Relevant and even prescient commentary on news, politics and the economy.

Pensions and retirements…

The New York Times points us to private industry under funding for your retirement:

AFTER years of poor investment returns, the pension funds of the United States’ largest companies are further behind than they have ever been.

The companies in the Standard & Poor’s 500 collectively reported that at the end of their most recent fiscal years, their pension plans had obligations of $1.68 trillion and assets of just $1.32 trillion. The difference of $355 billion was the largest ever, S.& P. said in a report.

Of the 500 companies, 338 have defined-benefit pension plans, and only 18 are fully funded. Seven companies reported that their plans were underfunded by more than $10 billion, with the largest negative figure, $21.6 billion, reported by General Electric.

The other companies with more than $10 billion in underfunding were AT&T, Boeing, Exxon Mobil, Ford Motor, I.B.M. and Lockheed Martin. JPMorgan Chase had the largest amount of overfunding, $1.6 billion.

The main cause of the underfunding at many companies does not appear to be a failure to make contributions to the plans. Instead, it reflects the fact that investment markets have not performed well for a sustained period.

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The Price of Offshore

Via The Guardian, Tax Justice Network has a report showing maybe 21 trillion of wealth in “offshore economies”. (hat tip Stormy)

A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.

“James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, The Price of Offshore Revisited, released exclusively to the Observer.

He shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is, as Henry puts it, “protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy“. According to Henry’s research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than £4tn in 2010, a sharp rise from £1.5tn five years earlier.” ßan excerpt from a Guardian article.

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Note to Laurence Kotlikoff on Social Security

Laurence Kotlikoff has a post in Bloomberg opinion section on the current status of the Social Security. This is lifted from Dale Coberly’s note back to him:

Your analysis that SS is desperately broke ignores the fact that the projected shortfall can be made up by raising the payroll tax one half of one tenth of one percent per year, while incomes are projected to go up over one full percent per year.

This would result ultimately in an increase in the payroll tax of about 4% of income (which you misleadingly call a 33% increase in the tax, which it is, but which is likely to mislead the average reader). A 4% increase in the tax really amounts to a 4% increase in the savings protected by Social Security, which is properly understood as insurance against the potential failure of other modes of saving for retirement. The 4% increase is a very fair price to pay for the longer life expectancy that the workers paying the tax will enjoy.

They really won’t want to work any longer, and since they are paying for their own benefits, there is no reason they should have to. Further, while the tax increase does represent a higher percent of their income going to their own longer retirement, the projected increases in their wages would leave them at least twice as well off “after the tax” (that is, in terms of money left in their pockets each month after putting away the extra for their longer retirement) as they are today.

I don’t know if you are able to understand all this, or if you just prefer to ignore it. But I do what I can.

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Euro Area Imbalances Are a Symptom of the Broader Global Imbalances

by Rebecca Wilder

Euro Area Imbalances Are a Symptom of the Broader Global Imbalances

Every year I travel to Germany to visit my in-laws, which is where I am now. Given the extra time on my hands, I’ve now mulled over a June 2012 NY Times opinion piece by Gunnar Beck. Beck displays an interesting medley of data in support of his view that Germany cannot afford to backstop the European Monetary Union (the single currency union referred to as the Euro area, or EA). Germany itself has been the loser, not the winner, of the single currency union. His comments are loosely based on the research of the Ifo Institute’s Hans-Werner Sinn.

Based on the ideas of Beck and Sinn, I start a short series on the benefits of membership in the EA, ex-post and ex-ante. The conclusion from this initial post: Some call the EA a microcosm of the world imbalances, i.e., Germany is to China as Spain is to the US. I disagree. I’d argue that the EA imbalances are a function of, rather than a mirror of, the broader global imbalances.

Let’s start by looking at the simple net trade statistics as rents derived by membership in the EA since 1999. I further Beck’s analysis on intra-EA trade (trade among the EA countries) for the original 1999 EA 11 economies. The 11 economies to meet the convergence criteria by 1999 were: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.

By definition, the trade balance is the difference between total exports and total imports, both of which are affected by relative prices and membership in the EA.

The chart below illustrates the change in the annual intra-EA trade balance as a share of GDP during the period 1999 to 2011. Spanning the years 1999-2011, intra-EA gains from the fixed exchange rate regime within the EA have been lopsided toward Spain, Portugal, and the Netherlands.

(Note: for consistency, I use the EA 17 economies as the ‘trading partner’ for the period in the chart below. Furthermore, notice that the axis points in both charts are equal for ease of comparison.)

Being a port economy, the Dutch trade ties to the EA are strong, and gains from EA trading partners have been robust, +11% of GDP spanning the years 1999-2011. Portugal and Spain have likewise benefited, however, their intra-EA net trade gains occurred exclusively since 2008. Of interest, Finland fares the worst, having seen a 5.1% (of GDP) decline in its net trade with EA partners. And Ireland, for all its praise (please see current account stats on Ireland here ), saw its intra-EA net trade decline by 5% of GDP while in the EA – admittedly, there’s been a 4.2% of GDP gain in net trade with the EA since 2008.

Who are the winners of intra-EA trade spanning the entirety of the Euro Area? As demonstrated above, not many countries. The gains from trade came primarily from net exports from developed economies outside the EA (while I do not include a country breakdown, the large net importers are the developed economies – see the IMF WEO database).

The chart above illustrates the change in the annual total trade balance (extra- plus intra-) of the EA 11 as a share of GDP spanning the period 1999 to 2011. Here, the gains from trade are a bit less lopsided and the ‘usual suspects’ are evident. Germany was the third best performing economy by this measure, where net trade increased an average of 2.8% of GDP over the period. The Netherlands benefited the most of the EA 11; but the improvement was based exclusively on intra-EA trade. Portugal experienced gains from net trade from the rest of the world and the EA, where the total trade balance improved by 3.2% of GDP (again, exclusively in the post 2008 period).

Of note, France performed poorly on both counts: intra- and total net trade, -3.2% and -4.9% of GDP, respectively. In contrast, Germany performed relatively well. Being the largest economies in the EA, and given that the absolute value of the total trade balances (either deficit or surplus) exceed that of their respective intra-EA balances, I hypothesize that the global imbalances exacerbated, even caused, the EA imbalances.

Thus, EA imbalances are not a microcosm of the broader global imbalances, rather a symptom of global trade policy.

Rebecca Wilder

crossposted with  The Wilder View…Economonitors

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What’s Romney Got to Hide? (Part III)

by Linda Beale

What’s Romney Got to Hide? (Part III)

In the last two posts, I explored a number of fairly simple questions that might be raised about Romney’s activities that would be clarified by seeing multiple returns (hobby versus investment/business losses; business versus passive activity losses; amounts of preferentially taxed income; income reported from Bain Capital and/or from foreign accounts) and some of the “squirrelier” possibilities that tax experts have raised (potential that Romney participated in the IRS voluntary disclosure “amnesty” program for reports on offshore accounts after the initiation of unraveling of Swiss banking secrecy as a result of the UBS scandal, in order to avoid weightier penalties, including potential criminal charges; contributions to IRAs that were undervalued, possibly by claiming zero value for partnership interests; use of aggressive tax sheltering transactions to ‘create’ capital losses to offset substantial capital gains, resulting in the net capital loss carryforward on the 2010 tax return).

Ed Kleinbard, a former partner at Cleary Gottlieb who served as chief of staff for the JCT and is now a law professor at Southern California, has joined with Peter Canellos, a prominent tax practitioner and former chair of the prestigious New York State Bar Association Tax Section, to address these issues regarding the importance of seeing multiple past years of Romney’s tax returns.  See Kleinbard & Canellos,Why won’t Romney release more tax returns?, CNN (July 18, 2012).  Hat tip Calvin Johnson.

So what do Kleinbard and Canellos add to this debate?  Perhaps most importantly, they note the importance of transparency in the vetting of presidential candidates :  as they say, “[t]he U.S. presidency is a position of immense magnitude and requires a thorough vetting.” (emphasis added)  Accordingly, they point out the advantage to the American public of the disclosure practice initiated by Romney’s father George Romney four decades ago and .

Since George Romney inaugurated the practice more than 40 years ago by releasing 12 years of tax returns in his bid for the Republican Party nomination, presidential nominees have been transparent with voters about their personal finances. For this reason, we have not suffered a significant tax scandal involving a nominee or sitting president since President Richard Nixon’s abuse of the tax code.
Disclosure goes to the heart of the truthfulness with which a nominee engages the American people, and it assures us that he in fact has comported himself before the election with the high moral character we associate with a future president.
What the American people deserve is a complete and honest presentation by Romney of how his wealth was accumulated, where it is now invested, what purpose is served by all the various offshore vehicles in which he has an interest and what his financial relationship with Bain Capital has been since his retirement from the company. These are all factors that go to the heart of his character and values.

Like the rest of us who have discussed this issue, Kleinbard and Canellos note that it is Romney’s abject refusal to follow his father’s example and disclose a decade’s worth of returns that “undermines the assumption” that would otherwise apply “that there cannot be any tax skeletons in his closet.”  Our only tool is to “reconstruct his financial record” from what he has released.  And that leads us to “red flags that raise serious tax compliance questions with respect to his possible tax minimization strategies in earlier years.”  Disclosure, they note, could “replace speculation with truth-telling.”

Kleinbard and Canellos go on to discuss some key issues (some already addressed in prior posts)

  • the Swiss bank account: Why would a presidential nominee be betting against the US dollar by speculating in Swiss Francs?  The account was closed in 2010, but was its income reported on earlier returns and were the FBAR reports timely filed as required? Did the Romneys participate in the 2009 partial tax amnesty for unreported offshore accounts?
  • the $100 million IRA: How could an account restricted to annual contributions of $30,000 grow to $100 million? Does it represent “unprecedented prescience in … Romney’s investment choices” or does it mean that “Romney stuffed far more into his retirement plans each year than the maximum allowed by law by claiming that the stock of the Bain company deals that the reitrement plan acquired had only a nominal value” (relying on a safe harbor rule about taxation of service partner’s receipt of such interests that is, however, inapplicable to contributions of those interests to a retirement plan)?
  • the Romney family trusts:  “Did Romney report and pay gift tax … or did he claim similarly unreasonable valuations, which likewise would have exposed him to serious penalties if all the facts were known?
  • the complexity of Romney’s assets:  even multiple years of returns won’t answer all these questions given the “complexity” and “arcane” and “opaque” nature of Romney’s financial affairs, so disclosure about specific issues, such as the $100 million IRA, will be needed
  • the low Romney tax rate:  a tax rate of 13.9% on $22 million is exceedingly low–lower than the rate paid by ordinary American wage-earners making 40-50 thousand a year.  How can we trust Romney to enact wise policy–which the vast majority of tax experts concur is to remove the super-preferential rate on the compensation income of private equity fund managers?  “Romney has not explained how, as president, he can bring objectivity to bear on this tax loophole that is estimated as costing all of us billions of dollars every year.”

Will Romney respond to these continuing calls for full disclosure about how his wealth has been built, where it is invested, and just what purpose the various offshore entities serve?  If he does not, we can only think the worst.
crossposted with ataxingmatter

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U.S. Trails at Least 15 OECD Countries in Median Wealth

by Kenneth Thomas

U.S. Trails at Least 15 OECD Countries in Median Wealth

Via @exiledonline, I learned today (July 18) that Canadians are richer than Americans. This is rather surprising, since GDP per capita is higher in the U.S than in Canada.: $48,100 vs. $40,300 (at purchasing power parity or PPP), according to the CIA World Factbook. But in fact things are much worse than that, as 15 OECD countries (plus Singapore and Taiwan) have higher median wealth than the U.S. does. There may even be more, as the Credit Suisse report I discuss below does not give median wealth data for several countries with higher mean wealth than the U.S.

Most reporting has been based on a story that was run in the June 30th Globe and Mail claiming that average (mean) Canadian household wealth had reached $363,202 vs. just under $320,000 in the U.S. This is not a particularly informative statistic, however, since wealth is even more unevenly distributed than income, and income in the U.S. is already highly unequally distributed. What we really need is median net worth, i.e. the level at the exact middle of the net worth distribution in a country. G&M commenter “TJMone” picks up that point, receiving an answer from “porkbarrel pundit”: a Credit Suisse report from October 2011 (via LSM Insurance), shows that the median net worth per adult in Canada was $89,014, compared to just $52,752 in the U.S. (all figures in U.S. dollars).

American reporting based on the study in the G&M did not start until 18 days later, when an article in U.S. News & World Report picked it up (Canadians are right: no one in the U.S. is paying attention to them). Moreover, no one picked up on the much better data in the Credit Suisse report until later in the day, when Dylan Matthews at Wonkblog wrote a great story on it (there are many high-quality comments, too). It turns out that lots of OECD countries, including economic basket cases Italy, Spain, and Ireland, have higher median wealth than we do. See the chart below:
Source: Dylan Matthews, based on data from Credit Suisse

It is mind boggling that median Australian net wealth per adult is four times that of the U.S., and Italy is three times as high. Ireland and Spain, meanwhile, are also higher despite having housing busts similar to that in the United States. What is going on here?

Part of the answer is more equal income distribution. According to the Credit Suisse report, mean wealth per adult is just shy of 5 times median wealth in the U.S., whereas in Canada it’s a little less than a 3:1 ratio (see Table 7-1). Other countries with higher median but lower mean net worth per adult are Taiwan, Finland, Germany, Ireland, Israel, the Netherlands, New Zealand, and Spain. Australia has a higher mean net worth than the U.S., but its ratio of mean to median net worth per adult is less than 2:1.

Another part of the answer may be that in many other wealthy countries, households have less debt. If you remember Michael Moore’s movie Sicko, in one scene he interviews an upper-middle class French family and asks them what debt they have. Their only significant debt is their mortgage, because they didn’t have to take out loans to go to college. The Credit Suisse report finds this pattern (unfortunately, only mean debt, not median debt). Mean debt per adult (see Table 2-4) is $59,362 in 2011 for the United States, whereas for France it is $40,873, Germany $33,424, and Italy only $24,291. Of course, this isn’t true of all countries: Ireland and Switzerland both have much higher mean debt per adult, but they also have about twice the median wealth per adult of the U.S.

This analysis is hardly exhaustive; I bet a good book could be written on the subject.

One final point: Matthews skewers the claim by Globe and Mail author Michael Adams (whose firm conducted the study discussed in his article) and later commenters on both sides of the border who accepted Adams’ claim that this was a historical first. As he shows with U.S. and Canadian government data, Canada’s median household net worth was significantly higher in 2004-5, before the crisis, than here in the U.S. Given the huge disparities between the United States and some of the other countries, it is likely that net worth per adult has been higher in a number of these countries for quite some time. These data reflect trends that have been developing for a long time, and are not purely driven by the economic crisis or by any single set of policies. But they make for sobering reading, and deserve more than the superficial analysis most of the U.S. press has given them so far. Bravo to Matthews for a great piece of analysis.

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About Ann Romney’s—And Other MS Victims’—Darkest Hour (those who have healthcare insurance, those who have very high deductibles, and those who may lose their jobs and be unable to get new healthcare insurance. Or a dressage horse.)


The DNC has apologized for using Ann Romney’s London Olympics-bound horse in an attack targeting her husband.
The Hill explains that Democrats had used the dressage horse to illustrate its claim that the presumptive GOP nominee was “dancing around the issue” of his decision not to release his tax returns. (Dressage is a dance-like sport, but on a horse. Get it?)
The problem? The horse is used by Ann Romney for therapy related to her multiple sclerosis.
DNC spokesperson Brad Woodhouse told ABC News that the decision to use footage of the horse “was not meant to offend Mrs. Romney in any way, and we regret it if it did.” Woodhouse added that the group won’t “invoke the horse any further to avoid misinterpretation.”
For what it’s worth, the dressage horse, named Rafalca, apparently gets the Romneys a rather hefty tax credit. (Literally, fwiw: $77,000 a year.)
A headline today on ABC News’ website, about an interview there today with Ann Romney, is “Mitt Romney’s Wife, Ann, Calls MS Diagnosis ‘MyDarkest Hour’.”  Unquestionably, that was a dark hour for her, and one that anyone can empathize with.  And, yes, it’s great that dressage helps her regain some of the ability to balance she lost due to her MS.
But here’s my question to Ann Romney and her husband: How much darker an hour does she think it is for someone who’s given that diagnosis and either has no healthcare insurance or has a very high deductible, or who now dearly fears the loss of his or her job, either because of the health problem or for other reasons, and who, for resulting financial reasons or preexisting-condition reasons—or both—may never again have health insurance if the ACA is repealed? Or be able to get a dressage horse.
I don’t think Obama or the DNC should shy away from asking this question.  Or from doing an ad in which someone in exactly that position asks it.


UPDATE: Because of the emotional impact of this particular issue, I want post as part of the main post a Comments Section exchange between reader MC and me.  Here it is:

MC: I’m confused. Does owning horses or houses somehow make you a bad presidential candidate? And therapeutic horse riding is used for all sorts of medical conditions, so this is not unusual. Regardless of who I think should win the election, Ann Romney is drawing alot of attention to multiple sclerosis, which is a largely unknowable disease at this point. I have it. Its ruining my life. We need more awareness and research so we can actually understand what causes this disease and how to treat it with something better than a 33% success rate. I’m all for candidates hashing out their issues, but I agree with those who are calling for a cease fire when it comes to involving Ann and her illness. MS needs positive attention and deserves respect.
Me: Does owning horses or houses somehow make you a bad presidential candidate? That depends on how you got the money to buy the several dressage horses, each worth several hundred thousand dollars, and to buy the several houses, each worth several million dollars.  And on such things as whether or not you paid the full amount of taxes you owed, or instead hid or misrepresented the value of the assets in offshore accounts, including offshore IRA accounts, in order to evade taxes or even to avoid taxes using legal means available only to the very wealthy.  And whether your proposed tax policies, such as reducing yet again taxes on the wealthy, would benefit you (the candidate) extensively, to the detriment of a large percentage of the public.
And, of course, on what you (the voter, rather than the candidate) thinks is a bad presidential candidate. My view is different than yours, obviously.
As for Ann Romney’s MS and dressage therapy, it was Romney herself, not the DNC, that raised the issue, by going on television this morning and responding to the DNC ad by telling everyone that she uses the Olympic horse for therapy.  (She has several substitute horses when that horse is training or in, say, London for a competition.  She didn’t mention that, though, I guess.)  She also said that the MS diagnosis was her darkest hour.
Her husband is running for president partly on a platform of repealing the ACA, including the provision that requires insurance companies to accept everyone regardless of preexisting medical conditions, and, of course, the provisions that provide for expansion of Medicaid and for subsidies for premiums for some others.
You say that we need more awareness and research so we can actually understand what causes this disease and how to treat it with something better than a 33% success rate.  So true.  It’s true for so many other very series diseases, as well, that effect young people and middle-aged people.  ([Muscular dystrophy] comes quickly to my mind; someone dear to me died of it two years ago after having lived most of his life in a motorized wheelchair.)  But in this country, unlike in every other advanced industrialized democracy in the world, medical advances can be made use of here only by those who have access to employee-benefit medical insurance.  You’re obviously among them.  But not everyone else with MS or another debilitating chronic illness is.
Although I didn’t put this in my Comment response, I’d also like to note that under Romney’s proposed tax and budget cuts, which are extreme, there would be virtually no federal funds for medical research, either to the universities or to the NIH. So if you’re someone who places a high value on medical research—and I suspect that most people do—this is no small matter to consider when deciding whether Romney is a bad candidate or not.

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