To resolve the long-term fiscal mess hounding so many Western developed nations, we’ll have to find a “cure” for Baumol’s Disease and its nagging ally, Moynihan’s Corollary.
What?
You read correctly. Essentials of the long-term budget deficit woes in Western Europe and in the U.S. can be found in those dreadful sounding economic dictums. Ask Larry Summers.
In the 59 pages of sometimes radical notions proposed by the heads of a budget-cutting commission intended to restore discipline and sacrifice to the economic lives of slothful Americans, there’s at least one idea that should be a no-brainer.
Gradually increase the age at which Americans retire and collect either early or full retirement benefits via the Social Security system. Make provisions for those 62 or older who can’t continue to work.
This one should be widley adopted by Americans if only to show they are ’mature’ about needed belt-tightening measures, given the size of current and future budget deficits. In France, major protests were launched about the plan to gradually increase the retirement age there to 62 from 60.
It’s fashionable to call TARP (Troubled Asset Relief Program, to be official) the most effective program that everyone hates. Hated because of the perception the big banks got bailed out for what’s perceived as their own mistakes, hated because of the notion that Main Street was handed the short end of the stick while Wall Street pretty much gets to merrily ramble on.
With expectations now that even the humbled insurance giant, AIG, is coming around to payback time, government officials are touting TARP as the plan that saved us from financial disaster and ends up not destroying the taxpayer.
“The direct budget cost of the program and our full investment in the insurer AIG is likely to come in well under $50 billion – $300 billion less than estimated by the Congressional Budget office last year.” So wrote Treasury Secretary Timothy Geithner in an “op-ed” article published Sunday in The Washington Post.
Bond manager William H. Gross has some tough talk for government debt issuers. If widely agreed, the view expressed by the PIMCO managing director will make the hard task of budget-deficit cutting in the industrial world even harder.
“Just last week Bank of England Governor Mervyn King said that it would be difficult to cut government spending quickly, but that there neeeds to be a clear plan for doing so,” wrote Gross in his monthly investment outlook.
“Not good enough, Mr. King. Don’t care. Show investors the money, not vice-versa,” Gros wrote.
Clearly, soveriegn debt is replacing the credit crunch as global economic issue number one. An extraordinary balancing act will be required of elected officials in deomcracies whose recoveries are extremely fragile but whose budget deficits already have caused worry among investors.
Hards words, if understandable from an investor’s viewpoint. Gross already has had some quite negative things to say about British sovereign debt.
In an extreme situation, and depending on the people in power, a showdown between citizens and creditors in the U.K. or elsewhere will likely be ugly for both groups. See Greece as potentially Exhibit A.
Lots of negatives are heard about the fiscal stimulus plan approved by the U.S. Congress to help stir the nation out of deep recession. Ineffective, slow, poorly structured are some of terms used.
Now a noted economist and former Federal Reserve official comes out squarely behind stimulus, the role it’s already played and the one it will play buttressing the U.S. economy.
Alan S. Blinder is a professor at Princeton University. He used to be vice chairman of the Fed. In today’s Washington Post, he penned an “op-ed” piece. In it he writes: “Critics claim that the stimulus program is running way behind schedule. Is it? Well no.” Blinder argues the $787 billion spending plan was never meant to be a quick fix or a cure all.
He adds: “What six months ago lookewd like an economy plunging into an abyss is now an economy on the mend. And the stimulus deserves some of the credit.” Worth reading.
Okay, it was too wonderful for the media pass up, as it so well exemplified the Main Street versus Wall Street war. But it is time for all of us, including the Congress of the United States, to move pastt the AIG bonus imbroglio and get our focus back on the substantive economic and credit issues before us.
Yes, AIG executives who work in the unit that sunk the firm and caused billions of U.S. taxpayers’ dollars to flow into AIG shouldn’t have gotten bonuses, retention or otherwise. Yes, the Treasury was in there early enough to do something about it and did not. That aspect illustrates the oddity of heavy federal government intervention into a private company without taking outright control. In some regards it means no one is really in charge.
The understandable problem that’s fueled so much outrage about retention bonuses and the like at government-sustained companies is that these companies and their federal overseers are caught in a netherworld that lacks precedents and hasn’t fully been thought through.
To take the most extreme case, AIG. The company is only afloat becaause of the U.S. government and its taxpayers, but it is governed like a private company and sticking to private company mores. (Let’s remember that there’s outrage even in normal Chapter 11 proceedings about companies that cut lots of staff and then give retention bonuses to key people who are among those who presumably helped get them to Chapter 11 in the first place.)
A dizzying number of new proposals in the Obama budget that was released earlier today. Looks like at least one proposal provides an opportunity for for the financial adviser and wealth manager businesses. Basically, the new budget will require every company that does not offer a retirement plan to foot the costs to enroll all of their employees into direct-deposit IRA accounts. The idea is that about half (or 75 million people) of the workforce in the U.S. lack employer-based retirement plans. And if you aren’t forced to save a little here and there, you don’t save. This gives individuals the incentive to start saving in a tax-deductible program. And at no cost for them to set up. Most of the companies that don’t offer 401 (K) plans or traditional pension plans are small businesses. So, the opportunity may seem minimal for plan sponsors who see the dollar signs in administering large company lans. But by pooling plans and products, some smart Wall Street firms and advisers may find a way to bring in some much needed new business.
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