Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

Leaving aside the issue of influence via political contributions and lobbyists (as they are as yet unproven) the moral of the Solyndra debacle seems simple to me. The Federal Government should stay out of the investment business.

Solyndra was an accident waiting to happen. The company couldn’t get funding from the private sector. A hoped for public offering had been cancelled. It was apparently obvious to analysts and lenders that the company was, at a minimum, not an attractive investment and possibly not even viable. They chose to avoid providing either equity or debt capital to the company. The macro factors were compelling – in an industry where the competitors’ raw material costs were falling, Solyndra was a classic case of a company with variable costs that were simply too high.

One has to assume that the Federal Government employees responsible for doing the research on Solyndra simply lacked the technical skills to do a thorough analysis of the company’s long term (or even short term as it turns out) viability. That is the most charitable thing that can be said.

It is hard to imagine that they were so dimwitted that they were willing to risk the embarrassment of a default on a loan of over $500 million. So it is fair to say that they didn’t really believe the company would go into bankruptcy. Common sense tells me that the powers that be who were making the final decision about which ‘green’ company would receive Federal Government backing most assuredly wanted it to be a success story.

Of course, it is possible that Solyndra’s management lied to the Government. That is not uncommon in the investment world, and that is what tried and true analysts are paid to figure out. The Government was in over its head. If an analyst in the private sector had recommended a loan or an investment in Solyndra and within two years the company had gone kaput, you can be assured that the yearend bonus for that analyst would also have gone kaput. In the investment world, there is a real incentive to be hardnosed, to get the facts right and to make a decision that creates a positive return. There is no such incentive system in the Federal Government. I doubt that anyone will lose his/her job over the annihilation of $535 million of taxpayers’ hard earned money being lent to Solyndra.

So assuming that there was no sinister under-story here, the problem must lie in the fact that the Federal Government employees charged with researching the case were simply not up to the task.

And therein lies the true moral of the story. Let the Federal Government stick to its appointed knitting, and for the benefit of all the people it serves, let it stay out of the sophisticated and specialized business of investing in and lending to corporations in the private sector.

Why is there no job growth in the U.S. Economy?

Depending upon whom you ask, you can get any number of different answers. Political demagoguery is the easy response, particularly when we are less than fourteen months away from the presidential election.

But I am confident that had John McCain won the election in 2008, the unemployment rate today would not be much lower than it currently is.

Contrary to what many Republicans say, the stimulus plan did indeed help the economy and certainly provided for jobs. And for the most part the money that was spent was used for long overdue infrastructure spending that the Government should have been doing all along. But there is no way the stimulus plan could be a long term solution for economic growth. That is the responsibility of the private sector.

The real problem underlying the dearth of new jobs today is twofold.

On the one hand, it reflects the fact that the consumer is paying for the sins of the past. For two decades, consumers in this country went on a spending spree. With the aid of banks and other lending institutions, they used the equity in their homes to borrow money, over and above what they were earning, and then they spent that money. Such behavior acted as a stimulus to the economy, that is, until the music stopped.

The recession that started in 2007 brought an end to the profligate borrowing, as the decline in home values eviscerated many homeowners’ equity. Banks turned off the lending spigot and consumers were forced to alter their lifestyles. Instead of turning to a new line of credit in order to pay off the old one, they found themselves forced to repay their loans, often as their own income was diminished. Their response was quick and logical. They cut back on spending and started to save, and savings rates, which had plummeted over the past twenty years of excessive spending, began a sharp reversal, rising dramatically over the last four years. All of that sounds like good news, and in one way it is because it means that the consumer’s balance sheet is improving.

However, savings increases are coming at the expense of spending and therein lies one of the big problems for job growth and the economy in the short run. Savings by definition is money NOT spent. Savings in the long run will be very beneficial and will allow consumers to replenish their balance sheets but the process is painful. And because the consumer had so much debt at the time of the recession, it is likely that it will take a number of years still before consumer spending becomes robust again. And without robust demand, it is difficult to create new jobs.
On that score, it is not fair to blame the current administration for the lack of jobs. Consumers brought this state of affairs on themselves, and they are slowly rectifying it.

On the business side of the economic equation, which is the investment part of the economy, the issue of job creation is also a problem. In part, it is the result of slow final demand by consumers who are unable to spend as freely as they could when borrowing was at their beck and call. However, the problem is bigger and more dire than that.
Businesses spend their capital and/or expand their labor force based on the profits they expect to generate from those investments. Entrepreneurs make decisions about starting new businesses (and more than half of the job creation in this country comes from new and small companies) on the basis of the long term outlook for growth and profitability.

What has emerged over the last several years is an environment of Government regulation that is truly crushing the entrepreneurial spirit in this country. Companies large and small are facing an array of rules, restrictions, and profit-destroying constraints that have immobilized capital. The threat of higher taxes for corporations and small owner-operated business is a powerful deterrent to capital formation.

Until and unless there is a major reprieve from such stultifying over-regulation, our economy will not make forward progress and unemployment will remain unnecessarily high. The blame for this state of affairs can indeed be laid at the feet of the current administration. President Obama is either getting bad advice from his inner circle of advisors or not heeding them, but he ignores the problems facing business and employment at his own peril.
There is not much time between now and Election Day in 2012 to remedy the unemployment rate. However, massive elimination of regulation and an equalization of corporate tax rates that allows the U.S. to be competitive with other countries would be a major start. A bold move such as that would send the message that the President understands how the economy works and what it needs to get it turned around. But as of now, people don’t think he gets it and they will be looking for someone for President who does.

The volatility in the markets this past week may be reminiscent of what took place in August and September of 2008, but this summer of our discontent is a far cry from what the world faced three years ago. Thank goodness!

That is not to say that the issues roiling the markets today are insignificant or of little consequence. To the contrary, the recent sharp decline in equity markets around the world reflects the host of global challenges that face economies and governments. And the equity market will likely continue to be volatile for a number of reasons.

For one thing, the banks remain under stress. The good news is that the entire banking system is not as leveraged as it was in 2007/2008. However, the largest banks still have far too many distressed loans on their balance sheets. That puts them in the unenviable position of being a reluctant lender, preferring to hoard cash.

Perhaps most important, consumers, the driving force for growth in our economy, are both underemployed and over-indebted. Such a condition severely crimps discretionary spending. Consumers, like the banks, are being forced to reduce their own debt and downsize their balance sheets. This process takes a long time and is the reason that economic growth is likely to remain sub-par for a number of years into the future. And lest we blame the young for profligate spending, it should be noted that it is the 40 and 50 and 60 somethings who have perpetrated this overindulgence. It is refreshing to see how many of the 20 and 30 somethings are choosing to live within their means, utilizing debit cards rather than the potentially bottomless pit of credit cards. And they seem to understand the need to save for their own retirement.

What they are entitled to expect is credible, prudent leadership from Washington. Our political system is choking on rhetoric – all talk and no action, or maybe better put – all shouting and irresponsible, self-centered brinksmanship. I wonder sometimes if the shrillest of the voices in our national legislature don’t reflect the views of but a small percentage of the population. Where is the representation for the nearly silent vast majority that is centrist in its politics and its values? Where is the leadership that can bring both sides together as President Reagan, working with Speaker of the House, Tip O’Neil, was able to do? I am willing to wager that, come the next election, the most secure seats in Congress will be held by those who have been willing to meet in the center over major issues.

Our challenges are daunting but not insurmountable. They will require major restructuring of long term retirement programs currently provided by the Government. Social Security must and will be means tested – the sooner the better. We will also need to overhaul our tax system. A good start is the elimination of all loopholes, those secretly agreed upon ‘deals’ that get slipped into legislation in the dead of night. (I sometimes wonder if the only way to get rid of tax loopholes is to outlaw lobbyists. The only bad news from that would be that the unemployment rate would likely sky-rocket – at least in Washington, D.C.)

The stock market reflects the outlook for corporations to generate profits and pay dividends. Profit growth in the U.S. has been excellent since the recession bottomed out in 2008. Today, nearly 40% of the stocks in the S&P 500 yield more than the current 10-year Treasury rate. The list includes such household names as PepsiCo, Merck, Kimberly Clark, Johnson & Johnson, Proctor & Gamble, Staples, Sysco, McDonalds – all companies that are sound, growing and most likely will be raising their dividends for years to come. Of course corporate earnings are not immune from economic activity, but today’s valuation of the S&P500 seems attractive, particularly when compared to the returns available on fixed income securities.

Three years ago, our economy as well as those of much of the rest of the world came close to hurtling over a precipice. The invaluable and too much maligned support from the Government did in fact save the day. We went through a serious recession and are still clawing our way back to prosperity. The challenges facing us today are long term structural issues. They must be confronted and resolved before they mushroom out of control. But they do not compare in urgency or magnitude to the events in the summer of 2008.

The markets around the world are rattled silly this morning by the first ever downgrade of the U.S. Government’s debt by Standard & Poors. That is understandable but not, in my mind, rational.

There is no way the U.S. Government is going to default on its debt obligations. Its debts are no less safe this morning than they were on Friday or one year ago or ten years ago. It is true that our country’s balance sheet is less healthy than it was a decade ago, but look what we have been through – a recession the depth of which had not been experienced since the 1930’s while simultaneously engaging in two wars. Debt buildup and fiscal deficits were inevitable.

At the end of World War II, our debt as a percent of GDP was far higher than it is today. The Government spent huge amounts of money subsidizing mortgages and providing education through the GI Bill. The country emerged from that era into a sustained period of growth and prosperity which allowed the balance sheet to right itself.

Today we face more than a few challenging issues but they are not insurmountable if only our elected officials would work for the good of the people. There is a need first and foremost to get the economy revitalized. The reason that is proving so difficult to achieve is because the balance sheet of the consumer is still going through a downsizing. In addition, the banks are also continuing to downsize their own balance sheets. It is difficult to spend when you are trying to pay off debt.

Corporations are becoming the easy whipping boy for not hiring more of the unemployed. But they are not the culprit. They came through the recession in solid financial shape and they would like nothing more than to see good demand that would allow them to increase employment.

One thing is for sure – a massive tax increase will NOT be productive for the economy or as a means of reducing the debt levels of the Government. Such a strategy would be counterproductive. However, eliminating tax loopholes –the unfair tax treatments that allow large and profitable companies to pay nearly NO taxes – is an essential step in moving towards reducing the fiscal deficit. The same is true regarding individual taxes – the wealthiest individuals should not be able to take advantage of tax loopholes that allow them to pay the lowest tax rates. It is appalling that Congress cannot agree in a bipartisan way to eliminate tax loopholes – genuine loopholes, NOT the very legitimate deduction of mortgage interest and charitable contributions.

Longer term there is no doubt that the issues of Social Security and retirement health care must be addressed. At least they are now being discussed. Only a decade ago, they were referred to as “the third rail of politics”. So progress has been made. At some point in the not too distant future, Social Security will be means tested – as it should have been all along. And individuals will be required to work longer before receiving their benefit. This is simple arithmetic that goes hand in glove with the increase in life expectancy. A better solution would be to allow – no, to force – individuals to save for their own retirement. The money would be their own, not the Government’s, and they would be able to pass it on to future generations if not consumed in retirement. Admittedly, such a program would need to provide supplemental support for those who could not save sufficiently during their working life. That would be the Social Security part, but it would be necessary for the few not the entire population.
I admit that none of these issues is really simple but what is disheartening, or perhaps better said, infuriating is to watch our lawmakers on both sides of the aisle engage in brinksmanship rather than productive dialogue and action.

Congress spared no words demonizing ‘Wall Street’ for the recession of 2007 and the precipitous decline in the markets, never admitting their own culpability in the debacle. Today the turmoil in the markets can be laid right at the feet of Congress. Let’s hope they understand the seriousness of their criminally inept behavior.

The markets around the world are rattled silly this morning by the first ever downgrade of the U.S. Government’s debt by Standard & Poors. That is understandable but not, in my mind, rational.
There is no way the U.S. Government is going to default on its debt obligations. Its debts are no less safe this morning than they were on Friday or one year ago or ten years ago. It is true that our country’s balance sheet is less healthy than it was a decade ago, but look what we have been through – a recession the depth of which had not been experienced since the 1930’s while simultaneously engaging in two wars. Debt buildup and fiscal deficits were inevitable.
At the end of World War II, our debt as a percent of GDP was far higher than it is today. The Government spent huge amounts of money subsidizing mortgages and providing education through the GI Bill. The country emerged from that era into a sustained period of growth and prosperity which allowed the balance sheet to right itself.
Today we face more than a few challenging issues but they are not insurmountable if only our elected officials would work for the good of the people. There is a need first and foremost to get the economy revitalized. The reason that is proving so difficult to achieve is because the balance sheet of the consumer is still going through a downsizing. In addition, the banks are also continuing to downsize their own balance sheets. It is difficult to spend when you are trying to pay off debt.
Corporations are becoming the easy whipping boy for not hiring more of the unemployed. But they are not the culprit. They came through the recession in solid financial shape and they would like nothing more than to see good demand that would allow them to increase employment.
One thing is for sure – a massive tax increase will NOT be productive for the economy or as a means of reducing the debt levels of the Government. Such a strategy would be counterproductive. However, eliminating tax loopholes –the unfair tax treatments that allow large and profitable companies to pay nearly NO taxes – is an essential step in moving towards reducing the fiscal deficit. The same is true regarding individual taxes – the wealthiest individuals should not be able to take advantage of tax loopholes that allow them to pay the lowest tax rates. It is appalling that Congress cannot agree in a bipartisan way to eliminate tax loopholes – genuine loopholes, NOT the very legitimate deduction of mortgage interest and charitable contributions.
Longer term there is no doubt that the issues of Social Security and retirement health care must be addressed. At least they are now being discussed. Only a decade ago, they were referred to as “the third rail of politics”. So progress has been made. At some point in the not too distant future, Social Security will be means tested – as it should have been all along. And individuals will be required to work longer before receiving their benefit. This is simple arithmetic that goes hand in glove with the increase in life expectancy. A better solution would be to allow – no, to force – individuals to save for their own retirement. The money would be their own, not the Government’s, and they would be able to pass it on to future generations if not consumed in retirement. Admittedly, such a program would need to provide supplemental support for those who could not save sufficiently during their working life. That would be the Social Security part, but it would be necessary for the few not the entire population.
I admit that none of these issues is really simple but what is disheartening, or perhaps better said, infuriating is to watch our lawmakers on both sides of the aisle engage in brinksmanship rather than productive dialogue and action.
Congress spared no words demonizing ‘Wall Street’ for the recession of 2007 and the precipitous decline in the markets, never admitting their own culpability in the debacle. Today the turmoil in the markets can be laid right at the feet of Congress. Let’s hope they understand the seriousness of their criminally inept behavior.

As a Republican, I respect the concept of fiscal conservatism. However, fiscal conservatism must not be embraced at the expense of fiscal pragmatism.
For Republicans, whose track record of raising the debt limit over the last three decades belies any sense of fiscal constraint, to adopt a holier –than-thou attitude on the subject is blatant posturing and offers nothing towards resolving the current economic stress. The debt ceiling must be raised and it must be raised now; there are no two ways about it. Both Republicans and Democrats need to accept the responsibility for doing so. Issues of cutting spending and tax reform are of critical importance, but they cannot at this eleventh hour be used to hold hostage the debt ceiling crisis.
The U.S. economy today is not in good shape. This is primarily because the housing sector is in a state of morbidity. Talk to almost anyone in the homebuilding industry and they will tell you that business is non-existent. That situation will not turn around until the banks start to lend to individuals who want to buy homes. With all the delinquent mortgages they currently hold, it is difficult to see light at the end of that tunnel. Admittedly, it is not all the fault of the banks. Individuals who took on too much debt are now in a long and slow process of right-sizing their own balance sheets. This means an extended period of under-spending as they pay off their debt.
Another major sector of our economy that is faring poorly in 2011 is Government. The reason the employment numbers so far this year look poor is because of lay-offs at all levels of government – Federal, State and local. The private sector has actually added jobs, even if the numbers are not awe-inspiring. Public sector employment is being downsized as Governments struggle to bring their wage costs, retirement promises and medical expenses in line with declining revenues. Over the long haul, that is good. The smaller the public sector relative to the entire economic pie, the greater the opportunity for growth, profits and prosperity. That is a truism of capitalism.
But another economic truism is that government deficits act as a stimulus to the economy. That does not mean that they are not a matter for concern. Over time, no government, company or individual can endlessly run deficits. But to force gargantuan Federal spending cuts during a period of economic hardship can have the perverse impact of worsening unemployment and prolonging economic stagnation.
Fortunately for the economy, much of the private corporate sector is vibrant. Many public corporations have strong balance sheets, good earnings growth and are globally competitive. In large measure this is because they were aggressive in cutting costs and conserving cash during the recession – a process that continues. Now is the time to eliminate corporate tax loopholes. That does not mean doing away with sensible, legitimate business costs (such as the R&D tax credit and the very valid use of corporate jets). Rather it means leveling the playing field for all corporations by undoing the myriad special deals that corporate lobbying by the most powerful companies has achieved.
Another tax loophole that must be addressed relates to the taxation of dividends. The logic behind reducing the high tax on dividends was economically sound and President Clinton signed the bill into law. But the unintended consequences of that event have been hugely detrimental to the coffers of the Federal Government, as billionaires have been able to shelter what is de facto earned income through corporate structures that treat their gargantuan incomes as dividends. No less a beneficiary than Warren Buffett has admitted as much, and he says that the system needs to be fixed. That should be easy to do. It would be far more powerful than eliminating the deductions for (1) mortgage interest which middle class Americans use to their benefit and (2) charitable deductions which help to serve the needs of so many of disadvantaged.
With the issue of a potential default just two weeks away, Congress is now trapped. Republicans and Democrats must not put the national interest at risk. The patriotic stance is to do what is right for the country and raise the debt ceiling. Once that is done, Congress must then go to work on restoring a sense of fairness in our tax code by eliminating loopholes and making the wealthy pay their fair share.
Patricia W Chadwick
President
Ravengate Partners LLC
July 18, 2011

Returning this past weekend to JFK airport and emerging from customs after two weeks in China, my teenage son turned to me and said, “Mom, this airport feels like a third world country.” The stark comparison between airports in Beijing, Shanghai and even the western city of Lijiang in China and those around New York City brought home the reality of that venerated corporate adage: Cash is king. China today is a cash-rich nation, while the U.S. is cash starved.
China is building roads, airports, hotels, high rise apartments and commercial buildings at a rate never seen on this planet. Not even our most massive infrastructure triumph, the construction of the interstate highway system following World War II, is on this scale. And hugely impressive as China’s changing skyline is, the building process is far from complete. Standing in the middle of Shanghai, among 3000 skyscrapers, one wonders if the growth in commerce across China will justify all this office space.
Many Chinese complain that already apartments are becoming unaffordable. Unlike here in the U.S., the standard down payment on an apartment is 30%. And outside the major cities nearly all transactions, including home buying, are made in cash. Many young professionals, college-educated men and women in their late twenties, all of whom seem to have flips or cell phones or some electronic contraption as a permanent appendage, look to their more frugal parents to help them with the down payment. One wonders if the culture of saving which has been the survival ethic of parents and grandparents will be lost on the new, young, professional generation. English is the second language in China today; students start English lessons in primary school where their teacher selects an “American/English” name for each child. We had guides with the names of Bill, Tony, Java, Rocky, Peggy, Danny and Martin. Colleges and universities are abundant; however, higher education is not free.
Admittedly, Facebook is inaccessible (for the time being, at any rate) and in Beijing internet access is less than ideal. And as an aside, I was astounded to discover that young, educated Chinese have never heard of the Tiananmen Square incident of 1989. Most of them were small children at the time and the event is unrecorded in their history books nor ever mentioned by their news media. The reason for my surprise is that these English speaking Chinese professionals have an air of Western-ness about them. There is a sense of openness, of freedom, of complete mobility (unless, that is, they want to come to the United States). They speak their minds about their leaders. Capitalism is rampant, in fact it is the operating credo of the entire society and it has an American flavor. Young people talk about doing better than their parents, and in doing so, making them proud.
To the older generation, Mao Zedong is virtually a god. To the younger generation, it is Deng Xiaoping they most admire. He carries the title of Leader of Modern China, and with good reason. One supposes that given his near deity status as the re-creator of China’s great rebirth, in the minds of his devotees, Deng could not have ordered the slaughter of 1989. Or if he gave an order to impose calm, China’s ubiquitous and despised party functionaries must have distorted Deng’s intent. Regardless, China has arisen to reclaim its rightful place of greatness, thanks largely to Deng.
So what is the source of the Chinese government’s seemingly endless stream of cash? Despite its system of government, a significant portion of China’s economy – approaching 40% of industry – is in private hands; export revenues do not automatically flow into the coffers of the government. Income taxes are not exorbitant. However, there is one valuable card that the Government holds and is using as a gargantuan source of capital: it owns all the land in China. It has developed a sophisticated profit system as the national landlord, reaping cash flow from a long term asset while not relinquishing its ownership. As buildings go up all over China, the Government is the beneficiary of the ‘sale’ of the underlying land (in fact, it is a seventy year lease, at the end of which ownership reverts to the government.) Talk about a capitalist/monopolist government!
China has an abundance of land and people. And as long as there are people anxious and willing to move from the countryside to the cities (more than 65 percent of China’s 1.3 billion souls still live in the countryside), and if the gleaming metro areas continue thrumming with opportunity for the young and adventurous, I venture there will be demand by the private sector for more land on which to build the apartments and residences of tomorrow. Assuming the country solves its very real water shortage problems in north and central China, that will help keep China supplied with an exogenous source of capital for infrastructure building for many years to come.
However, at some point in time (maybe decades away) as China’s population ages and the ratio of old to young surges, (the result of an entire generation of one child families) the demand for development land will diminish sharply and with it the flow of capital to the state. But today, that source of capital is a bonanza for the government’s ambitious development program and will allow it to exceed the U.S. in its investment in vital infrastructure. At the same time, the U.S. finds itself struggling to maintain an increasingly dilapidated network of roads, bridges, subways, tunnels and buildings. Sadly, there is no easy solution to our public sector infrastructure problem. The U.S. government is like an aging company, losing competitiveness to a more nimble, dynamic newcomer on the scene. Without a giant cash infusion, there is little we can do to fix the problem. China, by buying our Government debt, is at least providing some of that necessary cash infusion. Fortunately, the state of the U.S. private sector, which comprises 75% of our national output, is dynamic, strong and competitive.
Postscript: There is an interesting paradox of history in a comparison between the approaches taken by the U.S. and China in promoting national economic development. In 1862, in an effort to spur settlement and cultivation of the west, President Abraham Lincoln signed into law the Homestead Act. Over the next one hundred years, 420,000 square miles of this country were privatized (10% of the contiguous US landmass) through simple, physical occupation of the land, not through sale by the Government to the homesteaders nor by settler purchase from Native Americans. It was a giveaway, hardly a capitalist concept. In China today, as the people move from the countryside to the cities, the Chinese Government is capitalizing on the demand for land through lucrative sales, hardly a communist concept.
What is clear is that the final test of which country is better off will come in the degree to which the people choose their own future and choose it well. Emerging from JFK airport, I admit to momentary doubt… but only momentary.

While stuck in the Sarasota airport on Friday, I downloaded the Wall Street Journal to my iPad. The notation on the app was FREE which was my only incentive because I had no intention of giving up the print version which is delivered to my door at 5:30 each morning. There are few things more pleasurable than curling up in a chair with my several newspapers while sipping a cup of tea. Newspapers in particular, it seems to me, are designed for visual exploration.

When the FREE online version of the Wall Street Journal wouldn’t upload in full, I called the telephone number provided with the application. The gentleman at the other end of call informed me that the FREE notation was an error and I would have to pay for the online subscription. But he promised that the iPad online edition was a complete and perfect replica of the printed newspaper. I reluctantly agreed to subscribe for $17 per month. It was my curiosity that now needed to be sated.

Over the weekend I spent a couple of hours comparing the two versions of the Wall Street Journal. Armed with the newspaper in my lap, I searched the iPad and after a bit of maneuvering I was indeed able to locate every article. Most importantly, the Opinions were given their own heading, which meant that Peggy Noonan was easy to find. She is the best reason for getting up on Saturday morning. An added bonus with the iPad version was the ability to adjust the font size. And I discovered that I could save as well as send articles to friends. Good old Apple Computer – once again it had scored a winner.

Admittedly, it was not a cozy way to read the newspaper, but it was efficient. And I still had my local newspaper and the New York Times to fall back on for “curling up in a chair with a cup of tea”.

I was now left with a dilemma. What should I do with my subscription to the print version of the Journal? Most assuredly I did not need to pay for both services, which would total around $600 per year. The answer was obvious but old habits die hard. I pondered the pros and the cons and came to the logical decision. I had crossed the Rubicon; there was no turning back. I would cancel my delivery of the Wall Street Journal to my front door. I counted the ancillary benefits: I would save money (the iPad version is half the cost of the printed paper); I would help the environment by saving at least a few trees. And from now on all those articles I cut out of the paper and save for future reference would no longer pile up on a table getting yellow and frayed.

And In March, when I go to China for two weeks, I will have the Wall Street Journal at my fingertips each morning and won’t have all that catch-up reading to do when I return home.

Maybe the New York Times will be next – who knows?

Patricia W. Chadwick
President, Ravengate Partners LLC
www.ravengate.com

The Federal budget deficit cannot be brought under control or meaningfully reduced without addressing the looming insolvency of Social Security.
The heart of the problem lies in demographics. More than seventy five million baby boomers will be retiring over the next eighteen years. That is approximately one quarter of the entire U.S. population today. As they depart the workforce, they will immediately go from contributing to the funding of the program to taking from it. And thanks to medical technology, life expectancies continue to improve. Since the first baby boomer was born in 1946, life expectancy at age sixty-five has risen by nearly five full years. Good news to be sure, but it up-ends the arithmetic of funding. It is both logical and essential to raise the eligible retirement age for social security, even more that what has been done to date.
Most major corporate and government pension/retirement plans in this country are required by law to be safeguarded and managed separately from the operating finances of the company or government entity. The Social Security taxes received by the Federal Government, by contrast, are not segregated. There is no “lock box” into which Social Security payments are made and invested for future retirees. The system is truly “pay as you go” which means that the burden of funding the growing liability associated with the baby boomer generation will increasingly fall on their children and grandchildren.
Social Security legislation was signed into law by President Franklin Roosevelt in 1935 as part of the New Deal in the midst of the Great Depression. The law’s intent was to provide a social insurance program during a period of massive unemployment and poverty in this country. It certainly wasn’t intended as supplemental income for the wealthy.
Forty years ago, when I was hired for my first “real” job (which I define as one with a salary and not an hourly wage), I was excited at the offer of an annual salary of $10,800. I remember believing I was on the path to a career that would allow me to make enough money to forego Social Security when I retired. That was my goal.
Today, with the magical age of “retirement” and Social Security within sneezing range, I am pleased to have attained that objective. I neither need Social Security nor should I receive it. However, the system will not let me even opt out, much less allow me to register that I do not need it. And therein lies a big part of the problem. Social Security should be provided on the basis of need. The money withheld to fund social security is a tax pure and simple; it is not a savings plan. It is not my money, despite much rhetoric to the contrary. Means testing would be complicated no doubt. There are many who might appear to have adequate retirement income but in fact may be caring for children and grandchildren. But simply because the solution might be complex does not mean it should be eschewed.
I realize that I have already uttered what is heresy to many, so let me add more fuel to the fire. If a portion of the 6.2% of gross income that an employee pays into the Social Security system were instead put into a private personal savings account and invested over the forty years of her working life, it would generate a level of assets by retirement that would be able to supplement and possibly even exceed the social security benefits provided today. And most important of all, that money would belong to the person who saved it, not to the Federal Government. That means it could be passed on to the family in the event of death before retirement. It is a ”no lose” solution for workers. You can do the arithmetic yourself. Even if you use a conservative 4% annual growth rate for investment return, you will be amazed at the power of compounding. For minimum wage earners or those making too little money during their working years to build up a sizable private savings pool, they could still be provided social security through the contributions made by the employer.
The fiduciary oversight of those assets would need to be addressed. In the wake of the decimation of many 401(k) plans during the stock market decline of 2008/2009, there is much skepticism about private savings as a secure means of generating retirement income. But even if the private accounts invested only in Government bonds, they would be far ahead of the system today.
Social Security has been tagged as the “third rail of politics”: touch it and die. And since the “courage deficit” exceeds our budget shortfall, this growing fiscal crisis has been shunned and cast aside for some other lawmakers to address some other day. And now we face the next twenty years of having to pay the piper – well seventy five million baby boomer pipers lining up to be paid back after having contributed for forty years.
Here is the good news – it is not too late to solve this problem so long as there is a will to do it. Social Security can be fixed. It will take courage to change. The solution will almost certainly include raising the age of retirement, means testing and partial privatization. Let’s fix it for our children’s children.
Patricia W Chadwick
President
Ravengate Partners LLC
February 3, 2011

The U.S. economy is steadily improving. So where are all the jobs? That question has become headline news on a nearly daily basis. Unfortunately the answers are not simple.

Jobs are actually being created – over one million in fact in 2010, but compared to the more than eight million jobs that were lost during the recession, the recovery in jobs lags the growth in profits and the recovery in the stock market.

So what is going on? Why are companies unwilling or unable to hire? Where will the new jobs come from?

There are multiple forces at work muzzling the demand for new jobs. Two sectors of the economy are unlikely to contribute to much employment growth for several years – they are finance and real estate. In the financial industry, the lay-offs in 2008 and 2009 in the face of the industry’s collapse were huge. Last year, as the industry started recovering, it added employees, particularly in the northeast. However, many of the products it developed during the boom years of the last decade are no longer in demand, and the industry will likely employ fewer people over the next several years than it did in its heyday. In the real estate industry, the supply of housing in many parts of this country still far outstrips the demand and it will take years for that excess inventory to be worked off.

Another factor which I think is deterring employment growth is more complex. With all the credit in the world to Fed Chairman Ben Bernanke, who has been unfairly criticized (I believe) for his action to reliquify the banking system, there is a corollary to the low interest rate environment which is impeding the demand for workers. With interest rates at historic lows, the cost of capital (money) is cheap, making it advantageous for companies to borrow and invest in labor-saving technology and capital equipment rather than hire new workers.

At the same time, despite the currently elevated unemployment rate, the cost of labor (which includes both wages and ancillary benefits) remains high, particularly when compared to the low cost of money. The result is that companies are more likely to continue to replace labor with capital, at least on the margin. This will change as interest rates rise, reducing the productivity of capital.

Despite that economic reality, I believe we will see a pickup in demand for jobs from the private sector in this country as the year unfolds, but it will be slower than in the past. The good news is that the consumer appears to be more willing and more able to spend, and while not all consumers have straightened out their finances, the numbers show that consumers’ balance sheets are improving.

But there is one more hindrance to employment in this country. The Federal Government as well as many State and local governments are facing severe budget deficits which they will be forced to remedy through cutbacks in spending. Of necessity, this will involve lay-offs just as the private sector is starting to gain some momentum. It appears that even the U.S. military will not be spared the need to make personnel cuts.

While in the short run, public sector lay-offs will hinder both economic growth and improvement in the unemployment statistics, in the long run it is more economically advantageous for growth to come from the private sector of the economy. This is not meant to disparage the benefits of government and its services; rather it is admitting the economic reality that income and profits from the private sector are largely what generate the taxes necessary to fund the public sector.

Lest people despair that “all the high wage manufacturing jobs are going overseas, and we in the U.S. are left with low paying mindless service jobs”, I encourage you to go into an Apple Computer store at any time of the day. It is teeming with Apple employees (you can tell them by their blue shirts). I must have counted at least twenty of them on a recent trip to my local Apple store. Those are service sector jobs and they are anything but mindless. The employees are highly skilled technicians; they are the most cheerful people in the world and their numbers are growing, as Apple opens more retail stores.

What we need is more American companies like Apple Computer!!!

Patricia W Chadwick

President

Ravengate Partners LLC

On January 1, 2011 a small percentage of American households (under 2%) became the beneficiaries of a windfall they could not have anticipated two years ago. And a subset of that small 2% – those whose taxable income exceeds $500,000 did not know as late as the beginning of December that they would have such good fortune.

The extension of “the Bush tax cuts” as they are called had bipartisan support and its stated purpose was to stimulate economic growth by keeping money in the private sector of the economy. That sounds like and in fact is perfectly logical economic theory. If that money is spent, it acts as an immediate stimulus to growth; if it is invested or saved, it will produce the same result over a longer period of time.

The greatest economic concern in the U.S. at the moment is the high rate of unemployment. We all know that the “official” rate of 9.8% understates significantly the numbers of those who can and want to work. We are not used to high unemployment; it has always been the problem of other countries and now we are in its grip.

For those in the very highest income bracket in this country, the extended tax cuts truly are a windfall. They would not have been any less affluent had the tax breaks expired on December 31; their lifestyles would have been unaffected.

Meanwhile across the country there are hundreds and even thousands of not-for-profit organizations which serve a broad array of needs and interests of the population at large. They look after the homeless; they visit the homebound elderly; they make and serve food in soup kitchens; they provide joy and entertainment through music, dance and art. The economic stress of the last two years has reduced the funding they count on from both the private and the public sector. Many of them have already shut their doors and many more are barely clinging to life. If they cannot survive, not only will their needed services be lost, but their employees will join the ranks of the unemployed. For them the extension of the tax cuts does not provide any direct benefit – except through the largesse of the beneficiaries of the tax cuts.

And with that in mind, I propose a New Year’s resolution for those who find themselves in the enviable position of receiving money they don’t need:

Take your newfound income – that 3.5% of every thousand dollars over whatever level of income you need, and put it immediately and directly into the economy by donating it to charities that assist others with acute needs. In that way it will reach those who will spend it now; it will keep others from becoming unemployed; it will indeed stimulate the economy directly, rather than through the slow trickle down which is of marginal or no benefit to them. The benefit is immediate and three-fold: to you the donor as a deduction, to the organization which can survive to another month or year helping those in need and to the needy themselves whose desperation is relieved by your thoughtfulness.

Happy New Year!