PENSION REFORM = WALL STREET WELFARE

Cloaked in language that makes it appear to be the savior of private pensions, the new pension reform law will actually accelerate the move away from traditional pension plans. In addition, it will increase brokerage profits, increase short-run top executive bonuses paid on the basis of stock prices, and increase the long-run risk faced by average Americans.

To understand these issues we need to understand the contents of the bill and how pension funding is measured:

First, the bill will require company based defined benefit pension plans to be 100% funded in seven years as opposed to a 90% funding requirement. Although this sounds good there are two issues which make this a problem. The first issue is that full funding is based upon actuarial assumptions regarding inflation, interest rates and wage growth. These assumptions change and the level required to be fully funded changes based upon the market value of the assets in the plan. Some plans which were under-funded 2 years ago are fully funded today due to stock market growth. This means that some firms may never have to put a dime into the system. The second issue has to do with the fact that other firms are severely under-funded and, as a result of the funding requirement, will just give up the plans that they have.

Second, the bill expands the amount that may be placed into 401k and IRA retirement systems. The increase in funding to IRA’s and 401k’s, combined with the few firms increasing their defined benefit funding, will lead to increased short-term demand for stocks on Wall Street. This increased demand will drive up stock price regardless of company performances. The increased prices will benefit those who already own stock and will provide huge bonuses to corporate executives, the Bush constituency, whose incentive pay is based upon the valuation of their company’s stock. This increased demand will also lead to more transactions through brokerages and increased commissions to brokerage firms.

Third, defined benefit plans pay workers a pension based upon their earnings in the latter working years and the number of years of employment. This is a known amount and is not subject to fluctuations in the market. IRA’s and 401k’s allow either withdrawals or the purchase of annuities based upon the value in the plan at the time of retirement. IRA’s and 401k’s are invested in securities that are subject to the vagaries of the marketplace. If the market is down and interest rates are high, as we saw in the 1980’s, many people will find that they do not have enough money to retire. Cash balance plans, that many firms are using to substitute for defined benefit plans, are subject to the same market forces. The result is the shifting of risk from employers to workers.

The result of the supposed pension reform is a reverse Robin Hood effect of "taking" risk from the rich, who can afford it, and "giving" it to the poor who cannot survive it. Again the USA accelerates toward third world status.

Religious Fundamentalism and the Death of the American Economy

Once again President Bush is allowing his fundamentalist beliefs to cause irreparable harm to the American economy. This time it is his threat to veto legislation that would allow federal funding for expanded Stem Cell research. Does he believe that the US position will stop the research from taking place elsewhere in the world? The fact is that Europe and Asia are already deep into Stem Cell research. Stopping the research in the USA will only promote foreign companies to be the leaders in new, potentially life saving or life improving, products which may be developed.

If Mr. Bush’s narrow minded fundamentalism is carried to its ultimate conclusion, procedures and product developed overseas would not be permitted into the USA because it violates his religious principles to use products developed from Stem Cells. How many Americans will die young or live lives of agony because a narrowly defined fundamentalist religion is becoming the guiding light of all decisions? How can we let Mr. Bush guarantee the slow death our great pharmaceutical industry because he doesn’t believe in the most promising areas of research?

Mr. Bush needs to be reminded that religion’s opposition to “…lending at usury…,” meaning any type of interest, stymied European economic growth throughout the middle ages. Our President’s myopic view of the bible will exacerbate America’s, already beginning, decline to second or third world status.

Statistics Don’t Lie But they Can Deceive

Statistics Don’t Lie But they Can Deceive

By all of the traditional measures the American economy is in very good shape. Unemployment is down, GDP is growing at a rate above the long term average growth rate, and the number of jobs created is growing. Many economists believe that the poor showing for consumer confidence is merely reflecting that confidence may be a lagging indicator. However, anecdotal, and some statistical, data imply that the economic picture is less rosy than the traditional measures indicate.

Firstly, we need to look at job growth. The job growth numbers count the payrolls in one month and compare them to the payrolls in the following month. This might be good, but it ignores the question of whether the jobs are full-time or part-time. In fact there can be serious double counting in the system. For instance, I am an adjunct faculty member at several colleges. During the month of October I was added to the payrolls of four new colleges. I, therefore, accounted for five jobs in the system and four “NEW” jobs. How many people like me are out there carrying multiple jobs? In addition, how many of these new jobs were part-time?

Secondly, the reduction in unemployment can be distorted by aspects of the measurement system itself. Most people do not know that a person is considered to be employed if he received one hour’s pay in a two week period. That means if your aunt Mildred paid you $20 to move furniture to her attic, you are employed. The other problem with the measurement system is that it excludes discouraged workers. A discouraged worker is a person who wants to work but has gotten so discouraged by not finding any that they have not “actively” sought work in the last four weeks. These workers are not even counted as a part of the work force. Let alone the unemployed.

Thirdly, GDP measures the output of final goods and services in the economy and a growing GDP leads to growing disposable income. Looking at the numbers things look good. On the other hand disposable income says nothing about the distribution of that income. Median family income, however, gives us a better picture regarding distribution. Median family income is the income level where half of the families in the country earn more than this number and half earn less. Unfortunately, median family income has been decreasing over the last two years. A growing disposable income and a lowering median family income indicates that the people at the top are getting better off and those in the middle and lower income levels are become worse off.

It is no wonder that consumer confidence is poor. The average person is losing out in this supposed growth economy. The goal of an economy is to deliver prosperity to the members of that economy. I believe that the new age of integrated world economies requires that we develop new economic statistics which measure national prosperity.
Former Secretary of the Treasury Robert Rubin has, along these lines, proposed a new economic measure which I believe he called The Median Prosperity Index.