City of Lights

For many years Paris was our hub to Europe from the States, but with the 2004 collapse and temporary closure of Terminal 2E at Charles De Gaulle, Paris became inefficient. London, Zurich or Frankfurt became better choices. When I checked my diaries, I was surprised that we hadn’t been to Paris since May 2006; more than five years ago. And this was just a quick overnight visit from London to see friends Regine and François.

On Thursday morning, January 19, the Eurostar whisked us in just over two hours from London’s St. Pancras to Paris’ Gard du Nord; then a twenty minute car ride had us to the always pleasant Four Seasons Hotel George V.

The City of Light at first glance lacked its traditional sparkle; La Ville-Lumière seemed dimmed into a funk. The weather was damp with low and heavy cloud, well matched to the dreary economic climate now hanging over the Euro Zone. I wondered if all this would affect our trip. After a quick lunch, we were out walking the length of Rue Saint-Honoré; the smart shops were not as bustling as I had remembered.

As it turns out, the cadence of our long weekend in Paris was to be a beat of transition and change, but ironically, also continuity.

Upon our arrival to George V, I asked the concierge if there might be a cancellation at Taillevent for dinner and it seemed luck was with us – a reservation for 8:00 pm was available. Taillevent is a short stroll from the hotel, on Rue Lamennais.  The wonderful restaurant has been around since 1946, guided by the ever watchful Vriant family. Under the founder’s son, Jean-Claude, the restaurant prospered, receiving 3-Stars Michelin in 1973. Sadly, he died in January 2008 at only 71, and the restaurant passed to his daughter Valérie, with the financial help of the Gardinier family.

This evening the restaurant was only half filled, I had never seen the place as empty; reservations were always hard to come by. But everything remained marvelously the same; our Dover sole main course was fantastic. The room is wood paneled, overflowing with flowers and art; soft to the eye, and the staff prescient to the client’s every need.

Toward the end of our meal, the long time maître d’hôtel, Jean-Marie Ancher came over to talk. We mentioned that we had been dining here for almost two decades, and passed on our condolences regarding Mr. Vriant.  As we were finishing our espressos and petit-fours Jean-Marie said Jean-Claude still guides him daily. I then mentioned to him the habit forming effects of their caramels and pulled one out of my pocket, confessing I had stolen it for later. In a moment, I had a small plate full of caramels for the road; Jean-Marie confessed that he shared my addiction.

Michelin Guide downgraded Taillevent in 2008 to two-stars in what seemed to most a callous and capricious move. It remains Zagat’s number one for food in Paris and the chef, Alain Solivérès, continues on at the restaurant since his start in 2002. For me everything was just right in spite of the absence of the impeccably dressed Jean-Claude with his permanently affixed yet subtle Mona Lisa smile. French pride and patrimony protect institutions such as Taillevent; I am confident in its survival.

We awoke Friday to another sullen day. After breakfast, we were off to Musée du Luxembourg and the “Cézanne et Paris” exhibit.  Cézanne is more famous for his emblematic scenes of South of France, but he spent more than half his life in Paris; the collection celebrates this time with about 80 works depicting the City and environs.

It was then off to our friends at Freego, sisters Nadia and Katia, who have a wonderful cashmere shop. Since last in Paris, it moved from its longtime location on Rue Dauphine on the left bank, to a location close by at 11 Rue Jacob.  The new shop seems a little bit bigger. After a small shopping spree, Nadia suggested we have lunch at a nearby restaurant, La Crémerie, 9 Rue des Quatre Vents. We had a great time, but more on this wonderful place later.

Dinner was at the hotel’s grand restaurant, Le Cinq.  Our starters were good, but our main course of slow cooked, Moroccan scented lamb was somewhat fatty and a disappointment. All was made well; however, by the voluptuous 1990 Volnay Pitures from Jean-Marc Boillot.

The weather hadn’t improved as we walked a bit more Saturday morning. In the afternoon we took in another exhibit, this one at the Gran Palais featuring a massive display of the Stein family’s (Gertrude and her three brothers) Picasso’s, Matisse’s, Cézanne’s and others gathered from over 100 collections on five continents – magnificent but very, very crowded.

The most pleasing time was left for dinner tonight; Nadia and Katia invited us back to La Crémerie.  It’s hard to describe this restaurant; originally an old dairy shop. The owner, Serge Mathieu, is an architect by training, but finally succumbed to his passions for wine and food about seven years ago and bought the place. It’s tiny, ten or twelve seats; walls lined with wine; a beautiful hand painted tile ceiling, a giant, completely ill proportioned 1936 bright red Berkel meat slicer sitting on a cramped bar, with four stools tucked under it. This is where we sat, almost as guests of honor.

We started with champagne, I don’t recall the producer, but all Serge’s wines are artisanal, most organically produced. We continued with Burrata di Corato and tomato, a plate of slow simmered eggplant, tomatoes and onion; duck confit and a smoked tuna so good that it cannot be described. Serge’s wife Helen helped; rich conversations ensued; the playlist softly in the background, eclectic and a perfect fit. I can close my eyes, smell the charcuterie, and hear “Baby I’m a Fool” from the smoky voice of Melody Gardot even as I write.

After another long walk Sunday morning, we took an early afternoon Eurostar back to London. I mentioned in the beginning that this trip became about change and yet also things staying the same. Taillevent transitioned from Jean-Claude Vrinat’s professional hands to a new generation, but the spirit lives on; Nadia and Katia are in a new location, but their fashions endure; La Crémerie, once a dairy, is reincarnated to still serve its locals nourishment, for both stomachs and minds. Serge is still an architect, just designing delicious dishes instead of buildings.

I too changed. I realized that my last Paris trip was just a quick interlude from a three week trip to London. On the flight home on May 18, 2006 I pretty much decided to sell my remaining interest in my businesses; I talked to my friend and partner Walter that same week and we came to an easy agreement. We signed our sale agreement shortly thereafter.

So my last time in Paris I was a full time automobile dealer; this trip a relaxed retiree. But I too remain the same, still curious about places and things; and part of me continues to be a restless soul.  


And yes, Paris has changed a bit too, but remains the "City of Light."

Friendship & Surprise

Surprise and friendship are two words that do not come together that often; but they did for me earlier this month here in London. It seems appropriate to write about on this last day of 2011.

My beautiful wife Judith turned sixty-five on 26 December. In July I started to plan a surprise birthday party for her in spite of her specifically mentioning that she didn’t want one. Of course I didn’t listen. A great time was had sneaking around: arranging a date among a far flung group of friends, picking venues, planning menus and wines, party favors, developing a little slide show of Judith’s past, and lots of other small details.

Judith is a very perceptive and curious person; she notices things, so it was hard to keep this secret. A few times I was a whisker from being found out, a mouse click from being caught.

For the night of the party I had dreamed up a ruse supported by a few co-conspirators to get Judith to the party; to be held in the Mall Room at the Royal Automobile Club on Saturday, December 3.

About a week before, friend Phillip helped by inviting Judith and me to a fictitious art showing at the Club. With another friend’s support, I arranged to be called out on the day of the party to a last minute business meeting. This gave me a chance to finish setting up and to greet guests that had been instructed to arrive at six o’clock.

My wife is a fastidiously punctual person; and Philip had asked us to arrive at six thirty for the hoax art show. Carole, a longtime friend, was staying with us; we had coordinated her trip, unbeknownst to Judith, to coincide with the celebration. So as the final step, Carole was charged with the herculean task of slowing Judith down, which she did courageously and much to Judith’s mounting frustration. In spite of Carole’s valiant efforts, they still arrived to the club five minutes early; I met them at the door. After a few more vaudevillian near-encounters with a guest or two near the cloakroom; I escorted Judith and Carole upstairs to the Mall Room.  

Judith was completely taken aback upon entering the room to a thunderous yell of “SURPRISE!” She relates that time switched to slow motion, trying to figure out why Paul, from the States, was standing next to Philip; and other incongruities: Eileen was just in London, less than a month ago, what was she doing here, François and Regine should be in Mexico; Lilla, Portugal. Her right hand came up to her chest, she only could say “oh my God.”

Eventually things sunk in, and Judith was greeted by about twenty wonderful friends from around the globe. This was a priceless moment for me.

The room was conducive to conversation; friends met other of our friends for the first time; all fell into an easy exchange. Connections continued among the canapés, toasts and champagne, impromptu speeches, graceful service, nice food and good wine. Looking around it was a varied group: ages from mid-thirties to mid-seventies; different nationalities and native tongues, varied economic circumstances and political stripes. Sadly a few friends couldn’t make it because of last minute colds or other emergencies; and sadder still, our dear and departed friend Himanshu could only watch from the heavens.

Although spilled out from some cosmic puzzle box, people fit together perfectly.

The power of friendships has already been constrained in literature by too many metaphors, written by many so much more polished; I won’t try to add anything here. But I know all came together to honor Judith, and I remain awed by the richness of that blissful evening. It ranks among the top days of my life.

There was a second luncheon party the following day. It was more relaxed, conversations picked up from where they had left off the evening before. There was more champagne, wine and food (and as François jokingly pointed out, a bit too much crème brûlée).

As the year ends I have a lot to be thankful for, not least of which is friendship; and perhaps, surprise yet to come.

How Bad Is It?

How bad is it? The simple answer: "pretty bad!"

Since the early eighties and extending almost 20 years our economy and equity markets experienced a golden period; then things started to go a little sour. We had the dotcom bust in 2001 and the financial meltdown of 2008. Equity values have not really risen at all this past decade. My explanation for our current problems is that this seemingly outsized growth beginning in 1980 was a bit of a mirage; and can be pretty much explained by us citizens and our government just borrowing our way to today. Consider the following.

Our Federal Debt and the sovereign debt of other countries (think “PIGS”) has gotten the most attention, but it doesn’t illuminate the full state of affairs; it’s better to focus on all four debt components: that of governments, households, banks and corporations; in aggregate, the Total Debt.

For the longest time, America’s Total Debt was about 150% (1.5 times) the nation’s GDP. An exception was the Great Depression, when it increased to 300% (3.0 times), however this rapidly returned to normal. Around 1980 this long term trend of 150%, stable since the 1940s, began to climb. In 2011, we are now over Depression Era levels; estimates are as high as 360% (3.6 times GDP). The government, financial and non-financial companies, and households have a Total Debt of about $57 trillion (it looks worse when you actually include the zeros: $57,000,000,000,000). If we had maintained the 150% norm during this period, we would have a Total Debt of only $24 trillion. So an extra $33 trillion in consumption and investment (GDP) over the last thirty years was “put on the card” so to speak. This isn’t a trivial amount; it’s about 10% of total GDP for the period.

Some might say this is because a greater percentage of households now own their home, rather than renting. The fact is home ownership has hardly moved; in 1980 it was 65%, now it is 67%. Home equity historically had been above 50% in the United States, as of 2011 it is 38%. Housing is a big part of the problem, far from the fulfillment of the American Dream.

We most likely will not grow out of our debt problem as easily or as quickly as we did in the Thirties.

In the ten years from 1933 to 1942 our nominal GDP bounced by 187% ($56.4B to $161.9B). Unfortunately consensus estimates of our future growth are much more anemic, 2.5% annually on the high end (the economy thus taking almost 30 years to double).

Another negative staring at us is our demographics. As the Baby Boomers started reaching working age in the early Sixties there were relatively fewer children because of lower fertility and also fewer elderly as extended longevity hadn’t kicked in with full force. Academics call this phenomenon a “demographic dividend.”The number of Americans too young or old to work, compared to the number of working age adults (the “dependency ratio”) started to erode in 2010, going from 50% (5 dependents for every 10 working adults), to a forecasted 65% in 2050 (6.5 dependents for every 10 working adults). The tsunami of retiring Boomers is just beginning and it will be another unfunded and growing tug on productivity for the country.

The linked power of high economic growth and the demographic dividend are not present for us in this latest crisis. We are going to have to pay down a big chunk of this debt along with greater interest payments, analysts antiseptically call this an extended period of “deleveraging.”

And this rather gloomy scenario assumes we start accepting the truth about our current situation and get public policy and individual responsibility mostly right; which at this moment seems a bit farfetched. American politicians are bickering with themselves to distraction; the Euro Zone is balancing on the brink of collapse. China faces wrenching shifts away from its very successful export led growth and is also burdened with the worst dependency ratio trend in the world (rising from 38% today to 64% by 2050). It’s hard to see much to smile about. 

Michael Lewis’ new book, “Boomerang: The Meltdown Tour” has a wonderful quote that captures the moment: “leverage buys you a glimpse of prosperity you haven’t really earned.” We are in some big trouble. Interest payments and debt reduction will be a real and yet necessary drag on all our lives for perhaps decades. I think it would be foolish to plan for something else; better to dampen expectations and modify behavior now, perhaps to be pleasantly surprised later.

After all, there’s always an “upside case” that might be realized.

Portugal: Wedding Bells

Judith and I just returned from a week in Portugal, September 21 through 28, the visit prompted by the wedding of a friend. 

On our trip from the Lisbon airport, I made a quick detour north to the Cabo da Roca, the westernmost rocky outcrop of continental Europe; a rather odd geographical place on Earth, but somehow meaningful to me nonetheless – I wanted to see it. We then continued on to the hotel, which was about a 40 minute drive west of Lisbon. The Fortaleza do Guincho is a converted 17^th Century fortress; solid, low slung with muted yellow walls, perched upon the Atlantic coast in the town of Guincho. Its setting is lovely yet desolate; a windswept sandy bay directly on the ocean.

Our friends Regine and François were also attending the nuptials and arrived to the hotel, although a bit later than us; we had a nice dinner together at the hotel’s one-star Michelin restaurant. All eventually fell to sleep to the ceaseless pounding of the Atlantic’s thunderous waves.

The following day, Thursday, the four of us drove north; up the coast to Sintra, a pleasant town nestled in the wooded hilltops of the Serra. We toured the 14^th Century Palácio Nacional de Sintra; and the Palácio da Pena, a schizophrenic collection of architecture, built in the 19^th Century for the young husband of Queen Maria II. Most of this area was first developed as a summer getaway and hunting ground for the monarchs of the day. It was and remains good to be a king.

We had a nice luncheon interlude at the outdoor Café Paris in the main square. But we needed to cut sightseeing short; there was a pre-wedding party in Cascais, at the home of the soon to be married Lilla and Stan. The couple was very gracious to have their out-of-town guests for an evening of fun. It was a lovely time, our first time meeting Stan; the food was excellent and the conversation lively. The finale was the launching of seven candle-fueled paper lanterns, the glowing shapes slowing rising and disappearing into the night sky; their symbolism meant to bestow luck onto the couple for all time, each day of every week.

On Friday, after a lazy morning; we drove to Sintra for lunch at the beautiful Tivoli Palácio de Seteais. This hotel was breathtaking; however, the food just barely passable. We arrived back to the Fortaleza just in time to clean up for the five o’clock wedding at Quinta do Pé da Serra in Colares. The wonderful weather complimented the understated ceremony and delightful reception. Lilla is Hungarian, Stan from Luxembourg; and its current ambassador to Portugal. The approximately one hundred guests comprised a mini United Nations; seventeen different nationalities represented. Stan and Lilla made each of us feel at home, perfect hosts. We left for our hotel around eleven; Regine and François had an early flight back to Paris on Saturday, the 24^th; Judith and me off to Lisbon.

An easy drive had us to the Ritz Four Seasons – Lisbon, close to the Parque Eduardo VII; we were upgraded to a nice suite on the ninth floor. Unpacking with our usual military precession, we were out to explore.

Lisbon is a city of hills, anchored to the northern bank of the Tagus River. With what was left of the day, we walked from the nearby Praça Marqués de Pombal and down the wide boulevard of Liberdade to the Elevador de Santa Justa, built in the early 20^th Century by a student of Eiffel. It was a small, unimpressive cousin of the Paris landmark, but afforded some wonderful views. It was then down to the river and the large Praça do Comércio. Retracing our route, we arrived back to the hotel tired after a three hour trek.

Sunday was a beautiful day. We took the modern metro from Pombal to Baxia-Chiado station, and walked to the tram station at Praça do Comércio. The #15 was jammed with tourists, all heading west along the Tagus to Belém, to visit the Torre de Belém and Manuel I’s 16^th Century Mosteiro dos Jerónimos. The famous Portuguese explorer, Vasco da Gamma, is entombed here in the adjoining Church of Santa Maria. Lunch was at a nondescript place, but late afternoon drinks were wonderful at the very modern boutique Altis Belém Hotel’s terrace overlooking the river – highly recommended.

Monday, sunny and warm again, had us off by car to nearby Palácio de Queluz, originally a 17^th Century hunting lodge, then transformed into a Rococo summer palace; the rooms and gardens were a delight to the eye. We were back to the hotel by 12:30, and took the metro to the Bario Alto and Chiado and had a quick lunch; then traversed east to the old Moorish district of Alfama, to visit the Sé Cathedral and the expansive Castelo de São Jorge. Exhausted, we took the rickety #28 tram, it’s ancient gearing groaning against the steep grades, winding down the circuit of narrow cobbled streets. The metro took us to the Praça Marqués de Pombal, but we still had to climb the tortourous hill to the Ritz Four Seasons; our calfs at this point were threatening munity.

Our last full day was perhaps the nicest in Lisbon. We took a short walk past the Parque Eduardo VII to the Museu Calouste Gulbenkian. This was a purpose built structure constructed in 1969 to house the collection of its namesake, Mr. Gulbenkian, a wealthy Turkish businessman who had made his home in Portugal during WW II. The works are eclectic and exquisite; a personal artistic statement spanning decades of acquisition from around the world. It reminded me in many ways of Henry Clay Frick’s wonderful collection in New York City. It is similarly an intimate and personal statement of one man’s ideal of art, housed in Frick’s former home, which was designed from its start to eventually house his collection.

We returned to the Chiado district for a wonderful lunch at Tavares, on Rua da Misericórdia; faithfully serving its clientele since 1784. Afterward, it was to the 16^th Century Church of São Roque; a Baroque masterpiece. We stumbled back to the metro and dragged ourselves up the hill once again.

On Wednesday, the 28^th, we left in the early afternoon to London; arriving at Heathrow, Masood whisked us back to our flat through light traffic.

My feelings are mixed about Portugal. Its history spans a millennium; in the 16^th Century this country and Spain were the world’s superpowers, dividing the New World between them with the blessing of the pope. Although some were brilliant, its monarchs were mostly self consumed. In ways the massive wealth that poured in from trade with the New World seems somehow analogous to what sociologists now refer to as the “oil curse” when talking about Venezuela and the Near East. Oft times the fortune of natural resources, or in Portugal’s case, naval supremacy, can hollow out the rest of an economy, its leaders and its people. After all, Salazar’s dictatorship continued here until 1968, and only then did the Carnation Revolution bring true democracy. Nature also played its villainous part, the massive earthquake that flattened most of Lisbon in 1755, and the 1988 inferno that engulfed much of Chiado.

 In spite of its rich history, Portugal is in actuality a young democracy, with young institutions. Few realize this.

The guide books point to Portugal’s ten million people as gregarious folk, I sensed a much more stoic presence. Mine was a portrait contained in their language, “saudade,” a type of ethereal melancholy; this mood is even part of the national music, the Fado. I suppose this could be more than just this country’s rhythm, perhaps the world’s serial financial crises have flattened all our spirits of late. I suppose “gregarious” doesn’t come to mind looking at faces while I walk the streets of London.

Still, Lilla and Stan’s wedding was a metaphor for hope. They are smart and caring individuals committed to a brighter future, for themselves, their family and friends, for all in fact. My wish is that the seven lanterns looking down upon them will bestow many years of good fortune.

This trip was a wonderful experience, adding to my life and understanding of the world. The natural beauty and deep history of Portugal are extraordinary. I fondly remember being fascinated about “The Age of Discovery” in my grammar school classes; and Vasco da Gamma remains a hero, an explorer extraordinaire. I can imagine his curiosity and trepidation as he rounded the Cape of Good Hope in 1498, off to discover India for the West.

La Reserve de Beaulieu: “Seizième Année”

This was our 16^th September at La Reserve de Beaulieu; it was bittersweet – our annual “hajj au soleil.” I realize I have 16 years less of life to live, but in some important ways I’m healthier now than my working years.

When we first came here in 1996, we met two couples from Belgium (the women were sisters); fun loving but perhaps in their late seventies. I saw them checking out one morning and wished them well; saying “hope to see you next year.” With a telling smirk, one wife replied “so do I.”

One couple had actually first arrived in Beaulieu-sur-Mer out of serendipity; on honeymoon in 1947 after the war, their car ran out of petrol here and they stayed. They said they had been back every year since, with the exception of one. Sadly my morning goodbye was the last time I saw them; they didn’t show in 1997.

La Reserve hasn’t changed; the spirit of reserved and personal customer service still drips from everywhere and everyone. The clientele; however, has altered over time. When we first arrived in the mid-nineties, there were Americans here; as well as Brits, Germans and Swiss. For a time there were some Japanese; quietly taking pictures of their food; and some Arabs. Lately it has been the Russians in ascendancy; older men, the current masters of the universe, with young beauties obviously attracted to values other than their partners’ looks. The "new kids" on the block are scoping out the turf; driving the staff crazy (as well as some of the other guests).

I observe that the nationality of the clients here at La Reserve is a mirror to the world of economic “ups” and “downs” over the years. Russian oligarchs are currently “kings of the world,” happy to have themselves and their money outside the kleptocratic reach of their country.

When we first came here Europe was a bargain. The French Franc slipped to seven-something against the dollar in the late nineties; the Euro shortly after introduction had its nadir early this decade, one US Dollar buying €1.20 – ah, those were the days! Of course, now things have turned; the ratio has flipped: my US Dollar now gets me only €0.73. In ten years the US Dollar has dropped 40%; thus, not too many Americans around the pool.

Still we love our time here. We had the pleasure of making some lifetime friends. Sadly, we also experienced the unfolding horror of 9/11 in this quaint French seaside town; now it’s tenth anniversary.

In spite of everything, this is as close to paradise as one could hope.

Out of the Bretton Woods?

I’m not a gold bug, and do not own gold or gold shares of any kind (maybe I should). August 15 marked the fortieth anniversary of Richard Nixon’s closing of the gold window in 1971; and I was reminded of this by an article in the August 13 issue of “The Economist.” The last sentence was a shocker. It read: “In terms of the old gold measure, the dollar has devalued by 98% since the end of the Bretton Woods era.” Wow!

I thought this couldn’t be true; however, it is. Checking values, gold in 1971 was a few cents less than $41 per ounce, 40 years later this August 15, $1,766. Today’s one US dollar will only buy 2.3% of the gold it could buy in 1971; so roughly 98% less.

With the collapse of the convertibility of money to gold, world reserve currencies became Fiat Currencies. This doesn’t mean they became based upon the solvency of an Italian second-tier automobile manufacturer; rather currency is now backed by the full faith of the country issuing it.

I’m not arguing here that gold was the investment of a lifetime (its return against the dollar was just under ten percent per year); in fact the S&P 500 for the same period returned almost 12%.

Looking at the long term; however, the depressing fact is the erosive power of inflation. Trying to manage wealth for future generations is a demanding project; the “real return” for the S&P 500 for this period was only 7.2%, rises in real prices consumed 4.6%. If things held constant, and you placed $1,000,000 today in a safe deposit box and left it there for the next forty years, you would withdraw only $165,000 in purchasing power in 2050. It turns out the biggest investment “expense” is actually inflation, and the math is depressing. If one spends say 3% of retirement assets per year, one would need an 8% or 9% gross annual return on the portfolio to cover spending, taxes and the effects of inflation in order to keep wealth from declining in real terms. This is a very tough goal to achieve with, say, a lower risk, balanced portfolio.

“Fiat” is actually a Latin word, roughly translated as “to be done” or “let it be done.” I guess the question becomes “let it be done” to whom?

George Bernard Shaw has a wonderful quote with which I will end: “If the governments devalue the currency in order to betray all creditors, you politely call this procedure “inflation.””

Which Deficit, What Debt, Social In-Security

You would have to have had just crawled out from under a rock to not be aware of our Federal Debt, Deficit, Debt Ceiling and credit downgrade by Standard & Poor’s. Most of us know things don’t look too good.

It doesn’t help that our federal budget is fiendishly complicated. The Founding Fathers weren’t very good accountants, more “big idea” guys. The Constitution was pretty sloppy about financial reporting; Article 1, Section 9, Clause 7 just mentions informing citizens about revenues and expenses “from time to time.” Politicians of all stripes have taken this vagueness to heart and exploited it often. I reference Henry Kissinger’s poignant quote: “90% of politicians give the other 10% a bad reputation.”

Not until 1921 did legislation finally mandate an annual budget to be submitted to Congress by the President; and the Office of Management and Budget and the Government Accounting Office were created. Congress stayed pretty much in the dark financially until 1974; the “Congressional Impoundment and Control Act” brought into being the Congressional Budget Office (“CBO”).

Social Security from its formation in 1935 until 1968 was treated as a separate budget (wonks today call this “off-line”). Starting in 1969, the Nixon administration adopted the recommendations of the “President’s Commission on Budget Concepts” and changed this policy to a single “Unified Budget” bringing the Social Security surplus “on-line.” This is actually where a lot of mischief started. The old accounting system would have showed the budget in a deficit of $500 million; the Unified method, absorbing the Social Security surplus, showed a $3.2 billion aggregate surplus.

Not to bore you with too much history, but Social Security went back “off-line” in 1983 as recommended by the Greenspan Commission. In 1985 it became a confusing hybrid as a result of the “Balanced Budget and Emergency Deficit Control Act” (Gramm-Rudman-Hollings “GRH”), staying “off-line” in the Budget but schizophrenically allowed in the calculations of the Debt, thus reducing it on paper. In 1990 the “Omnibus Budget Reconciliation Act” repealed the ability to use the Social Security surplus in calculations of the Debt and Social Security went “off-line.” And legislatively this is where we sit today. Confused?

Unfortunately presidents since 1990 have presented the Federal Budget in a Unified format to press and public. The off-line revenues (payroll taxes) and expenses (benefit payments) of social security (and its surplus) are shown grouped with other on-line items with the effect of underestimating the Deficit. In the ten years to FY2010’s budget, this has understated our annual deficits for this same ten year period (2000 – 2010) by almost $1.8 trillion (the Unified deficit for the period was $4.4 trillion, the “on-line” deficit without the social Security surplus was $6.2 trillion).

In a further sleight of hand, administrations began to talk up the concept of “Debt Held by the Public” (politicians say that’s the “real” Debt) as the more meaningful statement of our Debt, rather than our Total Debt. Total Debt includes “Debt Held by the Public” and “Intergovernmental Debt,” amounts owed to one department of the federal government to that of another. Here the logic starts to break down. Our government reports a lower Deficit by absorbing the Social Security and other trust fund surpluses; but then does not count these “IOUs” in reporting our Debt.

Here is an analogy to bring home my point. Suppose I had a 401K with $100,000 in assets, but was continually getting myself into financial trouble. Out of desperation, my plan sponsor lets me borrow the $100,000 from my account to pay for my current spending, which I could not pay for with my current income. But when a friend asks me at dinner about retirement, I confidently reply that my 401K has $100,000 invested, not mentioning the loan. This is the present state of the Social Security Trust Fund; nominally $2.6 trillion, its net value actually zero, since it has been loaned to and already spend by us to cover current expenditures.

We shouldn’t get reports in this fashion; the press should “call out” our elected officials and demand more honest numbers. Our Total Debt as of July 2011 is $14.3 trillion; $9.8 trillion owed to the public, $4.5 trillion owed to various federal trusts (the largest of which is Social Security, $2.6 trillion).

By as early as 2015, annual revenues versus outlays for Social Security will become negative as more Baby Boomers retire. It is my prediction that politicians will then start to argue that Social Security should go “off-line” once again.

Moderates Revolt!

I wanted in this post to propose a revolt: a “Revolt of the Moderates.”

Watching the Debt Ceiling food fight among the Democrats and Republicans, the White House and Congress, and Fox News and others has caused total frustration. Before I continue, I want to briefly shed some light on the history of political parties and some interesting new research from Pew.

First, look at political parties. Our constitution doesn’t mention them, Madison and Hamilton each in their own way voiced concerns about them. George Washington was never officially committed to one, and remained stubbornly non-partisan through elections and his tenure as our first president. The Republican and Democratic Parties of today seem strong and timeless; integral to the process. A look at history sees them in a more transitory way. Political scientists see five or more distinct party phases that have come and gone in America; with names such as Whigs, Federalists; even the now oxymoronic “Democratic-Republican” Party of the early 1800’s. Our current configuration roughly began in the Thirties with the introduction of the New Deal. So parties aren’t at the core of our politics, although their most partisan voices now control almost all of the debate.

Second, I mention The Pew Research Center’s “2011 Political Topography” report. Its fifth since 1994, the research goes deeper than the traditional “Red-Blue” two-dimensional concept, and provides a more granular and politically useful view of the populous. The study creates a spectrum of nine cohorts positioned into four groups: GROUP 1 – MOSTLY REPUBLICAN: “Staunch Conservatives” (percent of public, 9%; of registered voters, 11%), “Main Street Republicans” (11%, 14%); GROUP 2 – MOSTLY INDEPENDENT: “Libertarians” (9%, 10%), “Disaffecteds” (11%, 11%), “Post Moderns” (13%, 14%); GROUP 4 – MOSTLY DEMOCRATIC: “New Coalition Democrats” (10%, 9%), “Hard-Pressed Democrats” (13%, 15%), “Solid Liberals” (14%, 16%); and finally GROUP FOUR – BYSTANDERS: “Bystanders” (10%, 0%). This framework allows one to break out of the current winner-take-all contest between Conservatives and Liberals. It is an excellent read, and goes into the demographics of each. (See http://people-press.org/2011/05/04/beyond-red-vs-blue-the-political-typology/ ).

If you examine the wonderful insights of Pew Research, the extreme positions, left and right, represent at most 23% ( less than 12% at each extreme) of the populous, 27% (less than 14% at each extreme) of the registered voters.  Unfortunately, Republican and Democrat candidates alike only survive the primary gauntlet by making promises to these zealots, and this should stop.

I had been pondering a solution to all this when I read Thomas Friedman’s Op-Ed piece in the NY Times on July 23^rd titled “Make Way for the Radical Center.” Friedman mentions a new group, “Americans Elect” (See http://www.americanselect.org/ ).

As he writes in his column:

“The goal of Americans Elect is to take a presidential nominating process now monopolized by the Republican and Democratic parties, which are beholden to their special interests, and blow it wide open — guaranteeing that a credible third choice, nominated independently, will not only be on the ballot in every state but be able to take part in every presidential debate and challenge both parties from the middle with the best ideas on how deal with the debt, education and jobs.”

Check it out. This might finally be a way for a virtual mainstream party to break through the tortured maze of the states’ arcane rules for getting on the ballot. I think “Americans Elect” could be a positive force.

Not One Dollar More!

I’m somewhat confused in our current debt ceiling drama. Republicans ask how Obama and the Democrats could be so out of touch with America and its economic frailty to propose tax increases. They are dug in around the rallying cry: “not one new dollar more in tax revenue!”

Yet in the same speeches Republicans also say what is necessary is to cut public spending vigorously to reenergize the economy. Don’t they know that if you are worried about a fragile economy, then any move that reduces private consumption places more pressure on a recovery? Raising tax or reducing spending provides the same result. If one is bad, so is the other; their policy effect is near identical.

Why don’t Democrats point this out? And while they are at it, Democrats should also dispel this notion that we’ve been overtaxed of late. In 2010, federal tax receipts were 14.9% of GDP, 3.1 points below the forty year average (1971 – 2010) of 18%; while federal spending was 23.8%, 2.8 points above 21%, for the same forty year period. Tax collections as a percent of GDP were 17% below the forty-year benchmark; spending 13% above; so about the same deviation.

So the problem isn’t one sided; we spent too much but we also collected too little.

With these facts in hand, a sane citizen would conclude the proper fix is to balance both spending cuts and increased tax collections together; and to do it quickly, since the August 2 deadline is fast approaching.

This is not the Republican conclusion. Since they aren’t stupid, I therefore conclude they are dangerously using the debt ceiling as a disingenuous and partisan pry bar in their pursuit to unseat Obama in 2012; shameful.

Tax Expenditures?

As I wade through all the budget rhetoric of late, a term keeps popping up: “tax expenditures.” Unfortunately, a citizen would be wrong if he or she assumed these were expenses paid with our taxes. Tax expenditure is actually wonky jargon for the opposite.

It is actually tax revenue that is not collected through the provisions of our tax laws that allow deductions, exclusions, or exemptions from a taxpayers' taxable expenditure, income, or investment, deferral of a tax liability, or preferential tax rates. Don’t get a headache; think loophole, but not corporate perks or private jets variety. Here are some commonplace examples: the largest is employer contributions for health insurance and care ($184 Billion), in second place, the deduction of home mortgage interest ($96 Billion), and in fourth, 401K Plans ($68 Billion). For FY2012 the CBO has identified 137 “tax expenditures” and they add up to a whopping $1.2 Trillion in federal revenues forgone. To put this in perspective, the total forecast collections of the federal government for the same period are $2.6 Trillion. Thus, the deductions, credits etc. are not small potatoes; they represent almost 50% of what the net collections are.

It’s easy to see how we got here. If you are a politician with a position that you would like to promote, it’s much easier to sell us on the idea of a deduction or a credit than to tell us that we are going to have to actually pay for your priority.

Let’s look at something close to home: the mortgage deduction. This tax expenditure is regressive and expensive, what is sometimes referred to as an “upside down subsidy” because it helps the relatively well off to reduce their taxes. Much academic research suggests that it does not promote home ownership, instead encourages households to acquire bigger mortgages and larger homes. At some point it might have been a good idea, but how do you withdraw the benefit? Multiply this dilemma 137 times and you start to understand the mess we are in.

A more perverse aspect to this is “tax rate inflation.” Because so much income has a tax preference, what’s left must be taxed at a higher rate in order to raise the required revenues. As rates increase, tax avoidance behavior becomes more rational, adding yet another drag on productivity.

We need more debate about “tax expenditure,” and how we can wean ourselves off this dangerous drug. We need to jettison the confusion in favor of low rates over a much broader income base.