David Cameron's "Big Society"

I found this New Yorker magazine article fascinating: "All Together Now!"
The topic is Britain's new conservative Prime Minister David Cameron, and his plan to solve the country's budget woes by having average people pitch in to help in small ways with things the government can no longer afford to do. Say the government can't afford to keep a playground well-maintained-- his concept is that local residents would get together in some sort of committee and assign each other tasks like raking, sweeping, painting, etc.

The article points out all sorts of weirdnesses to this-- why is a Conservative politician championing collective labor that sounds like it belongs in a Communist country? How does the Government expect to just totally back off from responsibility and not even provide any funds for getting these community schemes set up? Who's going to take charge of these local programs, and do people really want it to be the neighborhood busybody with too much time on his hands?

There's something to be said for the "niceness" of community participation but a lot of people just don't want to deal with the reality of it. As one man comments, more or less, he doesn't have time and prefers to pay other people to do this stuff-- the payments are called "taxes," and the "other people" are called "the Government."

But here's what didn't come up in the article that I'm curious about. Many of the the sorts of things the Government is looking to crowd-source are the kinds of programs that don't even get a lot of public funding in the US, like arts programs. Here, they get a lot of funding from rich people who want nothing more in return than social prestige and the satisfaction of doing something for others, and often, their name etched in stone on some building.

Why is David Cameron trying to get all the "little people" to volunteer to rake parks instead of getting a billionaire to pay the salaries of park-rakers in exchange for some warm fuzzy feelings and a bench with his name on it? Perhaps that sort of thing just doesn't play as well for P.R., especially in a country like the U.K., which has such long-standing class issues. Cameron is from the upper class himself, so I suppose he thinks he has to take this "we're all in it together" attitude rather than a top-down approach... but it doesn't sound very efficient to me.

It's not that I think the answer is for everyone to live off the charity of rich people whose whims dictate what services and enrichments the rest of us are allowed to enjoy. We'd probably end up with free eco-friendly dog-grooming salons on every corner (of terribly pot-holed roads) in some states, and free gun-shooting lessons for toddlers (but no public K-12 education) in others. As far as I'm concerned, taxes and government and elections are a pretty good way to provide the basic standard of living we've all come to expect as Americans living in the 21st century, with some private funding icing the cake. But I do wonder why the U.K. seems to have such a different approach to these things...

My Stimulus Tax Cuts

Did you get a tax cut in 2009? No? Are you sure? According to this article, a lot of people don't realize they got a tax cut: From Obama, the Tax Cut Nobody Heard Of.

At Pig Pickin’ and Politickin’, a barbecue-fed rally organized here last week by a Republican women’s club, a half-dozen guests were asked by a reporter what had happened to their taxes since President Obama took office.

“Federal and state have both gone up,” said Bob Paratore, 59, from nearby Charlotte, echoing the comments of others.

After further prodding — including a reminder that a provision of the stimulus bill had cut taxes for 95 percent of working families by changing withholding rates — Mr. Paratore’s memory was jogged.

“You’re right, you’re right,” he said. “I’ll be honest with you: it was so subtle that personally, I didn’t notice it.”

That was kind of the point: economists hoped people would be more likely to spend small amounts of money they got each month, as opposed to a lump-sum payment that they might just sock away in the bank. Whether or not that strategy was right is debatable, but politically, an invisible tax cut doesn't help the current administration's reputation.

I did realize that something was going on with my taxes because I had to adjust the repeating paycheck deduction transactions I enter in Quicken, but I'd never stopped to think about how much it came to. I just checked: in January, February and March of 2009, I was having $935.56 in Federal taxes withheld from each paycheck. After the Obama tax cut kicked in, that dropped to $891.14 in April 2009 and beyond, a decrease of $44.42 per month, or 4.7%. It's hard to calculate the total effect for all of 2009 because I maxed out my 401k before the end of the year, and of course taxes withheld are not the same as actual taxes paid after you factor in refunds, but I'd guess it might have totaled a couple hundred dollars in the end. I don't have the energy to dig up my tax returns and do all the math right now, but the actual terms of the tax credit are basically this:

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

More details here.

Compare that to back in 2008, when Bush issued his one-time stimulus checks: I got $19.70.

Neither of these windfalls was enough to make me change my behavior-- I'm fortunate enough to be able to save a good chunk of my income, and my spending decisions are made within an overall sense of what I want my budget to be, and other random factors of whatever I happen to want to spend money on at various times. But if I was living paycheck to paycheck and spending all the money I had, Obama's tax cut would have stimulated consumer spending more than Bush's.

Of course there are much larger debates going on about what's going to help our economy and whether tax cuts are a good idea, who should get them, etc. etc.-- I won't get into all that, but regardless of the bigger picture it's frustrating that so many people either aren't aware of facts or actively spread disinformation about Obama's actions on tax cuts.

Income Inequality

I liked this article from the New York Times: Income Inequality: Too Big to Ignore

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

This part echoes what I've said here myself about the bar being raised for everyone when we're exposed to the spectacle of how the rich spend their ever-increasing wealth:

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

It's to everyone's benefit to have a healthy middle class:

The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.

Ultimately, the article concludes that increasing income inequality doesn't benefit anyone-- the rich people who benefit from it aren't really happier, and everyone below them on the ladder isn't happier, and the costs to society affect us all. This doesn't mean that "income equality" is the goal, as those paranoid about communism and socialism may fear-- there will always be rich people and poor people, but when the division between them grows too out of proportion, we all suffer.

If you want to read more about the negative effects of income inequality, I recommend the book The Spirit Level: Why Greater Equality Makes Societies Stronger.

Bail-out Bankers' Compensation

This is a fascinating-- and infuriating-- article from last Sunday's New York Times Magazine:
What's a Bailed-Out Banker Really Worth?

Here's a few outtakes from this story, which details how Kenneth Feinberg went about negotiating (rather than czar-ishly dictating) compensation packages for top executives at companies bailed out under the TARP program:

Citigroup and Bank of America, for example, concluded that everyone in their executive suites [deserved multi-million dollar compensation packages because they were] above average when compared with peers at other giant banks that didn’t need a bailout. Or there was A.I.G.’s behind-closed-doors argument against Feinberg’s directive to pay its top people in large part with A.I.G. stock. The company’s reasoning? That the stock — trading briskly at the time at around $40 on the New York Stock Exchange — was actually worthless.

How does anyone actually say that with a straight face? "I want my $10 million bonus in cash from the US government, because the stock of the company I'm running has no value!"

Here's another gem:

That Dodd led the attacks on A.I.G. when what came to be called the retention bonuses were revealed infuriates [an unnamed friend of the author's, who works at A.I.G.]. He says that his boss asked everyone at A.I.G. Financial Products “to contribute the maximum to Dodd, because he was so important in Washington in terms of regulating the products we sell.” My friend went on to say: “Before he attacked us, Dodd was in our office” — in Wilton, Conn. — “giving a speech telling us how great we were. And our checks were in envelopes stacked up right there.”

Federal Election Commission filings show 31 maximum $2,100 contributions to Dodd during the last quarter of 2006 from employees of A.I.G. Financial Products. My friend’s former boss, A.I.G. Financial Products’ head, Joseph Cassano, who is listed as giving $2,100, did not return calls to his home, nor did his lawyer return calls seeking comment.

Asked about the event, and about checks stacked on a table, Dodd said: “Yes, it happened. I remember having a fund-raiser there. . . . I can’t finance my own campaigns. I have to raise money,” he added. “But what does this guy think? That if they give me money I have to do what they want me to do? That tells you something about them.”

Of course this sense of entitlement isn't just an issue at TARP companies-- almost all big corporations now operate in this rather closed world where all their top executives sit on each other's boards and reinforce the idea that they "deserve" more and more money:

“The boards of these companies just don’t have an arm’s-length relationship with these executives,” says Lucian Bebchuk, a Harvard Law School expert on executive compensation who advised Feinberg. Board members are frequently executives or board members at other big corporations, Bebchuk explains, and therefore are likely to be steeped in the same entitlement culture. Indeed, they are lavishly paid, too; in 2008, A.I.G. board members earned an average of about $300,000 for their work in 2007, the year when apparently unsupervised trading in toxic financial products destroyed the company.

“No director wants to be the skunk at the garden party,” says Sonnenfeld, the Yale Management School associate dean. “And the headhunters, whose compensation, by the way, is based on how much executives make, won’t pick them for boards if they’re going to be dissenters.”

Which leaves us with this stat:

Over the last 50 years, the ratio of top pay to average pay at public companies has multiplied roughly 11 times (24:1 to 275:1). That’s more pay in one workday for the chief executive than his average employee makes in a year.

Are top executives really working that much harder these days? Are they really delivering that much more value to shareholders? I don't think so, and I just don't understand why more people aren't furious about it. Everyone who holds shares in public companies, in the form of stock or through mutual funds in your 401k, is affected by this-- this is millions and millions of dollars that could be paid out in dividends to shareholders, or invested in more workers and new technology to help the company and the economy grow. Instead, it's going into the pockets of a tiny, well-connected group of people who think they can use that money to buy politicians and elections, not to mention an awful lot of personal luxury (not all of which is necessarily stimulating the economy within our borders).

I have no problem with people getting rich. There will always be a small number of people at the top of the pyramid, and many of them will have done something extraordinary to get there, something that will have provided value to millions of other people, in the form of money or convenience or entertainment, etc. But something is seriously screwed up when executives who have destroyed value, destroyed livelihoods and nearly destroyed an economy still think they deserve to earn more every single year than 90% of Americans will ever earn in a lifetime-- even when their big paycheck is coming straight out of taxpayers' pockets.

The article ends on a slightly optimistic note, hoping, as I do, that there's a way to use the ideas of people like Kenneth Feinberg and Warren Buffett and others to more fairly structure compensation on a broader scale, to appropriately reward good performance and encourage innovation while curbing the kind of risk-taking that leaves taxpayers holding the bag when things go wrong. But a lot of attitudes are going to have to change for that to happen.

Larry Summers on Inequality

From David Leonhardt's 11/26 New York Times column on Lawrence Summers, the former president of Harvard, Treasury secretary under Clinton, and now economic adviser to Obama:

INEQUALITY Mr. Summers has spent much of his career tweaking fellow liberals with arguments he considers unpleasant truths — on the dangers of budget deficits, the benefits of capitalism and other subjects. But he seems to have decided that conservative orthodoxies have become a vastly bigger threat to good economic policy than liberal ones. His favorite argument today is one that instead drives some conservatives nuts.

It goes like this: To undo the rise in income inequality since the late ’70s, every household in the top 1 percent of the distribution, which makes $1.7 million on average, would need to write a check for $800,000. This money could then be pooled and used to send out a $10,000 check to every household in the bottom 80 percent of the distribution, those making less than $120,000. Only then would the country be as economically equal as it was three decades ago.

The lack of middle-class income growth during that span is “the defining issue of our time,” Mr. Summers has said, in a tacit admission that liberals were ahead of him on this issue. He is likely to be front and center in Mr. Obama’s push to reduce taxes on the middle class and create good jobs. Mr. Summers may also push the administration to work with foreign governments to crack down on tax shelters.

Fascinating-- you could reverse this and say that the effect of the past 30 years was equal to the bottom 80% of the country each writing a check for $10,000 and contributing it to a big fund that then was drawn on by the top 1 percent. And just to be clear, the effect of such redistribution would not be to create equality, it would just be the lesser degree of inequality we had 30 years ago.

Of course there will always be inequality-- it's just how things work, and how they should work to some extent. But how much inequality is the right amount?

Here's the Post I Didn't Have Time to Write Yesterday

I'm proud of us.

Vote Today, and Get Free Stuff!

Courtesy of Lifehacker, here's a list of free things being offered to people who vote:

• Ben & Jerry's: Free scoop of ice cream between 5-8pm. Originally, materials stated you'd need some form of proof you voted (like an "I voted" sticker), but current materials just spell out "Free scoops!" (locate)
• Books-A-Million: Free cup of coffee after showing your "I voted" sticker. (locate
• California Tortilla: Free taco for showing "I voted" sticker. (locate)
• Chick-fil-A: "Several hundred" of 1,400 Chick-fil-A restaurants are handing out chicken sandwiches (the kind normally $2.70) to adults with proof of voting. (locate)
• Krispy Kreme: Free star-shaped doughnut with "patriotic sprinkles" (i.e. red, white, and blue) for "all retail customers with an 'I Voted' sticker." USA Today reports that 85 of 231 Krispy Kreme locations will participate. (locate)
• Shane's Rib Shack: A free "Celebrate America Meal"—3-piece chicken tenders, fries, and 20-ounce drink—to the first 300 customers at participating locations, according to their press release. (locate)
• Starbucks: Free tall coffee at "any Starbucks." "Tell us you voted" seems to be the bargaining chip, according to their recent TV ads. (locate)
• Vote & Vax: National project by non-profits to offer free flu vaccinations on election day. (locate)

Hopefully you didn't need these additional reasons to get out there and do it! Happy voting, everyone!

The Candidates' Economic Proposals: IRA & 401k Withdrawals

The New York Times had a good side-by-side comparison yesterday of Obama and McCain's economic recovery plans and tax proposals. It's pretty much reproduced here.

One thing that struck me was that both candidates are proposing to make some changes to the penalties to early withdrawals from 401ks in 2008 and 2009:

Obama:
Temporarily suspend mandatory annual withdrawals from Individual Retirement Accounts and 401(k)s. Current rules require investors to start selling stocks at age 70½. Exempt withdrawals made up to the required minimum amount from taxation. Allow savers to withdraw 15 percent, up to a maximum of $10,000, without paying a penalty as the law currently requires for withdrawals before age 59½. These withdrawals are subject to normal taxes.

McCain:
Temporarily suspend mandatory annual withdrawals. Current rules require investors to start selling stocks at age 70½. Allow savers who are younger than 59½ to withdraw up to $50,000 at the lowest tax rate of 10 percent in 2008 and 2009.

I guess the thinking is that people are hurting and might really need this money right away, and that if they spend it, it will stimulate the economy. But I couldn't help thinking, do we really want to encourage people to spend their retirement savings early? Americans save so little as it is-- 401ks are one of the few things that successfully force automatic savings (once you opt in), and then give a big disincentive to taking the money back out again before you retire, via taxation and penalties. This doesn't strike me as a particularly valuable part of either candidate's overall plans. What do you think?

Vice Presidential Candidates' Finances

Which Vice Presidential candidate is a better personal finance role model? It pains me to say this, but I think it might be Sarah Palin! The tax returns released by politicians may not always tell the full story, but there are some striking contrasts here:

The Palins reported taxable income in 2007 of $166,080, consisting largely of Ms. Palin’s salary as governor. The couple paid $24,738 in taxes on this income, at a tax rate of around 15 percent. But in 2006, the couple reported taxable income of $127,869, which consisted mainly of Mr. Palin’s income from BP Exploration Alaska and an income of less than $5,000 for Ms. Palin from the State of Alaska before she was elected governor.

That year, the couple paid $11,944 in taxes, a tax rate of just under 10 percent.

Yet for a couple with modest incomes, the Palins have amassed a sizable portfolio that consists mainly of retirement investments and real estate.

The family home in Wasilla, which has been valued for tax purposes at $550,000, was listed on the federal financial disclosure form, which requires that all values be given in ranges, between $500,000 and $1 million.

The remaining real estate, valued at between $150,000 and $365,000, consisted of a fishing leasehold on the Nushagak River and partial interest in two other parcels of land.

The Palins kept their taxes low by putting all their investable assets into tax-deferred accounts, including 401(k)’s, I.R.A.’s and defined-contribution plans from Wasilla, the State of Alaska and BP Alaska.

Financial Papers Show Palins' Assets Top $1 Million

Mr. Biden’s tax returns show why he consistently ranks as one of the least wealthy members of the Senate. He has virtually no outside or investment income and pays a substantial amount in interest on his home mortgage.

For 2007, Mr. Biden and his wife, Jill, paid taxes of $66,273 on an adjusted gross income of $319,853, which included $71,000 in royalties from his book. The couple, who file jointly, claimed $62,954 in deductions, including $995 in gifts to charities and $38,712 in interest payments. They earned $99 in interest on savings accounts and nothing in dividends.

Biden Releases Tax Returns, in Part to Pressure Rivals

At least by Senate standards, Mr. Biden does not have to try too hard to underscore his relative lack of wealth. He has long shouldered a heavy debt load; he obtained or refinanced mortgages 29 times since he was elected in 1972, and currently owes $730,000 on two mortgages on his home. In addition, he has had several personal loans, including one for up to $50,000 secured by the cash value of six life insurance policies.

Mr. Biden supplements his $165,000 Senate salary with a stipend from teaching a college course. His biggest boost came a few years ago, when he collected $225,000 in advances for his best-selling memoir. The Bidens have several checking accounts with less than $15,000 each, and Jill Biden’s retirement fund with between $15,000 to $50,000, according to their tax returns and Mr. Biden’s Senate financial disclosure reports. The couple reported virtually no investment income last year, and their largest asset by far was their home.

An Everyman on the Trail, With Perks at Home

I'm glad Governor Palin and her husband seem to be managing their family finances quite responsibly... but I still don't want her anywhere near the White House!

What Does "Main Street" Really Want?

All the usual dichotomies in politics seem to have broken down lately. Republican vs. Democrat, elitist vs. populist, liberal vs. conservative.

One of the reasons cited for the failure of the bailout was anger from "Main Street" that Wall Street tycoons will walk out of this laughing their way to whatever banks are still in business, while the rest of us little guys suffer. But aren't these angry people on Main Street supposedly the same ones who think that higher marginal tax rates were invented by the Anti-Christ? Do you want super-wealthy people to share the burdens of society or not?

If we're worried about punishing the people who created this mess, why don't we temporarily return to a tax structure something like that of the very prosperous 1950s, when a married couple's income after the first $400,000 (the equivalent of about $3 million in today's dollars) was taxed at 91%. Let's make it retroactive for about 3 or 4 years. That would be a nice little slap on the wrist for the big Wall Street guys, and give the government a nice little wad of cash to use for a bailout! And any rich person who wasn't a total idiot would still probably be very rich-- just not quite as rich as before.

Another Link

Paul Krugman's op-ed piece talks about the presidential candidates' definitions of what it means to be rich.

Be Careful What (Or Who) You Google

Have you ever googled an ex-boyfriend or -girlfriend's name to see what they're up to? I just did and got a big surprise-- one of the first things that popped up was a $2,300 donation to Hillary Clinton's campaign.

It's not like I thought "Shorty" was a Republican, but $2,300 is a lot of money to send as an individual donation to anyone or anything, as far as I'm concerned. I didn't think Shorty had such strong political opinions, or so much disposable income!

I also googled Shorty about a year ago-- yes, I'm bad and I'm bad repeatedly! It was even worse last time-- I discovered that the apartment we used to share had been sold for about $500,000 more than we'd paid for it, and Shorty used the proceeds to buy the much nicer apartment upstairs that had the fabulous roof deck we always wanted. Hmph.

Oh well, life goes on and it's not like I begrudge Shorty anything. But if I'd been nursing any resentment about the break-up, news like that would not have helped!