Economic Issues

A Look at Six American Economic Issues-
As We Head Into the 21st Century

America is 8 years into the new millennium.  We are on the verge of electing the second president of the 21st Century for this representative democratic republic called the United States.  Our counrty is over 232 years old as compared to the Roman Empire which lasted 1,100 years.

Ronald Reagan once asked the American people during the 1980 presidential debate with President Carter, "Are you better off than you were four years ago?” Today I would ask the question are you better off today than you were 8 years ago, at the start of the new century? Answering yes or no to that question will depend on how you feel about your own personal situation. If you answer no, it is not just because of Congress, the President or even Wall Street---who seem to have forgotten what Will Rogers once said: "I am less interested in the return on my money than the return of my money.” We have all heard about auction rate securities, subprime mortgages and the Bear Stearns’ hedge funds. Over time every individual, family, business, or organization will go through its ups and downs.   Some of the problems associated with the down periods could be avoided or reduced in their severity. These problems have more to do with outmoded ideas that are no longer usable or practical and cost this great country of ours sweat equity, time and money.

As a country we remain trapped in the 20th century. Our focus is on where we have been, not where we are going. We should learn from the knowledge we gathered from the past and tackle the issues of today with a full review of the current situation.  There are better ways to solve our economic problems.  We must have the will to do it.

During this election year, I hope this paper will generate interest and discussion on some of the important financial issues of the day. The six economic issues discussed are health care, retirement for the Baby Boomers, energy, home foreclosures, jobs and the economy. This is not meant to be a full discussion of each topic covered as each one of these topics would require hundreds of pages.

Health Care- The time has come to consider a national health plan. We spend as a nation $2.3 trillion dollars yearly, twice as much per capita, as any other industrialized nation. Yet we have 47 million people that are not covered by health insurance, per Senator John McCain. I have read estimates that the administrative costs associated with providing health services to all of America ranges from 22% to 31%. In this range, I am including the uninsured, many of whom show up at emergency rooms or health clinics and their paperwork has to be processed too.

We need to have a system that will standardize all the paperwork.  Where will the money come from to pay for a basic health care plan for the unisured?  You guessed it, the 22% to 31% administrative costs. It doesn’t have to be a government agency.  All the major health insurance companies would pay for the processing of the paperwork. The system would be an automated processing system subsidized by these companies based on the volume each company is generating.

Estimates to provide a basic health care plan range anywhere from $65 billion to $138 billion dollars.  Let’s say we save 10% of the administrative costs with the new centralized system. Two-thirds of that---$153 billion dollars---would pay for a basic health plan for the uninsured. The insurance companies would keep the additional savings as a profit incentive.

Tax credits for individuals and families could also be established to help pay for a health plan.

It is estimated that health care cost will go up 10% in 2009. This is still less than what the increase has been. How long can we sustain 10% increases in health care? We should have some level of competition. If the trend of Americans going overseas to receive health care continues we may see some relief on prices for services here. We should also look at what it is costing to deliver health services to each patient. I saw first hand how this system works, or doesn’t work, when I was the main caregiver for my mother who suffered from Alzheimer’s for 9 years.

Retirement for the Baby Boomers- First let’s start with how many Baby Boomers there are.  I have heard various numbers over the years. The most popular numbers are 70 million, 76 million or 79 million but what number is it really? A Baby Boomer is any person born between 1946 and 1964. I am a Baby Boomer. The Population Reference Bureau (PRB) did a review of the numbers on their web site. 76 million were born between 1946 and 1964; 4 million were already deceased based on the 2000 census, so that gets us to 72 million people. Including immigration to this country, the 79 million mark appears the most accurate. Name another time in history when there has been a group of this size retiring?

Are these Americans going to be able to retire and live in the way to which they have grown accustomed?  Will their extended life expectancy---over age 80 for a man and age 84 for a woman, once they reach age 65---cause strains on our economic system? Some retirees depend on their equity from their homes to help supplement their pensions, lump sum savings and social security.

We all know what has happened to home valuations in this country. A report published June 24, 2008, from the Center for Economic and Policy Research suggests some Baby Boomers will have less wealth in 2009 than they had in 2004, seeing their household wealth decline from $150,113 in 2004 to $113,268 in 2009. Another statistic shows the head of households between 62 and 65 have saved only $110,000 for retirement. We are going to see a greater number of us working into our 60's and 70's to supplement our income.

The future will depend on how well our economy grows and how much we save, not just for the Baby Boomers but for everyone including the government entitlement programs like Social Security and Medicare. The decisions we make today will have a greater effect on all of us because of the global economy. We are no longer competing with just ourselves. When I first started in the financial business 27 years ago, very little of a person’s portfolio was in international investments; today they play a much larger role.   Costs in the future---housing, energy, transportation, food staples and especially medical costs will greatly affect what kind of a retirement the Baby Boomers will have.

Are you wondering what you can do as an individual? The best place to start is to have a qualified individual, such as a Certified Financial Planner (CFP), review your financial and retirement goals.

What can we do for future generations to prevent strains on the economy down the road like we are facing for the Baby Boomers? It is just a simple idea of compounding. When a person is born, if you were to put $1 a day into an investment that averages 9% (the stock market has yielded over 11% the last couple of decades), at age 65 they would have over a million dollars! There would be a million dollars for them to spend for medical cost, housing, energy, etc., but you say, what will a million dollars get you in 65 years?  Ok, make it $3 a day and you amass three million dollars! It is preventive medicine for retirement and for the country.

Energy or, Your Life for a Barrel of Oil- While I am writing this paper the price of oil briefly hit $147 a barrel (current price around $67) and it helped to send the stock market down nearly 360 points for the day. Why do we not have a comprehensive energy policy? We all knew about the growing economies around the world for years and what affects they would have on the demand for energy resources like oil.

In my opinion, government has the job of creating an environment that allows the free enterprise system to react and reach the goals necessary to prevent shortages. Or economy is driven by oil (no pun intended) from the trucks, trains and automobiles that deliver goods and services to market, to basic transportation for going to work or taking the kids to school.

The energy crisis is a threat to our economic well being and our way of life. This calls for drastic measures to start addressing the problem today. I am suggesting that we work on a time table to turn things around.

We sent a man to the moon within our 10 year goal. We need another moon project; Americans do their best when they have a challenge. This time, we have 10 years to make this country energy independent. While some may claim this is impossible, back in the 60's, landing a man on the moon in 10 years seemed impossible, too. Still we did it!

I can’t make a statement like that and not have some ideas about what to do. First, I would let the automakers, foreign as well as domestic, work together and pool their resources to develop an engine that gets great gas mileage. Whether it is a hybrid, battery or a new system all the automakers would then have the same technology and could incorporate it in their automobiles throughout the world. I was recently at a “green fair” where a teenager converted his truck to battery and it was good for 40 miles after the charge.  If he can do it, I am sure the world’s best automotive minds will be able to develop an automobile we can use on a daily basis.

Next, I would promote geothermal to cool and heat our homes. You do not need natural gas once you have this system installed; all you would get is an electric bill. It costs more than a conventional system to install so I would give tax credits of at least $5,000 to help a homeowner cover the cost of installing the system. If you have been in a home that has a geothermal system or talked to someone that has one, you would be amazed at the positive feedback.

Windmills currently provide 1% of our energy needs.  The Midwest, Texas and the coasts of our country have enough wind to generate a significant amount of electricity. What I like about wind is that there is no pollution being generated or byproduct to dispose of.  What is slowing down the development of wind energy?   We have a grid system that has to be upgraded to handle the transport of electricity from one part of the country to another. It will cost billions to upgrade the grid system but it seems like a small price to pay for clean energy. People that have windmills on their property receive  compensation. The first place to look for the funding to upgrade the grid system is from the equity and bond markets, working with the utilities and energy companies that would benefit from the new grid system.      

Nuclear power is another energy source we have overlooked for far too long. By now everyone knows that France gets 80% of their energy needs from nuclear power. The last reactor built in the U. S. went online in 1996. It is my understanding that a number of the existing nuclear plants would have additional reactors built on an existing sight. The positive aspect about having waited to build more nuclear plants is the increased experience with nuclear reactors, since there are still plants in use from the 1960’s. We would be using the latest technology for safety. We also must develop better solutions for handling nuclear waste.

We have a great amount of natural gas in this country.  It is a cleaner fuel then gasoline. Currently it provides 22% of the energy requirements and fuels about 20% of the electricity generated. Can you imagine if we provided more that 20% of our energy needs through nuclear energy? It would free up natural gas to be used for other needs such as the energy to run our autos and trucks.    

Solar panels and bio-fuels can all play a role in reducing our dependency on fossil fuels.

Adjusting energy use, e.g., by installing compact fluorescent light bulbs and light emitting diodes (LEDs) that use 80% less energy than incandescent bulbs, will contribute to a more efficient America. Energy can also be saved by recycling your trash; recycled aluminum, plastic, steel and paper all use less energy to produce than non-recycled products. A recent article in BusinessWeek quoted statistics from the Environmental Protection Agency stating that just a 5% increase in recycling would save almost 2 billion gallons of gasoline annually.

It is not one energy source that will make us energy independent, but a combination of all of them, including the use of coal (one quarter of all the coal reserves are found in the United States). Work is underway in developing an emission-free coal plant, which is important in light of some of the reports about medical conditions of people who live around our current coal-fueled plants.

We need to look at the options available in realistic terms. If we start drilling more, as has been suggested, that will be a short term solution but one we need to consider along with building a new refinery (the last one built was over 30 years ago). We need an energy policy that is flexible enough to meet today’s energy needs, while at the same time focusing on energy independence.

Home Foreclosures-When I first started working in the  financial planning field, the value of clients’ portfolios and many of those middle incomes had the largest investments in their homes, cash value in their life insurance policies and some bank CD’s. During that time, people were retiring with a monthly pension as the cornerstone of their income stream along with their Social Security check. Just about everyone took their Social Security check at age 62.  Their homes were mortgage-free or almost paid-off.

Today it is a combination of home and investment portfolios (401k, etc.) for many of us. There are about 80 million owner-occupied housing units in this country and around 70 percent have a mortgage on them. The home of today has been used like a cash dispenser or to fund purchases. Of all the U. S. households (estimated at 119 million), 1 in 416 received at least one foreclosure related filing in August, 2008 (per RealtyTrac, Inc.).

Whether it is a subprime mortgage that is going into default because of the interest rate going up or because the homeowner has lost his/her job, these problems  affect all of our home values in most parts of the country in a negative way. Yes, I know if the homeowner didn’t take out a subprime mortgage this would not have happened, so it is their fault. They are partially to blame, but when what seems like cheap money is being offered to you with all kinds of creative financing, it is hard to resist. After all, the assumption was the price of homes would increase in value.

Prior to the stock market crash of 1929 people could buy securities with 10% down. They could control a lot of equity in those companies without a significant amount of money down and borrow the rest. Sound familiar? This time it was in the housing market. We package the mortgages from highly leveraged real estate, paying more interest due to the subprime risk and sell it to investors. Wall Street was showing record profits due to the fees they were making on packaging these instruments. They just had to feed the machine to keep earning the fees.

We have a mortgage relief bill signed into law by the President. What it basically does is have the federal government provide taxpayer money to bail out Freddie Mac, Fannie Mae and an estimated 400,000 homeowners on the verge of losing their homes. The government will become the lender of last resort for the liquidity needs of Freddie Mac and Fannie Mae. I remember not too long ago these two companies were the darlings of Wall Street. The new law will also protect financial institutions from lawsuits brought by investors who hold mortgages that are about to be modified. It is estimated that an extra 800 billion dollars will be added to the national debt as a result of the new law.

Such a package needs to provide relief not just for the people who may lose their homes but for the rest of the home owners as we watch our home values fall. At some point most of us who own a home will be in the market to sell, and we want a healthy real estate market. We can debate the merits of this package, but can we afford to do nothing? I don’t think so; because the way the home mortgage crisis goes, so goes the economy.

The Bush Administration wanted to increase homeownership for the poor and minorities in this country. That was a very laudable goal. In and of itself, stimulating homeownership would have had little effect on creating a mortgage crisis. Over time, financial institutions started to relax their requirements for qualifying for a mortgage loan. Money was free and easy to get but we forgot to factor human economics into the equation.

What is human economics? It is how humans react to financial stimulus (or lack thereof), whether provided by an individual or an entity. In this case we had plenty of financial stimuli coming our way in the form of creative financing, and we could end up with our own home---hard to resist. The median price of a home sold in June was $230,900.  As it turns out, if we would have simply bought the homes for the people it would have cost less than the estimated 800 billion dollars we are going to spend. In my estimation, the federal government will spend more then the 800 billion for the bailout.

Fannie Mae and Freddie Mac are there to provide liquidity to the housing market. The take-over by the federal government of these companies has already provided relief in the way of lower mortgage rates. Working through the mortgage crisis will take time. Put a moratorium on foreclosures for 90 or 120 days gives everyone involved, from the homeowners to the lenders, the opportunity to review their options on an individual basis. The end result may be more people staying in their homes and less downward pressure on home prices.

I believe we have no choice but to take drastic measures during this crisis. The end result will be a stronger housing industry driven by lending practices that can sustain a downturn in the housing market.                   

Jobs-The average price of a new car is over $28,000, according to the National Automobile Dealers Association, and the average price of a new home is $298,600. Inflation is on the rise.  We all know about the increasing costs of energy and food. Not everything costs more than it did.  If you are in the market for a big screen TV, you are going to get a good deal. The problem is we need transportation, housing, food and energy more than we need that big screen TV. Most of us pay for things from the money we earn from a job, unless you are retired or have a big trust fund. Not just any job, but one that pays well enough to provide for more than just the necessities in life. The median household income in this country is over $48,000, per the 2006 U.S. Census Bureau.

Where do we start with jobs? You have to go no further than getting an education. Every statistic I have ever read links the rising income a person makes with a higher education. The Commerce Department statistics show a person can expect to earn nearly a million dollars more over their lifetime if they have a Bachelor’s degree versus a high school diploma.

According to the U.S. Department of Labor, there will be 19 million jobs created by 2014. When reviewing these jobs, many require some level of education. Whether it is vocational training or a higher education, good paying jobs will need specific skill sets. Some of our workforce will have to be retrained, others will need professional assistance. The issue is not just getting an education but getting the right one in today’s highly competitive job market. Career counselors can help in guiding job seekers into good paying careers. I know families who have helped guide their children through their educational years and job seeking, some using these professionals. It comes as no surprise to me that their children have gone on to successful careers.   

Government can continue to play a role in job creation through the incentives it offers corporations, foreign and domestic. Many of our largest corporations pay no taxes on profits that are left overseas, so why bring the profits back to the United States? One incentive could be zero taxes on the profits if the money is used to create new jobs in this country. The government is not receiving any taxes on it anyway, so let’s bring the money back here. It would also help stimulate the economy (see next section,The Economy).

One out of every five manufacturing jobs in our country depends on trade. Free trade is an important part of our economy resulting in roughly 24% of our gross domestic product (GDP) up from 12% in the 70’s. The weak U.S. dollar has contributed to more goods being sent to our trading partners.

Free trade does help to create jobs, but how many? One estimate put the ratio as 2 jobs created for every one lost due to free trade but the Federal Reserve Board of New York estimated in 2003 the loss of jobs at 2.3 million due to imports. When you are competing on a world basis for jobs, wages fall for the lower skilled jobs.

Some foreign companies that compete for business in the U.S. receive subsidies and tax rebates from their governments. If we are losing jobs due to being at a competitive disadvantage, these practices should be addressed through trade negotiations and the necessary steps to create a level playing field, short of instituting subsidies here in the United States.

The federal government should look at incentives that will help create jobs in industries of the 21st century.

Good paying jobs are the most important ingredient to a vibrant nation. There is more to be discussed about jobs that go beyond the scope of this paper. As we look back 30 years from now, the success of this country will rest on how well we did with job creation as we compete with the rest of the world.

The Economy- Every one of the previous economic issues discussed affects our economy from energy to home foreclosures. Why is it important to talk about the economy overall? The need exists because of the number of economic issues that face this country.  Our financial system is at risk. It is estimated by a recent report done by USA Today that the long term debt grew by $2.5 trillion last year, not the $162 billion figure the federal government announced as last year’s deficit. The two numbers are different because the federal government doesn’t have to follow modern accounting standards.

The federal government is covering the losses of investment banks like Bear Stearns and they just took control of Freddie Mac and Fannie Mae. This is the first time our government has had to back the investment banks in this country since the Great Depression. The federal government has been put in a position where it has no choice but to bail out some of the firms on Wall Street to protect the fallout spreading to other parts of our economy. Some form of regulation should be put in place that will reduce the chance of this happening again. A reserve requirement would require Wall Street to set aside capital based on the type and amount of business they are doing. The capital would provide the liquidity needed to weather a downturn in the marketplace.

The bailout of some of our retail banks has started and the President signed into law a mortgage bailout plan. At some point it becomes real money that has to be paid back.  I have seen estimates, if you include the government’s long term obligations, it owes over $50 trillion dollars or around $420,000 per household.

We have to put our economic house in order. As we go forward we will be faced with ever increasing demands on Social Security, Medicare and Medicaid. We have added new categories to the budget such as Homeland Security and the War on Terror. We also have natural disasters like Hurricane Katrina. It cost over $3 billion for hotel rooms alone to house displaced people. As a compassionate society, we can’t ignore disasters like Katrina but it is our duty to spend the resources we have as effectively and efficiently as possible. It seems simple enough to say, but as we look back at the spending on Katrina I have read a number of stories about the waste associated with the estimated $129 billion spent.

The summer Olympics just finished and we heard about the stories of these Olympians---how they trained for this one event for years, made sacrifices in their personal lives, etc. We need that same determination as a nation to challenge ourselves and resolve the issues that face the country. Our success will determine if we get the gold, silver or the bronze medal and we certainly don’t want to be out of contention. Our strength is the people of this great country. We must have the right people in positions of authority. Good intentions are not enough.

Our leaders need to have the kind of tools and experience necessary to lead this country. During the Roman Empire there were five emperors, from Nerva to Marcus, that were chosen because of their experience. Is it by accident that this was one of Rome’s most successful periods in its history?

If we keep doing things the same way we will end up with the same results whether we are talking about the federal government or corporate America. There was an interesting quote by the North American President of Honda, Tetsuo Iwamura. When asked why their sales are up by 3% in this tough automotive climate, he answered; “We want to make Honda the company that society wants to exist.” Could you imagine anything like that being said by a U.S. company?

Washington has to come to some consensus and start being a problem solver; our future depends on it. We do not need unnecessary government programs, ineffective new laws and higher taxes.  We need actual cuts in wasteful spending, not Washington's version of spending cuts. 

Develop an action plan for some of the major economic issues we face. Start with a bipartisan review of the current situation and develop a plan and goals. Execute that plan with built-in contingencies and monitoring points. Test some of these new strategies in one part of the country and then roll it out to all 50 states after we are certain of success (corporations do this all the time).

Six economic issues of the day are discussed here. Usually these issues are covered one topic at a time in the various forms of media. I hope this gives the average person a start in understanding these important issues that affect us all. Your thoughts and ideas are welcome.

I have had the opportunity to travel across this great country of ours, and I am struck by the people and its beauty. As Thomas Jefferson once said; "I like the dreams of the future better than the history of the past."  I want the light to continue to shine brightly on this nation so America can continue to dream.

Joseph James Giordano, CFP

A Look at Six American Economic Issues-
As We Head Into the 21st Century-September 2008

James music and videos have received airplay throughout the world, with several #1 singles on the Independent charts. Known to his financial clients as Joseph James Giordano, he is a Certified Financial Planner, has a degree in finance and is president of a small broker/dealer, Joseph James Financial Services, Inc., since 1986.

Note: The views expressed in this economic paper are strictly those of the author. No solicitation or offer of any security or investment service is being made in any jurisdiction.