Friday, October 19, 2012

Romney's Top Economic Adviser

Both candidates for president have been light on details about their vision for the next four years.  We know who Obama’s economic advisors are, so we probably have a pretty good idea about their views on financial issues.  But what about Romney?

Romney’s “Go-To Economist” is R. Glenn Hubbard.  If his name sounds familiar, that may be because he is the dean of Columbia Business School.

He was also the chairman of the Council of Economic Advisers for George W. Bush, and the architect of the Bush tax cuts

Subsequently, he has championed the cause of the mutual fund industry’s approach to charging fees, stating that it was essentially impossible for mutual fund advisers to overcharge fees because the mutual fund business was so competitive.  For his advice, this industry has paid him over $1 million.

He testified for Fidelity in a case where company employees sued for excessive fees to manage their 401(k) plan.  He was paid $420,000 for that testimony, but Fidelity lost that case.

He has also worked for the insurance arm of the Investment Company Institute, a lobbying group that paid him $150,000 for an academic paper.

Hubbard co-wrote a recent position paper titled “The Romney Program for Economic Recovery, Growth and Jobs.”  In this paper, he favors,
  • reducing federal spending, 
  • cutting marginal tax rates 20% across the board, 
  • reducing Social Security and Medicare benefits for wealthy seniors, 
  • repealing Dodd-Frank financial regulation and 
  • repealing the Affordable Care Act, sometimes called “Obamacare.”

While on Bush’s economic advisory team, Hubbard supported reducing dividend taxes to zero.

Other consulting/advisory positions held by Hubbard include Freddie Mac, Bank of America, JPMorgan Chase and Goldman Sachs.  In one paper that he co-authored, he opined that “credit derivative(s) have become an important element that helped protect bank lending portfolios against loss.”

As Romney’s likely nominee for Treasury Secretary, Hubbard provides ample evidence of what voters may expect from his economic policies.

As always, I welcome your comments.

Monday, October 15, 2012

A Grown Up Girl’s Guide to the National Debt

If you ask the average person the difference between the deficit and the national debt, you're likely to get a blank stare. While you are much smarter than the average Josephine, we'll go over that anyway, just in case you were asleep during that session of your Econ class.

The Deficit

The deficit is the amount of money we're spending THIS YEAR that exceeds the amount we brought in.    

The national debt is the sum total of all the deficits we've had.

To give you a little perspective, here’s are the deficits from 8 years prior to the Great Recession to the present. 
  • 1999 - $125 billion surplus (Clinton)
  • 2000 - $236 billion surplus (Clinton)
  • 2001 - $128 billion surplus (Bush)
  • 2002 - $157 billion deficit (Bush)
  • 2003 - $377 billion deficit (Bush)
  • 2004 - $412 billion deficit (Bush)
  • 2005 - $318 billion deficit (Bush)
  • 2006 - $248 billion deficit (Bush)
  • 2007 - $162 billion deficit (Bush)                   The Great Recession begins Dec., 2007
  • 2008 - $410 billion deficit (Bush)                  
  • 2009 - $1.41 trillion deficit (Obama)              The Great Recession ends Jun., 2009
  • 2010 - $1.29 trillion deficit (Obama)
  • 2011 - $1.30 trillion deficit (Obama)
  • 2012 - $1.09 trillion deficit (Obama)
  • 2013 – projected $901 billion (Unknown)
Deficit spending grew by 620% from 1999 - 2013

Let’s compare those deficits to an analogous period for the 1980 – 1981 recession (the second worst recession in our history).

·         1973 - $14.91 billion deficit
·         1974 - $ 6.14  billion deficit
·         1975 - $53.24 billion deficit
·         1976 - $73.73 billion deficit
·         1977 - $78.97 billion deficit
·         1978 - $59.19 billion deficit
·         1979 - $40.73 billion deficit
·         1980 - $73.83 billion deficit
·         1981 - $78.97 billion deficit (Reagan)            Recession began Jul., 1981
·         1982 - $128 billion deficit (Reagan)               Recession ended Nov., 1982
·         1983 - $207.8 billion deficit (Reagan)
·         1984 - $185.4 billion deficit (Reagan)
·         1985 - $212.3 billion deficit (Reagan)
·         1986 - $239.6 billion deficit (Reagan)

Deficit spending increased by 1,507% from 1973 – 1986.

There are two factors that make up a deficit:  Revenues and expenses.  During a recession, revenues drop, as businesses lay off workers and less is collected in both a corporate and personal taxes.  Expenses also increase, as government spending in areas such as unemployment benefits go up.

The National Debt
From 1742 to 2010 (the last year complete data are available), we've had a total of about $8 trillion dollars in deficit spending. When you add interest paid on borrowing to pay that debt, it climbs to about $13.5 trillion.
Since 1900, we've had 31 years where our income exceeded our expenses. The other 82 years have had deficit spending.
Again, as a matter of perspective, here is the cumulative amount of the national debt for the last decade.
  • 2000 - $5.628 billion (Clinton)
  • 2001 - $5.769 billion (Bush)
  • 2002 - $6.198 billion (Bush)
  • 2003 - $6.760 billion (Bush)
  • 2004 - $7.354 billion (Bush)
  • 2005 - $7.905 billion (Bush)
  • 2006 - $8.451 billion (Bush)
  • 2007 - $8.950 billion (Bush)
  • 2008 - $9.654 billion (Bush)
  • 2009 – $11.88 billion (Obama)
  • 2010 - $13.53 billion (Obama)
  • 2011 - $14.76 billion (Obama)
All data compiled from
Let’s look at our personal debt.  Total US residential investment is $10,081 billion.  Consumer debt is $2,725.6 billion.  That’s $12,806.6 billion, and there are currently 314,123,000 of us.  Each one of us holds, on average, $43,800.  Some, including homeowners, owe far more.  Renters owe far less.  Few would probably have the ability to write a check and pay off all their debt, including their mortgage.  Some debt, or leverage, is a good thing.
How Much Do I Owe?
Those who express outrage regarding the national debt sometimes express the debt in terms of the amount that is owed by every man, woman and child in the US. Currently, that amount is nearly $34 thousand. Again, to gain some perspective, let's look at a couple of facts.
In 1960, the national debt was $290 billion and the population was 179.3 million. Every American owed about $1620 - $5432 in today's dollars.
In 1970, the national debt was $380.9 billion and the population was 203.3 million. Every American owed $1873 - $4908 in today's dollars (less than the prior decade).
In 1980, the national debt was $909 billion and the population was 248.7 million. Every American owed $3665 - $7479 in today's dollars (+52% from the prior decade).
In 1990, the national debt was $3.206 billion and the population was 248.7 million. Every American owed $12,879 - $20,589 in today's dollars (+115% from the prior decade).
In 2000, the national debt was $5.629 billion and the population was 281.4 million. Every American owed $20,002 - $24,980 in today's dollars (+2% from the prior decade).
In 2010, the national debt was $10.526 billion and the population is 308.7 million. Every American owes about $43,800 (+75% from the prior decade).
Population information was obtained from
Debt as a Percentage of Gross Domestic Product
Realistically, the national debt will never actually be paid to zero. We've had debt since 1900. The way to evaluate debt is as a percentage of GDP.
  • 1970 - 8.9%
  • 1980 - 15.6%
  • 1990 - 40%
  • 2000 - 50.7%
  • 2010 - 90%
Let’s put this in perspective.  In a corporate structure, about the optimal amount of debt is about 33%.  Here’s why.  If you invest $2 million in a company with no debt and that company earns $200,000, you earn 10% on your investment.  If you invest $1.34 million in a company, and have $660,000 in debt, and that company earns $200,000, you earn 15% on your investment.
Too much debt is not a good thing, and we all know very well that is true from a common sense perspective.  If you earn $100,000 and your mortgage and credit card payments are $100,000, you have no money.  You need to earn more AND cut your expenses.  You can’t have garage sales to raise money indefinitely.
It works the same way for the government.  We see the effects of immediate, draconian cuts in expenses into countries like Greece and Spain.  Too many spending cuts, or reliance on spending cuts alone, result in a decrease in earnings (taxes), which slows growth, which decreases earnings further, which slows growth further.  IMF Chair Christine Lagarde warned against this strategy as exacerbating the European Union problem.  
A more rational approach is to both cut long term expenses and raise long term revenues by allowing the country to grow, creating new businesses and more taxpayers.  In other words, spend less and raise taxes, but enact changes gradually, so not to worsen the problem. 
As always, I welcome your comments and questions.