Tax Policy

American Society / Corporate Behavior / Financial / Political / Tax Policy — 0 Comments
3
Jul 11

All Millionaires are Not Created Equal

In Is Debt Ever Good? we contrasted productive debt and non-productive debt.   There is a duality with millionaires as well.   Some are productive and some are not.

At his Wednesday press conference, President Obama adopted what he figured would be the populist stance, and he vilified millionaires as a group:

Mr. Obama repeatedly mocked tax breaks that he said were for “millionaires and billionaires, oil companies and corporate jet owners,” saying that voters would not look kindly on Republican lawmakers who defended such breaks at the cost of cuts in popular programs like health care, education and food safety….

“If you are a wealthy C.E.O. or hedge fund manager in America right now, your taxes are lower than they have ever been. They are lower than they have been since the 1950s. And they can afford it,” Mr. Obama said. “You can still ride on your corporate jet. You’re just going to have to pay a little more.” See Obama: Republican Leaders Must Bend on Taxes

The financial press immediately declared this as “class warfare.”  See e.g. Obama’s Case Against the Rich Rings Hollow.  I would conjecture that the American public can distinguish between the good millionaire, who creates jobs and real wealth, and the bad millionaire, who becomes wealthy through political maneuvering or illegal activity.

The Productive or “Good” Millionaire

Americans applaud individuals from all backgrounds who have an innovative idea and are able to execute and create real wealth.  Bill Gates (Microsoft); Sergey Brin and Larry Page (Google); Steve Jobs (Apple); Jeff  Bezos (Amazon);  Pierre Omidyar (EBay); Mark Zuckerberg (Facebook) and a host of other entrepreneurs identified a business need, created a new product or service, raised private capital and became wealthy.   Even in the much maligned financial industry there were pioneers such as Charles Schwab who brought discount brokerage and other financial services to the average investor.  These are thriving enterprises, which need no government assistance or special tax breaks to make money and create jobs.

The Non-Productive or “Bad” Millionaire

Unfortunately, we have too many examples of this type of wealthy interloper:

Failed Bankers – Richard Fuld (Lehman), Charles Prince (Citicorp) and Ken Lewis (Bank of America) are examples of bankers who drove their institutions into bankruptcy or made them wards of the state.  Each of these individuals secured great wealth and suffered no compensation “clawbacks” or criminal prosecution.

Failed Corporations – During the financial crisis, companies like General Electric almost went bankrupt.  When they should have diluted shares and jeopardized their own stock-based compensation through equity and debt offerings, crony capitalists such as Jeff Immelt called on their Washington “friends” to extend large, below market rate, irresponsible loans to GE.

Under- performing Corporations – Legions of CEOs collected large compensation packages while their businesses, employees and shareholders suffered.  Instead of amassing their personal largesse at company expense, many an under-performing CEO should have been dismissed.

Criminal Enterprises – Ken Lay and Jeff Skilling of Enron and Scott Sullivan and Bernie Ebbers of Worldcom, among a long and undistinguished list of corporate malefactors, were able to deceive shareholders and bankrupt their businesses.  And worse, each amassed a large personal fortune.

Defense Contractors – A small, tight knit cadre of defense contractors feed at the Defense Department trough.  Many of these contractors have been accused of violating various bidding and other contracting rules, but are never disqualified from bidding on future contracts.  Cost overruns, delays and malfunctioning systems occur far too often.

Why Are Americans Angry?

We are angry at millionaires who game the tax code, misrepresent the financial status of their businesses, and seek government bailouts while continuing to pay themselves outsized compensation packages.  We resent non-performing CEOs who continue to be richly rewarded. We oppose government contractors with cozy Washington relationships.  To the average American, these millionaires win because the game is rigged.

Americans applaud the honest entrepreneur because he or she fills a real societal need. Further, these individuals are the best examples of the American spirit and ethos of creative imagination, perseverance and hard work yielding a valuable result. Americans do not want to destroy these individuals; they want to be these individuals.  Obama is overreaching when he paints all millionaires with the same brush.  What Americans want is an end to the bailouts and special deals that destroy incentives for honest entrepreneurs and both create and protect the undeserving rich.  Americans  want a level playing field so they can compete and become wealthy, too.

 

 

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21
Jun 11

Corporations: The Good and the Bad

In Are Corporations Really the Devil? we examined the concept of corporate profit maximization.  Corporations are essentially amoral in nature, pursuing economic efficiency for the benefit of shareholders. In this pursuit they exhibit both good and bad behaviors.  Since Charles Hugh Smith conflates corporations with the “work of the devil,” let’s begin with his thesis of the evil corporation.

The Bad

Having worked for thirty-plus years within the bellies of these beasts I can indeed report lots of bad stuff:

Greed – Executive compensation often dominates the corporate agenda.  It is a costly diversion, consuming the efforts of attorneys, consultants, accountants and senior management.  Management is often diverted from the more important job of running the business.  In the end neither shareholders nor the executives are satisfied.  The result of the process is that there are too many overpaid executives.  Few if any executives demonstrate the management acumen justifying such overly generous compensation packages.

Lack of Foresight – I could excuse large pay packages, if a senior executive had true foresight and talent in matters relating to the business of the corporation itself.  The record of too many CEOs?   They stayed in businesses which should have been sold, missed investing in and deploying new technologies, made horrendous hiring decisions, laid off employees when they should have been hiring, and were late in removing poorly performing executives.   A corollary truth to this realization:  many executives can competently perform their jobs, but few are visionary.  Few executives can follow hockey great Wayne Gretzky’s advice: “…skate to where the puck is going to be, not to where it has been.”

Careerism and Promotions – Many executives put their own career advancement over the good of their employees, fellow executives and the corporation.   And worse, business ethics and simple interpersonal courtesy and manners were routinely and very sadly lacking.   Bad corporate behavior includes:  withholding of critical information, undercutting colleagues’ efforts, and wasteful projects for self aggrandizement.  Many times bad behavior leads to ethical lapses and legal shortcuts that subject the company to expensive liability.

Many times the wrong person is promoted into a higher level job for all the wrong reasons.  The tireless self-promotion and undercutting of colleagues that some executives made their modus operandi sent terrible messages to good performing employees when these behaviors were rewarded with inappropriate promotion and aggrandizement.

Abnegation of Responsibility - When something in a corporation goes wrong, executives who accept blame and responsibility are few and far between.   It is the rare executive who accepts blame for a decision gone awry and takes responsibility for the cleanup.

Job Insecurity – When I began my professional life in 1977, there was excellent job security in corporate America.  Starting in 1981 and each and every year thereafter until I retired in 2009, my corporate employers and many others had work force reductions either through early retirement or layoffs.  It was a fact of life.  Accepting this fact, my belief is that one is paid up to date, and the corporation does not owe the employee lifetime employment.

Bureaucracy – A corporate hierarchy by definition is a bureaucracy. Myriad layers of corporate approval always slow innovation.  In the wrong environment, bureaucracy is a sure condition for good ideas to go nowhere.

The Good

Wealth Accumulation – Given the current state of our tax laws, corporations provide the average employee with a means for wealth accumulation.   Many companies have 401k savings plans, often with generous matching contributions, health spending accounts, defined benefit pension plans, employee stock purchase plans, and medical, dental, vision and life insurance plans.  In my experience a frugal secretary who took advantage of stock purchase and savings plans would be able to accumulate substantial wealth, often times in excess of a million dollars.

Freedom from Discrimination – With our wide range of equal employment and anti discrimination laws, employees of big corporations are largely free of discrimination.   Although much maligned, the human resources department does ensure that employees are treated in accordance with the law and that the workplace is essentially fair.

Training and Promotions – Corporations provide their employees valuable formal and informal training.  Further, many large employers pay for college and advanced courses, thus enhancing resumes and promotional opportunities, notably promotion from within, which increases seniority while maintaining job stability for an employee.    I worked with many secretaries and paralegals who completed college and master’s programs, and then were promoted into management.

Ethical Conduct – Corporations promulgate codes of conduct.  Corporations are serious about enforcing these codes of conduct, as ethical infractions could lead to criminal penalties and fines.  While everyone can point to Enron and WorldCom as counter examples, by and large corporations are ethical bastions with numerous controls in place (internal and external auditors, compliance and legal departments) to deal harshly with violators.

Balancing It All Out

Regulators – Mr. Smith believes that large corporations can bend compliant regulators to their will.   And yes, corporations are profit maximizers in any way they can be.  They are going to try everything within the law to shape the regulatory environment in their favor.   Mr. Smith fails to realize that this is not a one-handed game.  Industry competitors, consumer groups and other activists are also lobbying regulators to bend the rules in their favor.  One corporation cannot entirely shape a regulatory agenda.

Taxes – Commentators lambasted GE for investing in a huge tax department to avoid paying any US income tax.  In law school one of the strongest mantras is:  no taxpayer has an obligation to pay one cent more than is due.  If one does not like GE’s tax avoidance, change the tax laws.

Technology – Much has been made of layoffs, outsourcing and the dispensable employee.  Little thought has been given to the role of technology which has eliminated the need for many jobs. High speed communication innovations and faster, larger modes of transportation have made outsourcing of manufacturing and other jobs feasible.  Are corporations supposed to retain employees when the job no longer exists or is uneconomical to perform in the US?

Man versus Machine

Corporations are a legal construct.  They are created by humans and are flawed like humans.  On balance, they probably do more good than bad.  To particularize the current state of affairs, we live in a highly competitive, financially short sighted world. And knowing that means that the days of guaranteed employment, lush compensation and benefit packages, and benevolent corporations will not be returning in our lifetimes.  In the end I guess no one likes to contemplate the thought that we are all dispensable.

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6
Sep 10

Labor Day 2010

In an earlier and different time in America, Labor Day was celebratory, a transition from the leisurely light-hearted summer to the more serious autumn, and a return to the busy rhythm of school.   This year, Labor Day is a grim reminder of an American economy that cannot produce new jobs.  How did we get here and how do we get out of this mess?

Lies and Statistics

Friday, the stock market rallied on a better than expected unemployment report.  But behind the statistics there was little reason for optimism.  Mike Larson of Money and Markets analyzes Friday’s Labor Department report:

  • The economy shed another 54,000 jobs in August after losing a similar number in July and 175,000 in June. If you strip out the impact of the Census, you see that private industry created a paltry 67,000 jobs last month. That’s far, far too low to bring down unemployment.
  • Speaking of unemployment, it rose to 9.6 percent in August from 9.5 percent in July, a three-month high. And if you include all unemployed and UNDERemployed workers, you get a whopping 16.7 percent of American workers who are discouraged, only able to find part-time work because full-time work isn’t available, and who have just given up looking entirely!
  • Then look at who’s hiring and who’s not! Education and health care continues to see reasonable growth, with 45,000 jobs added. But hiring health care workers to take care of an aging population isn’t going to drive your economy long term. See America’s Unemployment Nightmare

The problem is that higher paying economic sectors are either not growing or continuing to lay off workers:

Economically sensitive sectors are showing virtually no growth, with only 13,000 jobs added in leisure and hospitality and 19,000 in construction. Manufacturing shed 27,000 workers … trade and transport lost 9,000 jobs … and financial firms cut workers for the fourth month in a row. In fact, the “diffusion” index which tracks how many industries are adding jobs versus how many are cutting jobs sank to 53 from 56.7.

And let’s step back and look at the big picture for a minute. We’ve added just 650,000 jobs in the first seven months of 2010. We lost 8.4 million jobs in the recession that started in December 2007. It would take several YEARS to get back to even at this pace. See America’s Unemployment Nightmare

A Look at the Real World

Much reporting of the Great Recession (Depression) comes from New York, Los Angeles or Atlanta based media.  Few of these outlets examine what is really going on in most of the country. Michael Panzer in Financial Armageddon looks at who is really being hurt:

  • Two million workers over age 55 are looking for work.  Over a million have been out of work for six months or longer.  The unemployment rate in this age group is 7.1%, the highest rate since the 1940’s.
  • A sector of the work force denominated as “middle-skill, middle-wage” has been decimated.  These are entry level white collar jobs such as administrator or secretary, or blue collar jobs such as assembler or machine operator.   Instead of finding good paying jobs, these workers are taking massive pay cuts to work as wait staff or other service personnel, or health aides in homes or health care facilities.
  • Among young blue collar workers employment has fallen 18%.
  • Middle class and upper middle class managers and professionals are seeking assistance from social service agencies due to unemployment or underemployment.   Former donors to these agencies have become recipients of their services.
  • A recent Rutgers study found “that 73% of Americans have either been unemployed themselves (14%) or saw an immediate family member (12%), another member of their family (30%) or a close friend (17%) lose a job.” See Another Installment of ‘Scenes from a V-Shaped Recovery’

Why Intractable Unemployment?

Explanations of “we couldn’t see this coming” or “it was just bad luck” mask several reasons for our current state of unemployment:

  1. Technology is a “game changer.”  Technology will replace many lower skilled administrative and manufacturing jobs (postal workers, telephone operators, computer operators, etc).  See e.g. 23 Occupations That Will Never Recover from the Great Recession
  2. Outsourcing – Closely allied to technology is the outsourcing of jobs to other countries.  With high speed telecommunications, sophisticated software, larger faster ships and lax foreign labor and environmental standards, American companies will continue to outsource jobs.
  3. Financial Excess- The combination of financial engineering of mortgage back securities,  subprime loans and a zero interest rate policy misallocated capital to the housing sector.  With the inevitable housing bust, we destroyed construction jobs and supporting professions such as law, mortgage banking, appraisal, insurance brokers and real estate brokerage.  Moreover, until bad debt is completely recognized and restructured or defaulted upon, the banks will continue limiting new loans.
  4. Government Policy – Small business owners are the growth engines for new jobs.  Faced with new health care mandates and the prospect of heavy fines, new business owners are reluctant to expand.  A full description of the problem is outlined in “Angel Heart” and Obamacare.

Many of these issues were identified in The New Reality: Permanent Job Loss and Why This May Be Worse than the Great Depression.

Wall Street spokespeople and the Obama Administration have been less than candid with the American public about what the real prospects are for reducing unemployment.  While there is a certain inevitability about technological progress, poor government policy is not necessary.  We need to stop some of the self-inflicted wounds of zero interest rates, poor tax policy, wasted stimulus and new mandates, all of which impede economic growth and stymie new hiring.

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30
Aug 10

Memes of the Rich and Famous

Memes (as in “creams”) are cultural ideas that are transmitted through media.  Memes are the cultural analog of genes.  We have numerous transmitters: social networking sites, television, blogs, and print media.  Our focus on the rich and their separation from the rest of American society is a growing meme.  Recent articles have raised the question of whether or not America is becoming two societies, the rich and everyone else:

Voyeuristic focus on the rich has always been an American obsession.  “Lifestyles of the Rich and Famous” obsessively peered into the lifestyles of wealthy athletes, entertainers and business people.  The show ran for eleven years.   The rich are now objects of scorn: hedge fund managers making money from the housing collapse; bankers, on the brink of bankruptcy, awarding themselves huge bonuses thanks to government loans and guarantees; and corporate executives receiving gigantic severance packages after corporate wrongdoing. See, e.g. Following the Hurd

We have moved beyond voyeurism and scorn.  Our anger at the rich suggests economic and political upheaval.

The Rich Separate from Us

Michael Lind’s article in Salon, Are the American People Obsolete? appears to be the genesis of this meme:

Have the American people outlived their usefulness to the rich minority in the United States? A number of trends suggest that the answer may be yes.

In every industrial democracy since the end of World War II, there has been a social contract between the few and the many. In return for receiving a disproportionate amount of the gains from economic growth in a capitalist economy, the rich paid a disproportionate percentage of the taxes needed for public goods and a safety net for the majority. See Are the American People Obsolete?

We have always needed ordinary people as consumers and soldiers.  But now globalization has undercut the first part of this bargain at the nation-state level.  The middle classes in China and India are more intriguing customers than debt-ridden, unemployed Americans. They are also cheap and productive producers.  For the second part, a volunteer professional military undercuts the bargain even further.

Lind points out the economic and political consequences of this new social contract:

If the American rich increasingly do not depend for their wealth on American workers and American consumers or for their safety on American soldiers or police officers, then it is hardly surprising that so many of them should be so hostile to paying taxes to support the infrastructure and the social programs that help the majority of the American people. The rich don’t need the rest anymore.  See Are the American People Obsolete?

Bring Back the Robber Barons

Previously, we discussed the role of the nineteenth and twentieth century American entrepreneur in Bring Back the Robber Barons.   Lind focuses on the same point:

As bad as they were, the robber barons depended on the continental U.S. market for their incomes. The financier J.P. Morgan was not so much an international banker as a kind of industrial capitalist, organizing American industrial corporations that depended on predominantly domestic markets. He didn’t make most of his money from investing in other countries. See Are the American People Obsolete?

The robber barons were integrated into American society, not living in privileged enclaves like Greenwich, Princeton or Palo Alto or foreign equivalents of London, Hong Kong or Singapore.  Thus, it was natural for the robber barons to focus their philanthropy in America.  Our new citizens of the world have a different mindset:

…philanthropists may be inclined to devote most of their charity to the desperate and destitute of other countries rather than to their fellow Americans.  See Are the American People Obsolete?

Implications

Richistan, A Journey Through the New American Wealth Boom and the Lives of the New Rich, describes the rich becoming their own virtual country.  The new rich feel no civic obligation or shared sense of sacrifice.  They can default on mortgages and avoid military service for their children.  We have written about a different time in America where even the scions of the rich and powerful felt obligated to join the war effort to defend the nation. See e.g. A Reputation as Good as Goldman Part II.   Now we hear whining and threats: “if the Bush tax cuts are repealed we will leave the country.”

Unwittingly, the Obama Administration has enabled the petulance of the rich by supporting the banks and Wall Street to the detriment of Main Street.  Faced with threats of emigration, it remains to be seen whether the Administration has the gumption to let the Bush tax cuts expire.  Apparently, the rich are ready to depart the United States if marginal tax rates rise from 35% to 39.6%.  We are not exactly talking about conscientious objectors to the Vietnam War fleeing to Canada.

We have learned much about the new rich, and it is not all to the good. Paraphrasing Sir Winston Churchill, we have already established their virtue; we are only haggling about their price.

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23
Aug 10

Magical Thinking

“Just as in the late stages of the Roman Empire, magical thinking abounds. This is America, the capital of can-do! We are audaciously hopeful because we always arise, newly envigorated by the unquenchable spring of American innovation….” Nothing has Changed, Charles Hughes Smith

How ironic that we live in an age of magical thinking.  We have never had more information and commentary a mere computer keystroke away.   With all this information, one would think that we could easily accept reality and think critically.   Perhaps reality is so discouraging and the consequences of our current path of behavior so awful to contemplate that we prefer magical thinking, hoping against hope that a solution will appear.

Nowhere is magical thinking more evident than in our current economic plight.

The Land of Endless Deficits

Paul Krugman, Professor of Economics, influential Democrat and New York Times columnist, is the high priest of deficit spending.  His philosophy in short:

Spend now, while the economy remains depressed; save later, once it has recovered.  How hard is that to understand? See Now and Later

First, we never save later, as Congress would rather keep spending to buy votes than be fiscally prudent.   Second, the US is absorbing a large portion of the world’s savings to fund the ongoing $1.3 trillion dollar per year deficit.  Third, even Krugman realized that our debts are growing exponentially.  His view is that with high unemployment this is the not the right time to become fiscally prudent.  Fourth, taxpayers have paid $3.7 trillion over the last year to achieve a modest economic recovery which is currently fading.   In the 1950′s one dollar of debt added a dollar to GDP;  recently it took $5.57 to add a dollar to GDP.  Source Contrary Investor. We have reached the point of debt saturation.

Why Not Cut Taxes?

Republicans have an equally magical mantra:  “just cut taxes.”   Back to the Reagan era, Republicans have been enthralled by the Laffer Curve:

Economist Arthur Laffer made a very interesting supposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves. (In one of life’s great coincidences, he first sketched a graph of this idea on Dick Cheney’s cocktail napkin.) If the government cuts taxes, then Uncle Sam gets a smaller cut of all economic activity — but reducing taxes also generates new economic activity. Laffer reasoned that, under some circumstances, a tax cut would stimulate so much new economic activity that the government would end up with more in its coffers — by taking a smaller slice of a much larger pie.  See Debunking One of the Worst Ideas in Economics

If the US had a 99% marginal tax rate,the rate paid on the last dollar of taxable income, Laffer’s theory might work.  But, we do not:

We don’t have a 99 percent marginal tax rate. Or 70 percent. Or even 50 percent. We start with low marginal tax rates relative to the rest of the developed world. (Yes, I understand that it may not feel that way after the check you wrote last month.)

So cutting the tax rate from 36 percent to 33 percent is not going to give you the same kind of economic jolt as slashing a tax rate from 90 percent to 50 percent. There’s no huge black market to be shut down, no big supply of skilled workers to be lured back into the labor market, and so on.  See Debunking One of the Worst Ideas in Economics

The ultimate problem is that even if the economy grows, government revenues shrink, government spending continues and deficits widen.

Bring in the Grown Ups

Former Reagan budget director David Stockman recognizes that, if honestly measured, the budget deficit would be a Greek-like 120% of GDP by 2015.  Stockman excoriates the Republicans for cutting taxes and failing to balance the budget.

…the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. See Four Deformations of the Apocalypse

His prescription is both simple and logical: “…balanced budgets, sound money and financial discipline — is needed more than ever.”

Without Keynes, Laffer or Friedman

Keynes’ “pump priming” through endless deficit spending and Milton Friedman’s monetarism call for expansion of money supply to ward off deflation.  These flawed strategies have captured our Treasury Secretaries from Republican Henry Paulson to Democrat Timothy Geithner.  Reviving Laffer’s arguments, and ignoring widening deficits, Congressional Republicans argue for extension of the Bush tax cuts.  Unfortunately, these theories have not extricated us from the current economic morass.

Faced with reality, the political elite would rather delude themselves with hope and magical thinking than confront the harder realities of austerity and living within our means.  We appear doomed to repeat these failed policies until it is too late.  Perhaps an economically rational adult will arrive to break the magic spell.

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28
May 10

Taxing the Crude

The government is running deficits in excess of $1.6 trillion this year and projected to run trillion dollar deficits for much of the decade.  In the midst of it all Wall Street firms still earn outsized profits and bonuses.  Much of these profits can be directly traced to generous government policies, like zero interest rates which allow virtually risk free profits.   Hedge funds receive favorable taxation rates.   Government also provides other benefits to banks, hedge funds and other firms.

Given all this largesse from  Uncle Sam, why not seek tax revenue from these beneficiaries; namely,  a windfall profit tax.

The Precedent

In response to the Arab oil embargo and deregulation of the domestic oil industry, Congress passed the Crude Oil Windfall Profit Tax of 1980.  Unique factors led to this law:

• Congress was concerned that the domestic oil industry would reap enormous revenues and profits as a result of the deregulation of price controls to allow domestic oil to reset to world oil price levels. Congress believed that the projected huge redistribution of income from energy consumers to energy producers would not be fair.

• Congress also felt the industry was not paying its fair share of federal taxes. The oil industry’s low effective income tax rates were due to the availability of two oil industry tax subsidies (incentives): the percentage depletion allowance, and the provision which permits companies to expense (deduct fully in the initial year) the intangible costs of drilling.

• In addition, Congress was looking for additional sources of revenue. Between 1961 and 1979, the federal budget was in deficit in every year but one (there was a small surplus in FY1969). The Congress’s Joint Committee on Taxation projected the tax would generate, from 1980 to 1990, additional gross revenues of approximately $393 billion.

In 1988, the act was repealed. See Windfall Profits Tax

Oil versus Wall Street

We need oil.  But it is exorbitantly expensive and dangerous to extract.  Moreover, we have to transport, refine, and distribute what we extract.  And if we are honest about it, we do not even know what unknown technological or environmental consequences may face us in the future.

Compare this effort to business on Wall Street.  Sitting in climate controlled offices surrounded by lawyers, MBAs, sales representatives and massive government support, these white collar people earn profits in a virtual monopoly.  In fact, four firms had perfect trading records for the first quarter.  See 4 Banks Score Perfect 61-Day Run. The government had no compunction about levying a windfall tax on the far riskier oil industry.  Why not tax the government-coddled Wall Street firms?

We are at a propitious time to impose a windfall profits tax on these Masters of the Universe.   A new rallying cry: don’t tax just crude oil, tax crude financial profiteers.

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18
May 10

Confidence, Savings and the Future

The first quarter 2010 savings rate dropped from 3.9 to 3.1 percent.  Given the severity of the recession, economists assumed that out of fear Americans would save more.  That has not been the case.

Theories abound for the abysmal savings rate: high unemployment, little incentive to save in a low interest rate environment, high debt levels siphoning off income, stagnant personal income and others. Yves Smith, founder of Naked Capitalism,  introduces an intriguing theory that when an economy features great income disparities, a “plutonomy” emerges wherein the over-confident wealthy spend rather than save.

Behaviors on both ends of the income spectrum no doubt played into the low-savings dynamic: wealthy people who spend heavily, and struggling average consumers who increasingly came to rely on borrowings to improve or merely maintain their lifestyle. And let us not forget: average consumers were encouraged to monetize their home equity.  See High Income Disparity Leads to Low Savings Rate

I would posit another theory.  Americans have no confidence in the future.

The “Me Generation”

Baby Boomers grew up with the threat of “the Bomb,” Viet Nam, the assassinations of President Kennedy, Robert Kennedy and Martin Luther King Jr., and drug and sexual experimentation.  Paul Begala, political adviser to Bill Clinton, Baby Boomer in Chief, commented in Esquire:

At the risk of feeding their narcissism, I believe it’s time someone stated the simple truth: The Baby Boomers are the most self-centered, self-seeking, self-interested, self-absorbed, self-indulgent, self-aggrandizing generation in American history. See The Worst Generation

Losing Confidence in the Future

Generational characteristics have macro-economic consequences.  We have discussed the “Greediest Generation” with the ethos of “I want it and I want it now.”  See The Greediest Generation – Where has Shared Sacrifice Gone? Missing from that analysis, however, is a less obvious underlying motivation:  my view is that collectively Americans have lost confidence in the future.

The Meaning of Savings

Savings requires deferring immediate gratification in order to provide for the future.   Savings requires a goal: a house purchase, kids’ college education, retirement, intergenerational wealth transfers, and future medical needs.

The task is daunting.  Society and even bogus patriotism conspire against a savings ethics: diner coffee for $1.25 or treat yourself to Starbucks?; extend yourself and buy a house now or save for a larger down payment?; buy a no-money-down car now?; take out a student loan for college or work for a few years first?  The present trumps the future.   With consumer spending representing 70 percent or more of the economy, is saving actually un-American?  And governmental policy discourages savings through ultra low interest rates, tax credits and deductions encouraging taking on debt and  consumption.

Save Some Money, Save Yourself

The siren song of indulgence and consumerism has led us directly into the path of this tornadic financial crisis.  We’ve accumulated too many houses, plasma televisions and attendant debt.  In the face of an anti-savings zeitgeist, saving money is a good idea for many reasons: a chance for personal financial autonomy, a better life for our children and grandchildren and a secure retirement. Savings requires self-sacrifice, thriftiness, a financial plan and debt avoidance.  And most of all, savings requires confidence in the future.  Lurching from crisis to crisis, dire headlines at home and abroad, house foreclosures, and high unemployment has sapped this much needed confidence.

In the end, we have always been a resilient, even optimistic people.  Let’s save some money and save ourselves.

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