The Financial Review
PUBLISHED: 25 Feb 2012
Anna Bernasek
Try as they might, big US banks can’t seem to get away from the foreclosure mess. About 4 million American families have already lost their homes in foreclosures since 2007. And there may be a million or so more to come. Now some strong evidence has come out that, in the banks’ rush to get paid, laws have been broken.
The whole saga reminds me of a Bible story. In it, a king calls his servant onto the carpet to repay a huge debt. The servant begs for time, and, moved with compassion, the king forgives the debt. Soon after, the fortunate servant finds a fellow servant who owes him a tiny amount. Catching his unlucky peer by the throat, he demands his money on the spot. The moral contrast is clear.
Now look at recent history. Back in 2007, the US megabanks teetered on the brink of collapse only to be rescued by the unprecedented generosity of the federal government. The bank bailout was an immense benefit to the owners and executives of those big banks, providing them time and resources to limp back to solvency. And keep in mind that this was no random disaster. The crisis itself was created and inflated by the banks themselves, fuelled by unprecedented leverage and shoddy risk management.
A king-sized recession ensued. Employment went in the tank. More than a few home owners saw their principal asset, their home equity, wiped out. Soon, millions of families faced their own hour of need, unable to pay their mortgages and begging for time. The rest is history. Loan forgiveness or modifications were few and far between. Instead, a massive wave of foreclosures and their attendant misery swept across the country.
As if that wasn’t bad enough, it seems the banks and their agents had the audacity to run roughshod over the law. In their rush to get repaid, banks and their agents appear to have ignored long-standing laws and procedures that protect individual rights.
It’s a sorry picture.
Signs of foreclosure abuse first emerged two years ago when an employee of Ally Financial admitted he had signed hundreds of foreclosure documents daily without reviewing them. For months after that more anecdotal evidence emerged suggesting that so-called robo signing was widespread. One by one, major banks suspended foreclosures while they investigated.
Since then, new evidence has come to light that abuses are widespread and far more significant than just robo signing.
A recent audit by San Francisco county officials of 400 foreclosures sheds some light on what has been going on. The audit found that nearly all of the 400 cases involved apparent legal violations or suspicious documentation.
In 85 per cent of those cases, documents recording the transfer of a defaulted property to a new trustee were not filed properly or on time. In another 45 per cent of cases, foreclosure properties were sold at auction to entities improperly claiming to be the beneficiary of the deeds of trust. And 8 per cent of the time, the loan servicer did not even take the step of giving borrowers notice.
The states of Florida, California, Illinois, New York and New Jersey account for 53 per cent of loans in foreclosure but represent only about 33 per cent of all loans.
Banks say that if borrowers are behind on their payments it matters little if they are foreclosed upon a little sooner. They were going to lose the home anyway.
Maybe. But surely some fraction of those affected could have kept their homes, given more time or flexibility. What makes the foreclosure mess so disturbing is that it involves society’s weakest and most vulnerable members.
A few weeks ago, five of the biggest banks in the nation tried to pave over the mortgage mess with a settlement approved by government and state officials.
Ally Financial/GMAC Mortgage, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo agreed to pay $25 billion ($23.5 billion) in cash to borrowers who were foreclosed upon, engineer some principal reductions and offer some refinancing in return for guarantees that banks couldn’t be sued over foreclosure violations.
It looks like a good deal for banks. Cash payments amount to about $1000 to $2500 a family. That won’t come close to putting anybody back in a home.
No one has taken responsibility for the foreclosure mess and the problem remains. Banks can still hire shady operators to do their dirty work and then pretend they are shocked at the consequences.
The San Francisco audit suggests there’s more evidence to come out about the banks’ irresponsible foreclosure practices. Until banks come clean and address the mess they created, Americans will trust them less and less.
And remember how the Bible story ends. When the story of the unforgiving servant gets back to the king, things don’t end well for the servant.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. She is the author of The Economics of Integrity.
Monday, February 27, 2012
Monday, February 20, 2012
Robert Shiller tips a double-dip recession
Financial Review
PUBLISHED: 18 Feb 2012
Anna Bernasek New York
Predicting a market boom or bust is not for the meek. Partly a matter of good timing and partly about being bold, a correct call can turn the forecaster into a star overnight, sought after by the global banking glitterati and invited to A-list events such as the World Economic Forum in Davos.
A bad call, on the other hand, can mean years of ridicule, quickly becoming fodder for endless jokes. Remember the book Dow 36,000?
Then there’s Robert Shiller, who’s in a class of his own. An economics professor at Yale, Shiller not only called the dotcom bubble of the late 1990s and the more recent devastating housing bubble but he warned that both would end badly. Very badly.
Remember back to when previous Federal Reserve chairman Alan Greenspan first used the term “irrational exuberance” to describe the booming market of the late 90s? He lifted that phrase from Shiller, after the economist had given the Fed chief a private briefing.
When the dotcom bubble burst in 2000, Shiller was vindicated and his book published earlier that year, Irrational Exuberance, became a hit. Between 2000 and 2002, about $US5 trillion of value was wiped out of the sharemarket.
Soon after, Shiller turned his attention to the housing market. Along with two other economists, Karl Case and Allan Weiss, Shiller developed a national housing price index in the early 1990s. The index gave those studying the market much more accurate observations of price.
Working through the numbers, Shiller became more and more convinced that the housing market was entering dangerous territory. From as early as 2003, Shiller appeared on television and radio – a lone and persistent voice warning about a national housing bubble. In late 2006, home prices peaked. Since then, they’ve fallen 33 per cent, unleashing one of the worst economic recessions ever.
This week I caught up with Shiller to find out what he thinks about in the post-bubble economy. It turns out there’s still plenty to worry about, except perhaps bubbles.
“My worry right now is that confidence is still shaky,” Shiller says. With Washington in gridlock, “we don’t have Keynesian tools available – we can’t do the big deficit spending at the moment, and we can’t do bailouts because of Dodd Frank. We’ve been tearing down our usual defences and now we are vulnerable”.
Despite recent signs of strength in the United States economy, Shiller predicts a double-dip recession. He defines double dip as a recession that occurs before employment returns to normal.
“Something will come along and tip the economy down,” he explains. “We’re at risk of that now. The European crisis comes first to mind but it could be anything. We don’t really know what causes recessions but we know they come along every few years.”
As for predicting what happens to housing prices, Shiller is less confident. “It’s become very difficult to know what will happen next,” he says. “Housing prices have come down to a more normal level and given interest rates, housing is pretty affordable. But prices could overshoot.”
What adds to the uncertainty, he explains, is the government’s role in the mortgage market and a lack of available credit for borrowers.
Since last northern autumn, housing prices have begun to fall again, surprising many commentators who believed that the market had stabilised. Shiller wonders whether the resumption of declining prices reflects a permanent shift in public attitudes to housing.
“The big question is whether people still think that they really have to get into housing or they’ll miss out on life. There’s evidence people may be just fine with renting instead.”
And just in case there’s any complacency about the housing market, Shiller adds that in Japan, following the property bust that began in the late 1980s, home prices continued their decline – with only minor interruptions – for 20 years.
A prolific author, Shiller’s next book, due out this spring, is called Finance and the Good Society. The impetus for the book was his students. Shiller says that most of his students end up in finance and he wanted a book to help them think about the bigger picture and address moral questions.
“I was working on this book a long time before the Occupy Wall Street Movement came along. People will think I’ve written it in response but I haven’t,” he says.
“People are angry about the banks and I hope the Occupy Movement likes this book. The central theme is the democratisation and humanising of finance. I take as reality that we’re not going to abolish banks or see bank presidents take a big pay cut. And I focus on how can we make finance work better.”
As for any bubbles on the horizon, Shiller pauses. “There are a few bubbles in housing in certain other countries,” he says. “I’m looking at Norway and Canada, for instance.”
And then he says quietly, almost as an after thought: “And there may be an oil price bubble.”
Will Robert Shiller be right three times in a row?
PUBLISHED: 18 Feb 2012
Anna Bernasek New York
Predicting a market boom or bust is not for the meek. Partly a matter of good timing and partly about being bold, a correct call can turn the forecaster into a star overnight, sought after by the global banking glitterati and invited to A-list events such as the World Economic Forum in Davos.
A bad call, on the other hand, can mean years of ridicule, quickly becoming fodder for endless jokes. Remember the book Dow 36,000?
Then there’s Robert Shiller, who’s in a class of his own. An economics professor at Yale, Shiller not only called the dotcom bubble of the late 1990s and the more recent devastating housing bubble but he warned that both would end badly. Very badly.
Remember back to when previous Federal Reserve chairman Alan Greenspan first used the term “irrational exuberance” to describe the booming market of the late 90s? He lifted that phrase from Shiller, after the economist had given the Fed chief a private briefing.
When the dotcom bubble burst in 2000, Shiller was vindicated and his book published earlier that year, Irrational Exuberance, became a hit. Between 2000 and 2002, about $US5 trillion of value was wiped out of the sharemarket.
Soon after, Shiller turned his attention to the housing market. Along with two other economists, Karl Case and Allan Weiss, Shiller developed a national housing price index in the early 1990s. The index gave those studying the market much more accurate observations of price.
Working through the numbers, Shiller became more and more convinced that the housing market was entering dangerous territory. From as early as 2003, Shiller appeared on television and radio – a lone and persistent voice warning about a national housing bubble. In late 2006, home prices peaked. Since then, they’ve fallen 33 per cent, unleashing one of the worst economic recessions ever.
This week I caught up with Shiller to find out what he thinks about in the post-bubble economy. It turns out there’s still plenty to worry about, except perhaps bubbles.
“My worry right now is that confidence is still shaky,” Shiller says. With Washington in gridlock, “we don’t have Keynesian tools available – we can’t do the big deficit spending at the moment, and we can’t do bailouts because of Dodd Frank. We’ve been tearing down our usual defences and now we are vulnerable”.
Despite recent signs of strength in the United States economy, Shiller predicts a double-dip recession. He defines double dip as a recession that occurs before employment returns to normal.
“Something will come along and tip the economy down,” he explains. “We’re at risk of that now. The European crisis comes first to mind but it could be anything. We don’t really know what causes recessions but we know they come along every few years.”
As for predicting what happens to housing prices, Shiller is less confident. “It’s become very difficult to know what will happen next,” he says. “Housing prices have come down to a more normal level and given interest rates, housing is pretty affordable. But prices could overshoot.”
What adds to the uncertainty, he explains, is the government’s role in the mortgage market and a lack of available credit for borrowers.
Since last northern autumn, housing prices have begun to fall again, surprising many commentators who believed that the market had stabilised. Shiller wonders whether the resumption of declining prices reflects a permanent shift in public attitudes to housing.
“The big question is whether people still think that they really have to get into housing or they’ll miss out on life. There’s evidence people may be just fine with renting instead.”
And just in case there’s any complacency about the housing market, Shiller adds that in Japan, following the property bust that began in the late 1980s, home prices continued their decline – with only minor interruptions – for 20 years.
A prolific author, Shiller’s next book, due out this spring, is called Finance and the Good Society. The impetus for the book was his students. Shiller says that most of his students end up in finance and he wanted a book to help them think about the bigger picture and address moral questions.
“I was working on this book a long time before the Occupy Wall Street Movement came along. People will think I’ve written it in response but I haven’t,” he says.
“People are angry about the banks and I hope the Occupy Movement likes this book. The central theme is the democratisation and humanising of finance. I take as reality that we’re not going to abolish banks or see bank presidents take a big pay cut. And I focus on how can we make finance work better.”
As for any bubbles on the horizon, Shiller pauses. “There are a few bubbles in housing in certain other countries,” he says. “I’m looking at Norway and Canada, for instance.”
And then he says quietly, almost as an after thought: “And there may be an oil price bubble.”
Will Robert Shiller be right three times in a row?
Monday, February 13, 2012
The great hedge fund anomaly
Financial Review
PUBLISHED: 11 Feb 2012
Anna Bernasek, New York
Is there a bubble in the hedge fund industry? For some time now there’s been talk about an impending shake-up in hedge funds. Growth was expected to drive the industry’s performance down toward the average, with more competition resulting in lower fees.
In the aftermath of the 2008 financial crisis, that shake-up seemed imminent. The industry’s poor performance, coupled with shocking scandals like Bernie Madoff’s fraud, shook some observers’ faith in the sector. But apparently little has changed.
True, some high-profile funds have closed their doors and some big ones have become smaller. But on the whole, the industry is booming. Fees remain as high as ever and money is pouring in.
What makes it all the more puzzling is that hedge fund performance, especially of late, hasn’t lived up to the industry’s promise of outsized returns. In fact, looking at industry returns, it’s hard to fathom why investors keep investing.
Take last year for instance. On average, hedge funds lost 5 per cent, according to Hedge Fund Research. That’s not great compared with a popular reference, the S&P 500 stock index, which was flat for the year. Or the Dow Jones Industrial Average, which gained 5 per cent.
And last year’s dismal performance of the hedge fund industry is not an isolated event. For two years hedge funds have underperformed the broader stockmarket. What’s more, analysis suggests that investments in hedge funds over the long term have underperformed, not only investments in major stockmarket indices but bond market indices too.
A recent book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good To Be True, by Simon Lack, raises serious concerns. At the centre of Lack’s book is a shocking conclusion: “If all the money ever invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.”
Looking at performance of the industry since 1998, Lack figures that the vast majority of gains have gone to the hedge fund managers as opposed to their investors. In fact, Lack plausibly suggests that in real terms, investors may have lost money in hedge funds over the period while managers raked in stupendous sums.
Proponents of hedge funds will say that the funds, on average, have lost money in just three years since the industry was formed. But their numbers are shaky. The hedge fund indices are calculated based on voluntary reporting. If a hedge fund has a bad year and it keeps quiet, those numbers don’t go in the index. Funds can selectively report good numbers in good years, driving up the indices.
Without detailed disclosure it’s hard to be confident of the quality even of the reported numbers. It’s not beyond the imagination to suppose that accounting games are played behind the scenes.
And, of course, the secrecy of the industry provides an ideal environment for occasional outright frauds. Hedge fund managers like Bernie Madoff and Raj Rajaratnam have become household names because of their crimes, yet there are many more managers still under investigation.
Philip Falcone, the manager of Harbinger Capital Partners, is among the latest to be investigated by the Securities and Exchange Commission for a $113 million loan he took out of his funds to pay his personal taxes.
Despite fraud and poor performances, hedge funds seem to be more popular with investors than ever. The total dollar amount invested in hedge funds hit a record last year of more than $2 trillion.
If you pick the right fund you can win big. While the average one has underperformed the broader market, some have spectacularly outperformed everyone.
Look at Bridgewater Associates for instance, the world’s biggest hedge fund with almost $120 billion under management. Bridgewater bucked the downward trend in hedge fund performance last year by making a 23 per cent gain.
The curious thing about the growing popularity of hedge funds is that demand seems to be coming from the very institutions that can’t afford to lose big – private and public pension funds.
In today’s low interest rate and relatively flat stockmarket, pension funds are having great difficulty meeting their 8 per cent target return on investments. As a result, many are taking a bet on hedge funds in the hope that they produce additional returns. Some estimates have a typical pension fund now holding 20 per cent of its portfolio in so-called alternative investments including hedge funds, private equity and real estate.
There’s nothing wrong with trying to make money in hedge funds. But the typical fee structure – the so-called “2 and 20”, where managers take 2 per cent of assets and then another 20 per cent of any profit – is so rich it may turn out to be impossible to justify. All those pension fund managers piling into hedge funds could wind up with egg on their faces.
PUBLISHED: 11 Feb 2012
Anna Bernasek, New York
Is there a bubble in the hedge fund industry? For some time now there’s been talk about an impending shake-up in hedge funds. Growth was expected to drive the industry’s performance down toward the average, with more competition resulting in lower fees.
In the aftermath of the 2008 financial crisis, that shake-up seemed imminent. The industry’s poor performance, coupled with shocking scandals like Bernie Madoff’s fraud, shook some observers’ faith in the sector. But apparently little has changed.
True, some high-profile funds have closed their doors and some big ones have become smaller. But on the whole, the industry is booming. Fees remain as high as ever and money is pouring in.
What makes it all the more puzzling is that hedge fund performance, especially of late, hasn’t lived up to the industry’s promise of outsized returns. In fact, looking at industry returns, it’s hard to fathom why investors keep investing.
Take last year for instance. On average, hedge funds lost 5 per cent, according to Hedge Fund Research. That’s not great compared with a popular reference, the S&P 500 stock index, which was flat for the year. Or the Dow Jones Industrial Average, which gained 5 per cent.
And last year’s dismal performance of the hedge fund industry is not an isolated event. For two years hedge funds have underperformed the broader stockmarket. What’s more, analysis suggests that investments in hedge funds over the long term have underperformed, not only investments in major stockmarket indices but bond market indices too.
A recent book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good To Be True, by Simon Lack, raises serious concerns. At the centre of Lack’s book is a shocking conclusion: “If all the money ever invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.”
Looking at performance of the industry since 1998, Lack figures that the vast majority of gains have gone to the hedge fund managers as opposed to their investors. In fact, Lack plausibly suggests that in real terms, investors may have lost money in hedge funds over the period while managers raked in stupendous sums.
Proponents of hedge funds will say that the funds, on average, have lost money in just three years since the industry was formed. But their numbers are shaky. The hedge fund indices are calculated based on voluntary reporting. If a hedge fund has a bad year and it keeps quiet, those numbers don’t go in the index. Funds can selectively report good numbers in good years, driving up the indices.
Without detailed disclosure it’s hard to be confident of the quality even of the reported numbers. It’s not beyond the imagination to suppose that accounting games are played behind the scenes.
And, of course, the secrecy of the industry provides an ideal environment for occasional outright frauds. Hedge fund managers like Bernie Madoff and Raj Rajaratnam have become household names because of their crimes, yet there are many more managers still under investigation.
Philip Falcone, the manager of Harbinger Capital Partners, is among the latest to be investigated by the Securities and Exchange Commission for a $113 million loan he took out of his funds to pay his personal taxes.
Despite fraud and poor performances, hedge funds seem to be more popular with investors than ever. The total dollar amount invested in hedge funds hit a record last year of more than $2 trillion.
If you pick the right fund you can win big. While the average one has underperformed the broader market, some have spectacularly outperformed everyone.
Look at Bridgewater Associates for instance, the world’s biggest hedge fund with almost $120 billion under management. Bridgewater bucked the downward trend in hedge fund performance last year by making a 23 per cent gain.
The curious thing about the growing popularity of hedge funds is that demand seems to be coming from the very institutions that can’t afford to lose big – private and public pension funds.
In today’s low interest rate and relatively flat stockmarket, pension funds are having great difficulty meeting their 8 per cent target return on investments. As a result, many are taking a bet on hedge funds in the hope that they produce additional returns. Some estimates have a typical pension fund now holding 20 per cent of its portfolio in so-called alternative investments including hedge funds, private equity and real estate.
There’s nothing wrong with trying to make money in hedge funds. But the typical fee structure – the so-called “2 and 20”, where managers take 2 per cent of assets and then another 20 per cent of any profit – is so rich it may turn out to be impossible to justify. All those pension fund managers piling into hedge funds could wind up with egg on their faces.
Monday, February 6, 2012
If an economist were president of the US
The Financial Review
PUBLISHED: 04 Feb 2012
Anna Bernasek NEW YORK
Republican presidential nominee hopefuls continue their merciless attacks on each other. President Barack Obama remains focused on his own tactics and manoeuvring before the November elections. Meanwhile, the big economic problems facing the nation remain unaddressed. So here’s a different idea. What would things be like if an economist were in charge?
Meet Larry Kotlikoff, a professor of economics at Boston University. He’s seeking the nomination of a third party, called Americans Elect, to enter the presidential race against Obama and Mitt Romney, the Republican frontrunner and likely nominee.
Kotlikoff’s message is simple: politicians have made a mess of things and can’t be trusted to fix the major economic problems confronting the nation. In his view only an economist who understands what’s at stake can get the job done.
“I’m trying to put the truth forward and I’m not shy about that,” Kotlikoff tells me. “The country has significant short-term problems, which the [US Federal Reserve] is predicting will last till 2014 at least. Then we have serious long-terms problems. Healthcare is making us broke, the tax system is a mess, social security is in worse financial shape than it’s ever been, and Wall Street still hasn’t been fixed. It remains as big a danger to Main Street as ever.”
Playing off the commonly used “red” Republican and “blue” Democrat imagery, Kotlikoff terms his plans “purple”. By that he means they are designed to appeal to liberals and conservatives.
So far, no one in the White House or in the Republican camp is paying much attention. After all, there’s never been an economist president and few would give a third-party candidate any chance of winning the presidency.
But Kotlikoff brings a focus on the key issues that’s lacking from the major candidates.
He believes unemployment is the immediate concern. By a combination of jawboning and compulsion he would get major companies to hire additional workers. Kotlikoff expects co-ordinated mass hiring to have positive knock-on effects. The housing sector would start to heal and consumer confidence would grow, encouraging even more hiring in a virtuous cycle of economic growth.
Once that’s under way, Kotlikoff would tackle long-term problems. This is where his years of study as an academic economist come in.
Kotlikoff’s best recognised contribution to the field of economics has been a way of accounting for national debt called generational accounting.
That eye-opening approach reveals the staggering financial burden the US is placing on its younger generations.
Officially, the US states its national debt at about $US15 trillion ($14 trillion). But, as measured by Kotlikoff, the debt is far higher. That’s because the great bulk of government obligations – Medicare, Medicaid and social security – are expected in the future and aren’t on the balance sheet today. Future obligations don’t show up in official debt numbers.
Kotlikoff’s method measures the present value of all future spending, including spending on Medicare, Medicaid and social security, and compares that with the present value of expected government receipts. The gap between the two represents government debt.
Just how big is US government debt according to Kotlikoff’s method? Fourteen times official debt, or $US211 trillion.
With Congress failing to reach agreement on savings of a mere $US1.2 trillion over the next 10 years, it’s little wonder Kotlikoff is alarmed. So what would he do?
Since healthcare costs account for 60 per cent of the gap, Kotlikoff would start with healthcare reform.
Worried that Obama’s reforms will do nothing to stop skyrocketing costs, Kotlikoff would give every American a voucher to buy a basic health insurance plan set by a panel of doctors. Under Kotlikoff’s plan, the cost to the government of providing everyone with a basic plan would not exceed 10 per cent of gross domestic product.
Today, the US spends 18 per cent of gross domestic product on healthcare. Individuals could buy supplementary insurance.
To make up the rest of the gap, Kotlikoff advocates changes to the government-funded retirement plan and simplification of the tax code. He also worries about the spectacular decline in national savings since World War II and his tax ideas derive from his intent to encourage saving and investment. In 1950, the national savings rate in the US was about 15 per cent. Today it is close to zero.
Not everyone agrees with Kotlikoff’s ideas about privatising social security, since he wants to provide a guaranteed minimum return backed by the government. Nor are most Americans ready for a switch to the consumption tax Kotlikoff favours. But it’s clear that some changes in each of these areas need to be part of any comprehensive solution to the nation’s long-run problems.
Kotlikoff would be the first to admit he lacks political experience. His purple plans run the risk of pleasing no one on the left or right. But before you dismiss him, consider this: he’s made an honest attempt at tackling the problems.
PUBLISHED: 04 Feb 2012
Anna Bernasek NEW YORK
Republican presidential nominee hopefuls continue their merciless attacks on each other. President Barack Obama remains focused on his own tactics and manoeuvring before the November elections. Meanwhile, the big economic problems facing the nation remain unaddressed. So here’s a different idea. What would things be like if an economist were in charge?
Meet Larry Kotlikoff, a professor of economics at Boston University. He’s seeking the nomination of a third party, called Americans Elect, to enter the presidential race against Obama and Mitt Romney, the Republican frontrunner and likely nominee.
Kotlikoff’s message is simple: politicians have made a mess of things and can’t be trusted to fix the major economic problems confronting the nation. In his view only an economist who understands what’s at stake can get the job done.
“I’m trying to put the truth forward and I’m not shy about that,” Kotlikoff tells me. “The country has significant short-term problems, which the [US Federal Reserve] is predicting will last till 2014 at least. Then we have serious long-terms problems. Healthcare is making us broke, the tax system is a mess, social security is in worse financial shape than it’s ever been, and Wall Street still hasn’t been fixed. It remains as big a danger to Main Street as ever.”
Playing off the commonly used “red” Republican and “blue” Democrat imagery, Kotlikoff terms his plans “purple”. By that he means they are designed to appeal to liberals and conservatives.
So far, no one in the White House or in the Republican camp is paying much attention. After all, there’s never been an economist president and few would give a third-party candidate any chance of winning the presidency.
But Kotlikoff brings a focus on the key issues that’s lacking from the major candidates.
He believes unemployment is the immediate concern. By a combination of jawboning and compulsion he would get major companies to hire additional workers. Kotlikoff expects co-ordinated mass hiring to have positive knock-on effects. The housing sector would start to heal and consumer confidence would grow, encouraging even more hiring in a virtuous cycle of economic growth.
Once that’s under way, Kotlikoff would tackle long-term problems. This is where his years of study as an academic economist come in.
Kotlikoff’s best recognised contribution to the field of economics has been a way of accounting for national debt called generational accounting.
That eye-opening approach reveals the staggering financial burden the US is placing on its younger generations.
Officially, the US states its national debt at about $US15 trillion ($14 trillion). But, as measured by Kotlikoff, the debt is far higher. That’s because the great bulk of government obligations – Medicare, Medicaid and social security – are expected in the future and aren’t on the balance sheet today. Future obligations don’t show up in official debt numbers.
Kotlikoff’s method measures the present value of all future spending, including spending on Medicare, Medicaid and social security, and compares that with the present value of expected government receipts. The gap between the two represents government debt.
Just how big is US government debt according to Kotlikoff’s method? Fourteen times official debt, or $US211 trillion.
With Congress failing to reach agreement on savings of a mere $US1.2 trillion over the next 10 years, it’s little wonder Kotlikoff is alarmed. So what would he do?
Since healthcare costs account for 60 per cent of the gap, Kotlikoff would start with healthcare reform.
Worried that Obama’s reforms will do nothing to stop skyrocketing costs, Kotlikoff would give every American a voucher to buy a basic health insurance plan set by a panel of doctors. Under Kotlikoff’s plan, the cost to the government of providing everyone with a basic plan would not exceed 10 per cent of gross domestic product.
Today, the US spends 18 per cent of gross domestic product on healthcare. Individuals could buy supplementary insurance.
To make up the rest of the gap, Kotlikoff advocates changes to the government-funded retirement plan and simplification of the tax code. He also worries about the spectacular decline in national savings since World War II and his tax ideas derive from his intent to encourage saving and investment. In 1950, the national savings rate in the US was about 15 per cent. Today it is close to zero.
Not everyone agrees with Kotlikoff’s ideas about privatising social security, since he wants to provide a guaranteed minimum return backed by the government. Nor are most Americans ready for a switch to the consumption tax Kotlikoff favours. But it’s clear that some changes in each of these areas need to be part of any comprehensive solution to the nation’s long-run problems.
Kotlikoff would be the first to admit he lacks political experience. His purple plans run the risk of pleasing no one on the left or right. But before you dismiss him, consider this: he’s made an honest attempt at tackling the problems.
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