This is a repost from Forbes. 
 
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The federal budget process may fail by Friday which means the federal  government will stop all but bare bones, non essential, operations.

Congressional authorization for significant amounts of spending—agriculture, justice, environment, homeland security, and other areas-- runs out on December 21.  Despite the looming deadline Congress and the President are not working around-the-clock to negotiate an agreement.

Before President Trump planned to leave Washington for a 16-day vacation at Mar-a-Lago he held a televised session with the Democratic Congressional leadership that degenerated into an argument. The President took ownership of  the looming shutdown (contrary to most political advice and shocking many of his Republican allies), saying “I am proud to shut down the government for border security” if he can’t get $5 billion for his wall on the Mexican border.

And although Republicans still control the House of Representatives until early January, when the newly-elected Democrats take over, many of them are not even in Washington or showing up for votes.  The outgoing representatives have been moved out of their offices into cubicles, so the new members can move in, and many of November’s losers aren’t working  though they haven’t closed the budget. Republican Congressional leaders admit they have no strategy. Senator John Cornyn (R-TX), the number two Republican leader in the Senate, says “There is no discernible plan — none that’s been disclosed.”

Budget Process Flawed for Decades

Although the current looming shutdown is tied to President Trump’s hard stance on funding the border wall, brinkmanship and short-termism is now the normal federal budget process.  The  regular process described in textbooks says the President submits a budget in February for the fiscal year beginning in the following October.  Congress reviews it, setting an overall budget amount that is then allocated to twelve different appropriations bills in each chamber covering the myriad things government funds—defense, housing, national parks, airport security.

House and Senate committees then are to negotiate internally among the political parties, after which each chamber combines its committee decisions, creating an overall spending bill. More negotiations and compromises between the two chambers and with the White House results in the new approved budget being ready for the President to sign before the new fiscal year (FY) starts on October 1.

But this formal process hasn’t been the real budget process in Washington for decades.  Congress hasn’t passed all of its spending bills on time since 1997, almost twenty years ago.  For six years in a row, FY2011 through FY2016, not one appropriations bill was passed on time.  In fact, as the Pew Trusts sadly document, ever since the 1974 Congressional Budget Act put current procedures into place, “Congress has managed to pass all its required appropriations measures on time only four times: in fiscal 1977 (the first full fiscal year under the current system), 1989, 1995 and 1997.”

The real process instead involves passing some individual spending bills when possible, and enacting a “continuing resolution” (what the Washington insiders call a “CR”) for the remainder that continues previous spending levels for a fixed period of time—anywhere from a few weeks to the remainder of the fiscal year.  Of course, negotiations about what goes into the CR, at what levels and for what time period, are themselves contentious and complex.  (Some members further disrupt the process by trying to put pet projects or controversial policy issues like restrictions on abortion spending in the CR, which is seen as a “must-pass” bill that might carry divisive policy positions into law.)  Forbes contributor Stan Collender, the “budget guy” and one of the best guides to these dysfunctional procedures and politics, writes “the federal budget process is not broken: it’s dead.”

Political Failure Imposes Costs

Failing to pass the budget on time is costly.  It causes uncertainty about whether national parks will be open; problems for many federal contractors (including small companies) in planning their business; volatility and speculation in financial markets; increased economic uncertainty that inhibits long-term private investment; confusion for  state and local programs and budgets (given their reliance on many federal spending streams), and weaker  long-term policy and economic strategies that depend on reliable federal spending.

The process can be viewed like a Washington reality TV episode of “The Federal Budget:  Deal or No Deal” featuring colorful characters—the tough Nancy Pelosi, the inscrutable Mitch McConnell, and the unpredictable Donald Trump.  But this systematic fallure is not theater.  As compelling as they are, personalities are by far the least important aspect of the shutdown threat.  The uncertainty and ill will fostered by this chaos hurts the economy and all of us, not just government employees and those that directly rely on federal spending.

Government shutdowns are economically harmful.  But perhaps their worst effect is to further erode respect for the federal government’s reliability. The President’s combative stance is aggravating our already damaged broken democratic processes while threatening to destabilize the economy, financial markets, and confidence among investors, households, and businesses.

This is a repost from Forbes. 
 
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Last night Olivier Knox of “The Big Picture” SiriusXM interviewed me asking what I was worried about. Answer: “I worry about the coming recession and whether the government has the right tools to fight it.” Yesterday, the Financial Times spooked me (the article is behind a paywall so I can’t link). Michael Mackenzie quoted Mark Tinker of Axa Investment Managers, “The fact that a decade of quantitative easing has produced a lot of products that rely on spread, carry and leverage has left financial markets vulnerable to the unwind of these strategies.”

Ouch.

Tinker is saying that low interest rates caused banks, insurance companies, and firms in the real economy to base their business models on debt and implies little productive activity. And, though debt can be good, it is fragile.

Here are some flashing lights for the next recession. The first is just extrapolation: time’s up! We seem “due”. If this expansion lasts until July 2019 it will be the longest. This expansion is almost twice as long as the average since 1945 -- a little more than 4 1/2 years. The record holder expansion lasted  10 years from March 1991 to March 2001, and the next longest from February 1961 to December 1969. Those were, in part, fueled by large armed conflicts. Armed conflict, though stimulative, not good.

The second concern is the corporate cash-to-debt ratio, which indicates a company's ability to cover its debt with cash flow. The lower the ratio, frankly, the closer a company is to bankruptcy or a takeover. Academics (see Ben Bernake and John Campbell for a standard view) are watching. Other recession flags include the inverted yield curve and oil prices says the St Louis Fed.

Can government help dampen the pain in the next recession?  Government didn’t do all that bad ten years ago, the economics and politics were competent and remarkably bipartisan. The outgoing Bush administration and Republican Fed Chief Ben Bernanke worked with incoming Obama advisors using old and new tools. Both Presidents urged rapid and substantial government spending. Bush passed the bills in 2008 which established the Troubled Assets Relief Program and laid the foundation for the auto bailout . Obama passed the American Recovery and Reinvestment Act (which created about 2 million jobs).

After the dust settles, most economists agree that quiet and effective automatic stabilizers, infrastructure spending, and aid to state and cities work quickly and effectively to counter job loss. Take the progressive tax system, the biggest automatic stabilizer. It stimulates the ecoomy because as the economy worsens households move down a tax bracket and pay less tax leaving more for disposable income to goose the economy. Unemployment insurance, Social Security, and other social safety nets inject money to low and middle class households, which balloon, appropriately, the federal deficits. My worry? President Trump and the Republicans created deficits in a boom, leaving us less wiggle room in a recession.

Sensing I was casting a dak cloud on holiday cheer and a perfectly good Friday night I blurted, “Wait, wait, I can give your listeners some hope.” “Whew” said Knox.

Hope in New Old Ideas-- Job Guarantees

Some politicians are searching for new/old ideas – one is a federal job guarantees – the government would guarantee a job to every adult American who wants one. If pulled off, federal job guarantees would eliminate the worst effects of unemployment. Bard College Economist Pavlina Tcherneva explains how and economists Malcom Sawyer and Scott Fultwiller assess the history and variations. Don't like job guarantees? What do you got? Maybe you like the pro - private sector job matching effort by government -- activist labor market policies including training (see Sweden and others). The bottom line is that quantitative easing, the progressive tax system and deficit spending got more elusive with the tax cuts of 2017 and the unlikely math of even lower interest rates. Doubtless we will rely on garden-variety recession- fighting tools -- automatic stabilizers, adhoc fiscal spending -- but we will need more.

Let’s mobilize the  “Scout Economists” -- our motto "Be Prepared.” Let’s lay out options now (Democrats are pushing Job Guarantees) using history and a creative informed vision for a stable prosperity shared by all.

November 2018 Unemployment Report for Workers Over 55

The Bureau of Labor Statistics (BLS) today reported an unemployment rate of 2.9% for November, an increase of 0.1 percentage points from October.

Older workers are benefiting from a historically low unemployment rate. Now is the time to prepare for older workers’ higher risks in recessions.

Older workers least prepared for retirement are most likely to end up jobless in a recession. During the Great Recession, 16.1% of older workers without retirement plan coverage lost their jobs and either remained unemployed or retired involuntarily. click Those with coverage fared better - 10.7% of those with a 401(k)-type defined contribution (DC) plan and 8.5% of those with a defined benefit (DB) plan were unable to find a new job.

Even workers on track for a secure retirement aren't out of the woods. If they lose their job, they likely stop saving for retirement and may have to draw down assets prematurely, putting them at risk of outliving their wealth.

To protect older workers from the effects of unemployment or involuntary retirement, including downward mobility and poverty, we need to ensure workers have bargaining power. Bargaining power allows older workers time to seek a good job, negotiate better pay and working conditions, or choose to take a dignified retirement.

​To ​ensure a dignified retirement​ for all, we need ​to expand unemployment insurance, Medicare, Medicaid, and Social Security ​and create Guaranteed Retirement Accounts (GRAs). GRAs ensure all workers a secure path to retirement by providing universal, secure retirement accounts​. GRAs are professionally managed,​ funded by employer and employee contributions​ - ​paired with a refundable tax credit​ - and provide monthly benefits for life.

*Arrows next to "Older Workers at a Glance" statistics reflect the change from the previous month's data for the U-3 and U-7 unemployment rate and the last quarter's data for the median real weekly earnings and low-paying jobs.


This is a repost from Forbes. 
 
 

Don’t sell now. I know you are watching your balances tumble and news it could be worse in the near future. Despite the urge to do, don’t. Doing nothing is hard when you are both disgusted by the stock market and like all humans you have a “bias to action" – in face of discomfort humans tend to act. Know now the only action to be taken is reflection. If you want to do something, assess your debt and check your monthly income and spending. Make sure you have a budget for holiday shopping. Set a date in the future – I like mid-February after the dust has cleared for the holidays – to assess your investment goals.

Above is advice, next is math. Tony James, my coauthor of Rescuing Retirement and Executive Vice President of Blackstone  did these calculations to help convince you to stay the course.

From 1970 to 2016 there were 11,620 trading days. If you missed the 25 best days your return would go from 6.7% to 3.4%. In other words a $100 invested in 1970 and taken out of the stock market for just 25 selected days over 46 years that $100 would be worth less than $500 today. If you left that $100 alone you’d have approximately $2,000.

I repeat: if you took your money out of the stock market for just 25 selected days out of 11,620 days you would have lost 75%.

Here is another way to understand the gains of staying in. From 1978 to 2018, 40 years, there were only six negative years. If you invested $1000 in 1978 you would have had $96,000 at the end of September 2018 for an annual return of 11.82%.

The above math shows the importance of the long-term in the stock market but it does not mean I dare not give a normal person advice to own 100% stocks 100% of the time. Also, 60 years olds should not have all their wealth in the stock market. I am saying staying in, especially in bad times, is better than timing.

What is happening? My colleague Dr. Anthony Webb points out there are only two reasons stock prices decline: 1) the prospects for profits have dimmed, or 2) future profits are being discounted because of a mood or panic. Trouble is we will only know whether fundamentals have changed after a year or two. But probably yesterday and today’s volatility were based on expectations, it is not likely that something fundamental has happened in 24 hours.

It is a shame that this country depends so much on individual financialized retirement accounts which are vulnerable to panics. The current system does not provide most workers with professionally-run investment portfolios and it requires workers to do what they aren’t equipped to do – convert sums to lifelong income and to adopt a professional investment discipline. Worse, is that workers, knowing they need help turn to conflicted investment professionals who do not have their best interest at core. We need a simple, professionally managed retirement account for everyone.

The system needs help and so do you but this is not the day to act.

This is a repost from Forbes. 
 

Letter 'R' turns cash into crashGETTY

It might not be a stock market crash  -- conventionally crash mode is a 10% drop or more -- but it might feel like one. On Tuesday Dec. 4, the S&P 500 fell -3.24%. Based on estimates from Monique Morrissey of the Economic Policy Institute when one considers stock holding of $5.2T in 401(k)-type accounts and IRAs, the retirement savings for all Americans fell by $155 billion yesterday. About 55% of the 24 million older American workers, age 50-64, who had,generously, $100,000,  their account balances fell by $1,620 in one day. That kind of hurts. If that goes on it can hurt more.

If the market falls like it did in 2008-2009, these 13 or so million older workers would lose over $20,000. And, they simply won’t have time to recover especially if a family member loses their job and they have to take Social Security early.  As I have written before  the morbid joke about the Great Recession was that it turned Americans’ 401(k)s into 201(k)s. Indeed, the nation’s 401(k)s and IRAs lost about $2.4 trillion in the final two quarters of 2008. In 2008, those aged 30-50 had a median return of -30%. Over half of people over age 60 with 401(k) and IRAs lost more than 20%, according to Hewlett.

What kinds of retirement plans are affected by stock market changes?

Practically, every 401(k)-type account and IRA will be affected by changes in stock and bond values, even if many 401(k)s or IRAs are diversified into real estate, private equity and other alternative plans because the value of the assets in plans are affected by the price of equities to some degree or another. To be more precise, how much of an impact the volatility has depends on what funds employees are invested in, how much of their portfolios are allocated to those investments, and when they plan to retire.

Why traditional pensions and Social Security are better for times like these.

The Great Recession of 2008–2009, the worst recession since the Great Depression (1929–1937), reduced national wealth by 10%, or $15 trillion, in 2008. Between December 2007 and December 2009, employment fell by 5.7%—a loss of 8.3 million jobs—and the unemployment rate peaked at 10%. Because of job, income, and wealth losses, consumers spent dramatically less in every major expenditure category from 2007 to 2010, and almost 39% of households experienced job loss, an underwater mortgage or other significant declines in wealth.

But the government pension programs came to the rescue. Built-in automatic stabilizers injected billions of dollars into the spending stream of the economy. Traditional automatic stabilizers such as unemployment insurance (UI) and the progressive tax system helped the Great Recession avoid becoming a colossal depression. But overlooked is Social Security’s Old-Age and Survivors Insurance (OASI), Social Security Disability Insurance (SSDI), and traditional defined benefit plans' effect on righting the failing economy. Households turned to these programs for income and life-style support. For the reasons we saw above, the financial market–based retirement programs, such as 401(k)-type programs, did the reverse and hurt the economy.

Tomorrow

What savers are told to do (nothing and stay calm), what they do (sell), and want they feel like doing (flee) are all different. Age and size matters a lot in how the stock market matters. If you are 30 and you have $20,000 in your IRA you are told not to worry and you probably don’t. You cheer and say it’s a great day to buy stocks. If you are 60 and have $200,000 and lost $6,000 you worry. You may want to leave the market so you never have to worry like this again.

I am worried. And not because I don’t have a lot of stock, I do. I am in TIAA, which helps me annuitize, and I have a lot of time before I retire.

I worry because 10,000 people will turn 64 every day for another 8 years, and half have financial market-linked retirements so that the sheer numbers could affect macro behavior; depression over the loss of wealth could trigger widespread deleveraging and suppress economic growth.

The stock and bond markets open tomorrow. It is closed on Wednesday, December 5 in recognition of the national day of mourning following the death of former President George H. W. Bush. Regular stock and bond trading will resume on Thursday.

This is a repost from Forbes. 
 

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On the plane to a family Thanksgiving a nice seatmate asked what kind of work I do (as she watched me struggle with a spreadsheet). I brightly told her I am an economics professor working to expand pensions to solve the retirement crises. She looked at me blankly and said, "I'm Canadian, we don't have these problems."

That stopped me short. Really? Canada? Has the friendly nation to the north figured it out?

Canada has been described, in jest of course, to be a lot like Montana with a national railroad. Certainly, the U.S. and Canada are similar and any difference doesn’t lie in our two nation’s goals for retirement. Canada, Ireland, the United Kingdom and the United States use what is called the “Anglo-American” model to arrange retirement that consists of relatively small public pensions combined with tax incentives for voluntary employer-based pensions and 401(k)- type plans.

But, the outcomes are pretty different in one important respect. The elder poverty rate in the U.S. is twice that of the Canadians (23% versus 11%) (Both countries need improvement: Canada, like the U.S., lags well behind most European countries by tolerating much more poverty among their elderly.) Canada’s lower poverty rates is due in part to Canada’s more generous minimum pension, funded by taxes from all wealth and income and not just earnings like Social Security does. However, Social Security isn't shabby -- without it U.S. elder poverty rates would more than double to a whopping 39% elder poverty rate.

U.S. Top Heavy Tax Breaks 

University of Toronto Professor Keith Ambachtsheer suggests the U.S. poor performance could also be because, ironically, the U.S. gives larger tax breaks to retirement plans. How would that hurt? The tax breaks are skewed to the highest-paid workers and do little to help middle and lower-income workers. An American worker under age 50 can contribute 100% of their income, to a maximum of $18,000, to a 401(k), and another $5,500 to an IRA, in addition to any defined benefit pension the job might offer. “Catch-up” contributions (for those age 50 and up) raise those limits by $6,000 for 401(k) plans and $1,000 for IRAs. The self-employed and executives with deferred compensation plans can contribute thousands of dollars more. Bottom line: in the U.S. the tax savings are skewed more heavily to the rich: The top 20% get about 70% of the tax benefit. In contrast, Canadian workers contributions to the “Registered Retirement Savings Plans” can’t exceed 18% of a worker’s pay up to a maximum contribution of $24,930. That limit is reduced by amounts accrued in traditional pensions. Canadians also can contribute up to $5,500 to a Tax-Free Savings Account, or TFSA. And, in 2012, Canada adopted a new kind of voluntary supplement to their state pension system called, the Pooled Registered Pension Plan (PRPP). The new plans were aimed to encourage participation among Canadian workers, but they are voluntary so coverage is low.

Voluntary Doesn't Work

The Canadian plan has some good features Americans don’t have. Canadian workplace retirement plans are portable, and even better, if someone adopts a PRPP, the funds are pooled in professionally managed funds. Fees are smaller than in individual plans, and the pooling and investment diversity lower employers’ and employee’s investment risks.

Again, Canada Wins Health Care 

Another big difference between the countries that make Canadians better off, to no one’s surprise, is health care. Canada’s system is funded by the government and accessible to all without co-pays or deductibles. The United States has Medicare for people 65, but the program doesn’t cover dental, vision, hearing aids, and long term care and premiums and co-pays can be high. Medicare covers only about 60% of their health care costs.

Low Savings Rates and Dark Clouds 

The savings rate in Canada has dipped to the lowest in more than a decade, a sign economic growth may be nearing an end and that the Canadian retirement system is poorly designed. Statistics Canada reported at the end of November 2018 that the household savings rate, which represents the proportion of disposable income that remains after spending, fell to 0.8% in the third quarter, the lowest level since early 2017. Canada's savings rate averaged 1.4% over the last year, the lowest since 2005 and much lower than in the U.S.

The household saving rate in the United States is decreasing, but it is higher than in Canada. The rate decreased to 6.60% in August from 6.70% in July of 2018. Personal savings in the United States averaged 8.83% from 1959 until 2018, reaching an all time high of 17.30% in May of 1975 and a record low of 2.20% in July of 2005. Recently it peaked, as savings rates do in recessions. In 2009,  the U.S. savings rate was high, at 12%, when households deleverage rather than borrow, households reduced spending. The U.S. saving rate is now lower than it was in the 1970 and 80s. Many factors determine savings rates,  for instance, the average age of the population, economic cycle etc, but there is no doubt that the built environment of retirement savings makes a big difference.

The low savings rate leaves Americans and Canadians more vulnerable to an economic shock.

And, don’t be too fast to blame consumer overspending and too much luxury consumption of avocado toast and fancy lattes. Humans have always given into immediate gratification and not caring about the future. Humans haven’t changed; pension design has. Stop blaming the victim. Both nations have flawed retirement saving systems. Pension plans in the 1980s helped households build up buffers.  DB plans were used for many things, they were especially valuable tools to off-ramp workers in recessions. In contrast, people with DC plans clung to their jobs, making the recession worse.

My coauthor, Tony James, Executive Vice Chairman of the investment firm Blackstone Group, and I propose the Guaranteed Retirement Plan, a universal plan that would cover 63 million American workers who have nothing but Social Security. The GRA supplements voluntary plans and covers everyone who doesn’t have a plan. The GRA is simple and anxiety-free because it is pooled, like the new Canadian plans, and the principal guaranteed. The GRA proposal mandates full funding paid for by workers, employers, and government. Since the accounts are pooled, they are safer and more efficient than individual – directed plans because the proposed GRA funds are invested in low-cost professional portfolios.

We need to restructure the Anglo-American retirement model so everyone is covered and every dollar saved for retirement is managed well. And, this is the moment for a bold restructuring of American retirement plans as both nations face a both a coming recession and population aging.

This is a repost from Forbes. 
 

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The strong Democratic showing in the 2016 midterms was puzzling. With historically low unemployment rates, better than expected GDP growth, low inflation, and the deep Republican tax cuts, why weren’t voters more grateful to the incumbent party?  One guess is discomfort with President Donald Trump—and by association the Republicans. But that isn’t enough of an explanation. Despite the strong economy, voters worry the economy and Republicans will harm their retirement security. They fear the stock market may crash their 401(k)s and IRAs, employers may slash their pensions, and budget deficits may put pressure on Medicare and Social Security.

Across party lines workers are worried -- three-fourths  of Americans are concerned economic conditions will affect their ability to achieve a secure retirement. For self-identified Democrats, the level of concern was at 78% compared to 76 % for Republicans. And financial concerns about retirement edge out having enough money for a medical emergency as the top financial worry among workers.

And women’s worries also may have come out in the vote. Women, compared to men, are most at risk of having inadequate retirement income —women have lower pensions and live longer on average. And women have moved away from Republicans as the midterm results confirmed.  Pre-election polls showed that women scored 22 % lower than men when asked if the economy was excellent or good.  This undoubtedly reflects their overall dislike of Trump, but also underscores the continuing worries and weaknesses of this economy even with strong aggregate numbers.

The economy also didn’t help the Republicans because their stewardship is suspect. The tax cut was widely (and correctly) viewed as helping corporations and the wealthy to the detriment of middle-class households.  Republicans discovered this voter reaction early and adjusted their strategy accordingly.  In February, ads from one Republican superPAC mentioned the tax cut over 72 percent of the time; by September, that was down to 17 percent.

Low unemployment numbers may not have helped because current low rates don’t help someone worried about pensions. And though Democrats may attribute low unemployment rates more to Barack Obama’s policies than Trump’s, but a Harris Poll just before the election found that 47 % of respondents credited Trump for the strong economy while only 21 %credited Obama.  But those voters who gave Trump credit for the economy still didn’t vote Republican in big enough numbers.

And that credit to the president didn’t go as far as it might have. Trump’s economic approval rates didn’t follow the usual pattern of approval ratings rising when unemployment rates fall. Based on the past, Trump’s economic approval rating should be about 70%, not just under 50%. Bill Clinton and George Bush had economic approval ratings that peaked at over 70 % when unemployment was slightly higher than Trump's.  And Barack Obama’s economic approval rating was 49%--almost the same as Trump's--when unemployment under Obama was over nine percent.

The Democrats won more than they expected--if not a “blue wave,” then it was at least a “blue tide.”  Democrats won at least 36 House seats, and that number could go as high as 39.  Democrats flipped seven governor seats, including Michigan, Wisconsin, and even historically Republican Kansas, although they failed to capture the Ohio and Florida governorships.  And they lost Senate seats, although not as many as some feared, and they flipped Republican Senate seats in Nevada and Arizona.

The Democratic flip was historic. It is the highest number of House seats Democrats have gained since the post-Watergate election of 1974.  Although both parties showed high turnout, Democrats got around 3.5 million more votes than Republicans, and in thirteen states Democratic votes exceeded their totals for the 2016 presidential election, an almost unheard of pattern for a midterm election.

As an economist, I know that presidents get too much credit and too much blame for the economy. But continuing inequality and worries about health care and retirement are likely undercutting the economic message Trump and the Republican’s message that times are good. So retirement and economic worries may explain the disconnect between Trump’s low approval ratings and the robust economy.  And with an economic downturn more and more likely in the next two years, those ratings could suffer further stress.