saying nothing. Finally several blocks from the Shul, the bird, happy as a lark, began to sing an old Yiddish song. Meyer stopped and looked at him.

“You miserable bird, you cost me over four thousand dollars. Why? After I made your tefillin, taught you the morning prayers, and taught you to read Hebrew and the Torah. And after you begged me to bring you to Shul on Rosh Hashanah, why? Why did you do this to me?”

“Don’t be a schlemiel,” the parrot replied. “You know what odds we’ll get at Yom Kippur?!”

If you like that joke and are Jewish, like me, you may retell it. If you are not Jewish, maybe not. But my main concern is that whoever wrote it has gotten no credit for it. In hope of finding some attribution, I used the Alta Vista engine to search on “Meyer” and “Parrot” — and it turns out (seriously!) there’s a guy named Meyer who has a parrot, but not a Jewish parrot. When I added Rosh Hashanah into the search mix, I came up blank. Thanks, in any event, to whoever started this thing orbiting. I assume he’s Jewish.

"Is money the root of all evil?" — Dawn M.

Hardly. Shaw had it right. Lack of money is the root of all evil. Once people get a lot of it, they turn into philanthropists, endow colleges, and send their sons off to be inspiring presidents of the United States.

Money itself — the medium of exchange — is of course this miraculous invention that is as fundamental to economics and prosperity as language is to civilization and culture.

It’s not money that causes evil, it’s desire (whether material or sexual or egomaniacal). Not to knock desire; just to say that a "good" person will not allow it to trample basic notions of fairness and honesty. So it’s perhaps the lack of scruples or conscience that’s the root of all evil. A chemical imbalance, no doubt. One day there will be a pill. Or a patch. (Imagine the money in that!) And the truly evil people will find a way to get everybody else to take it, or wear it, but not them. AND THEY WILL TAKE OVER THE WORLD. Except that George Clooney and Nicole Kidman will find those people in the nick of time — I mean WITH JUST SECONDS TO SPARE — and stick patches on them and it will all work out OK.

Trust me on this.