This is a repost from Forbes. 

The ongoing government shutdown that began on December 21 is affecting many programs, but it doesn't affect mandatory, entitlement, nondiscretionary spending including all tax breaks, Medicare and Social Security.

That's a good thing for the elderly and for the economy, since over half of seniors depend on Social Security for most of their income and Social Security constitutes over 90% of household income for one-fifth of seniors. That financial dependence is essential when considering the Social Security program's financial and political stability.

Although checks are being sent, the partial shutdown is hurting seniors in other ways.  Sixty-seven million seniors depend on many other government programs besides Social Security. For example, the Department of Agriculture may run out of money for food stamps (Supplemental Nutritional Assistance Program) which means 4.8 million people over 60 will not get full food assistance.

Further, the breakdown in Washington still hurts Social Security.  The unreliability of the federal budget process may weaken public support for the Social Security system. More concretely, the agency’s current fiscal 2019 budget, adopted just two days before the Oct. 1 start of the fiscal year, reduced funding for beneficiary services and administration from their 2018 level.  That’s on top of the fact that, customer service was already suffering from years of administrative budget cutbacks, even as the number of Social Security beneficiaries has been growing with the retirement of the Baby Boomers. (Author’s note: the original version of this article, relying on contingency plans posted by the White House Office of Management and Budget, incorrectly suggested that some Social Security services have been further curtailed and some agency workers furloughed during the partial shutdown.)  

The Far Flung Economic Costs of An Unreliable U.S.  Government

President Trump is owning the shutdown, tying it to his insistence that Congress fund a wall on the border.  But the "Trump shutdown" is in part a reflection of a larger, ongoing problem in Washington. The regular budget process has not worked since 1997 (the last time all annual appropriations bills were passed on schedule.)  In its place, temporary and short-term spending authorizations--continuing resolutions--have become the norm, causing uncertainty and imposing direct costs on federal contractors (many are small companies), employees and communities that depend on reliable federal spending.

An unreliable U.S. federal government indirectly imposes costs on the world economy. For all its faults the United States and the dollar was seen as a stable entity – over 30 countries (IMF report Table 5)  peg their currency to the dollar.  The Financial Times reports that the partial government shutdowns and erratic Presidential statements are important factors destabilizing the U.S. economy and  financial markets. A substantial share of older workers and seniors depend on financial markets for their retirement income and the last thing they need is financial uncertainty and volatility.  Regrettably, I foresee a great deal of financial instability for older Americans driven in part by our broken budget process.

Despite the costs and disruption, no further negotiations are scheduled.  The shutdown will become the first order of business when the new Congress begins its session on January 3.

This is a repost from Forbes. 

The stock market is in bear territory the night before Christmas, dropping 19.7% in 3 months from a peak during the day on September 20.  And many blame the President’s slipshod economic management.

Financial markets matter more than ever. Twenty-four million American workers are approaching retirement age, and many will have to retire before their time when the recession hits. Just over a third have no financial assets, so for once not having a 401(k) or IRA may be a relief. But 15.6 million American workers, age 55-64,  have real skin in the game – they had on average $92,000 in retirement assets in 2017.  If it were all in stocks each older American lost an average of over $18,000 this quarter.

Folks are panicking as their retirement income and prospects for work look grimmer than they have in 9 years. Account balances shrink at the same time job prospects shrivel and older workers are often FIFO  – first in and first out – and more vulnerable to recessions. Only near retirees relying on a defined benefit pension plan and Social Security don’t have to follow the S&P500 -- their income is guaranteed.

Other assets, such as bonds, don’t promise much relief – the financial markets and real estate may slump for a while.  However, market volatility is not a culprit; market corrections are expected and even necessary. Erratic government policy is the culprit. The clumsy government shutdown and awkward, ill-advised and seeming impulsive statements from  Treasury Secretary Stephen Mnuchin should not be expected and and they are unecessary.

This week the executive branch hit the wallet hard. First, the government shut down as President Trump insisted Congress fund the Mexican border wall and turned down a budget deal. This caused federal budget authorization to expire, shutting down non-essential government services (the White House Christmas tree closed, and now is open only with private money). The shutdown is forcing many federal employees—including border patrol agents—to work without pay.  As of Christmas Eve no further negotiations are planned.

Second, Treasury Secretary Steve Mnuchin caused a minor panic that helped drive the S&P 500 index down by 2.7% today. He probably didn't mean to. Apparently he actually was trying to calm the markets.  Mnuchin announced he spoke to the CEOs of the six largest banks and reassured us the banks had adequate liquidity.   But since no one had been worrying about liquidity, markets either assumed that the Treasury had some disturbing inside information or that Mnuchin was acting under orders from President Trump. The motive might have been to support Trump's constant tweeting against the Fed and its chairman Jerome Powell (who Trump appointed). It is as if the Treasury, reassuring us we are secure from white rabbit attacks, caused more fear of white rabbits than ever before.

Tim Duy, the economist behind the Fed Watch blog,  agrees with Trump’s discomfort with the Fed’s interest rate hikes.  But he worries about the President and his impulsive policy declarations, writing,  "My guess is that Mnuchin was under pressure from Trump to 'do something' and this half-baked attempt to calm markets is the result.”  Duy added "it is widely believed that Mnuchin’s actions were so poorly conceived that they can’t be taken seriously. But they were so poorly conceived that they imply a worrisome lack of competence for economic policymaking as a whole, and that creates uncertainty that undermines investor confidence."

This week the executive branch’s incompetence has caused million of workers to uneccessarily lose thousands of dollars.

This is a repost from Forbes. 

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. 

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.”


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.


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.