Generations@Work

“Recession fighting measures will help if they come quickly experts say, but there is disagreement over which policies would have the greatest impact.” This is the lead sentence from the Jan 19th Times under the headline “Economists Debate the Quickest Cure.” Below this story is another, with the headline “Bush Proposes $145 Billion Plan to Spur Economy.”

That was Saturday morning. It’s now early Tuesday evening and the economic turmoil felt last week has taken an ominous twist as financial markets worldwide appear to be in free fall. Early morning selling pressure had the Dow down 467 points until the Lone Ranger (Fed Chair Ben Bernanke) rode into town wielding a .75% interest rate cut. To put this in perspective, this would be like Warren Buffet showing up at the World Series of Poker and pushing $30 billion in chips across the table. You’ve gotten people’s attention, but it’s still gambling. If this doesn’t work there is little else the Fed can do in the near term short of having Ben stand at the top of the Fed Bank in NYC throwing piles of thousand-dollar bills off the rooftop.

So now the drama switches to Washington where today several members of Congress said in essence, ‘we need something and we need it fast’. I’m paraphrasing.

Well, this is another fine messs you’ve got me into Ollie! What to do? What to do?

Just a week ago, I published my first post on ‘Gen-Omics.’ How timely. In light of this past week’s economic events - the Dow’s 4% decline, the $10 billion quarterly loss reported by Merrill Lynch, the announcement of weak job growth and worse-than-expected news on holiday retail sales - not to mention Bush’s groveling in Saudi Arabia in an effort to get the “leaders” of this neo-medieval monarchy to agree to pump more oil and bail out Wall Street, the announcement of rising wholesale and consumer price indices and the related weakness of the dollar (I could go on), this wasn’t the best week for our economy.

So, let’s do some applied Gen-Omics. Here’s a quick reminder of the basic national income model:

Y = C + I + G + X - M

The fear, of course, is that Y (total income) is falling or will be soon. Actually, that may be a bit of understatement. There are some folks saying Y isn’t just falling, but is in a full-on swan dive. People are talking about the early ‘80’s all over again, or perhaps the return of ‘70’s-era stagflation (rising prices + rising unemployment) largely due to skyrocketing energy costs. In economics terms, this is “human sacrifice, dogs and cats living together, mass hysteria!” And who we gonna call? Not Bush. In fact, the man should just shut up and go away! Our President hasn’t blessed us with a sneak preview but in all likelihood he is going to tell Americans just what he told them after 9/11: go out and shop! Take the family to Disneyworld. Don’t worry, be happy! Simple Simon is going to give middle and upper-middle class folks a few hundred bucks so the peasants can go to the fair and buy stuff they cannot afford, most of which won’t have been made here!

Some stimulus. I can hear the cheers in Shanghai already.

Here’s a Gen-Omics snapshot. Thinking in generational terms I would propose to give:

• The Silents mostly get an income boost

• The Boomers get some tax relief depending on their tax bracket

• Gen X’ers get tax relief + target consumption incentives + lots more

• Millennials (Gen Y) get ed loan relief + jobs and job training + lots more

George, Harry, and Nancy will likely wind up taking care of the folks who have “lost wealth in the real estate and stock markets plus something very modest for the unemployed. The long held consensus in DC and on Wall Street is that you have to make it look fair but most of the “relief” goes to those who save and invest: in Gen-Omics terms, the Silents and the Boomers.

My stimulus plan targets all four generations.

The Silents. Most of these folks are retired. They live on social security, perhaps a pension (if it hasn’t been taken away), and some personal savings, much of it invested in the market. Yuuucccccckkk. While many of these folks will ride out this storm, I would still propose to give them, particularly those who are living mostly on social security, a boost by immediately adding some dollars to their social security check. How much? As with the rest of this framework for a stimulus, the numbers will have to wait. Suffice it to say it should be enough to cover rising energy, food and medical costs. By using the consumer price index (CPI) these discrete components should be calculable and these funds should be added to the base, plus the current cost-of-living adjustment. Why? Because the total CPI in all likelihood understates the rise in these items’ cost due to the fact that the market basket of goods used to calculate the CPI includes a lot of things poor seniors do not buy. They buy the basics, and the basics are getting harder and harder for the elderly poor to afford.

The Boomers. This bunch is tough for a variety of reasons. First, this is the generation that profited most from the tech and real estate bubbles. It’s also the generation that blessed us with nearly two decades of uninterrupted corporate scandals. Some in this generation make the Robber Barons look like Boy Scouts. In purely historical terms, the Baby Boom generation may be remembered as the most corrupt generation in American history when it comes to absconding with the cash.

Hard to feel sorry for this group. Take the average Boomer who bought a house twenty or thirty years ago for $50,000. They saw the value of this house rise exponentially, then borrowed several times against this equity to buy securities at a time in the 1990s when real interest rates were negative (less than 0%), thus spawning the dot-com bubble; and so, here they sit, twenty years later, lamenting that their “wealth” is now declining. That house that they bought in 1989 for $50,000 is now only worth $600,000, down from $700,000 last year. And the stocks that they bought in 1996, when the Dow was at six thousand, are now worth only twice their original value.

Weep not for the Boomers - at least not many of them. Not every Boomer struck it rich. Some went into teaching, social work, environmental preservation, advocacy law or nursing. Millions once worked in manufacturing but never got off the mat after the body blows the manufacturing sector took during the 1980s and after. For the sake of these Boomers, some type of income tax cut is appropriate, but it should be capped at households making less than $200,000 a year. Sorry Bill Gates.

I would also give the Boomers an additional tax credit, over and above the current credits, if they were to trade in their SUV’s in favor of hybrid vehicles assembled in the US. This is the SUV generation. Their profligate spending on gas guzzlers made us more oil-dependent. Now it’s time for these wide bodies to get their asses out of such energy hogs and into something that won’t destroy the economy and the planet.

Gen X’ers. Okay, here’s where the real stimulus begins. Gen X’ers are major consumers right now and they can buy what we produce with a few incentives! This will take a minute, but if you’re still reading at this point, I figure you’ll stick with it.

The youngest Gen X’ers are in their late twenties, the oldest in their mid forties. There are a lot of single person households in this generation, but they and the rest of their generational peers are at that age when demands on income are most severe. Gen X is the generation having kids, buying homes, motor vehicles, appliances and other durable goods that put people to work. While some in this generation have been able to accumulate considerable wealth, most Gen X’ers were too young to take advantage of the real estate bubble and are thus the households living paycheck to paycheck.

The objective here is to spur the consumption of durable goods (those typically lasting three years or more). More durables are made here in the US, thus greater demand for items such as new homes, motor vehicles, and “white goods” (appliances) benefits our economy. How would I do this? I propose that we increase the home interest mortgage deduction and restore the long-since-gone interest deduction on new motor vehicles. Again, though, only motor vehicles assembled in the US (I say ‘assembled’ because every vehicle on the road has some parts made abroad), and only those motor vehicles that considerably exceed current CAFE standards. If this recession is as severe as some predict, it could mean the end of Ford, Chrysler or both. Michigan and the upper Midwest do not need any more bad economic news. Dysfunctional though they may be, Ford and Chrysler are pillars of our economy, employ thousands of American workers, and must be saved. Such demand-stimulating policies might do the trick.

What else for Gen X? I assume many Gen X’ers are still paying off government student loans. An immediate moratorium on student loan payments, lasting for at least a year, would help (more to come on this subject later).

Finally, I would double the dependent tax credit. The cost of raising a child today bears no resemblance to the federal tax credit for dependents. If we as a society really want to express ‘family values,’ we should express them in our tax code.

Gen Y (the Millennials). Like the Gen X’ers, there is much that can be done here to provide an economic stimulus plan crafted to generational realities.

A lot of what I propose for this generation revolves around education. This generation is pursuing higher education in record numbers. My previous post pointed out that this investment in our society’s human capital has largely been paid for individually and at a staggering price tag (read: stratospheric student debt). So, as with the Gen X’ers, I would grant an immediate moratorium on debt repayment on government-financed student loans for at least twelve months. But what about the billions in private student loans that have been so profitable to banks over the years? We cannot further destabilize the financial sector, hence, I propose a tax credit to young workers equal to the annual amount of education related debt repayment. For a lot of working Millennials, this would translate into a bigger tax rebate. That’s the point. Use the tax rebate to pay the monthly student loan and thus have more money to buy other consumables.

What about the young Millennials who have yet to hit the campus? The higher education system is about to be flooded by the largest number of Millennials yet, as seventeen and eighteen-year-olds represent the largest cohorts within this generation. If parents are losing their jobs, along with equity in their homes and their investments; if grandpa and grandma are now worried about how they are going to pay the utility bills, a lot of Millennials may find themselves having to forego college for lack of a means to cover tuition. These same young people will not be able to find jobs at a time when the unemployment is climbing steadily. This is a prescription for personal and social disaster. Government has to act, and act fast.

First, federal support for education through PEL grants and student loans must increase significantly – now! High school seniors, and others, are poised to make important decisions about their education over the next few months. No young person qualified to go on to some form of higher education should be denied on the basis of affordability. Not one.

Second, Federal aid to states needs to increase. I would target this aid in part by mandating that some percentage of it be applied to the costs associated with public community colleges and universities. Tuition at four year state colleges should be frozen at the state level, and the added costs should be made up with federal aid. The tuition at community colleges should be cut in half in every community college in America, starting with the fall semester. The money that would have accrued to states in the form of student tuition should be made up by the federal government. In addition, every student admitted to a community college should receive a loan, given directly to the state and monitored by each community college for student academic performance. If a student receives a loan indirectly through the state and does not complete the degree program, that student will repay the state in the form of future wage liens.

Support for young people should not stop there. Federal funds for organizations like the Peace Corps, Americorps, City Year, and Job Corps should be immediately and significantly increased. How much longer must we wait before the federal government musters the will to fund a real investment in urban and rural energy conservation, weatherization and rebuilding national infrastructure? Young people who run afoul of the law by committing minor offenses should be obligated to do public service in such programs. They should include on-the-job training in the basic skills associated with retrofitting residential and government buildings. For those who need it, this on-the-job training should include remedial adult education. Upon completion of time in a public service/energy conservation program, those young people who did not complete high school should have completed their GED and a job readiness program and/or should be ready to go on to a two or four your college or university.

I’m not done yet. The long term economic health of our nation will ultimately depend on the quality of entrepreneurship and the innovativeness of the Millennial generation and young Gen X’ers. But where will young entrepreneurs find the capital they will need to start or expand their businesses? We are in the throes of a major credit crunch and liquidity crisis. Undoubtedly tens of thousands of young entrepreneurs are going to be denied the credit financing they need to start or grow their businesses. The loss to our economy in the near term, but more importantly in the long term, is incalculable. The Small Business Association should aggressively target young entrepreneurs providing them with the capital they need while applying the same prudent business review practices that I assume they employ now. If the SBA needs additional capital to fund legitimate business loans, it should receive it from the federal government.

Finally, young Millennials would receive the same mortgage interest and auto loan interest benefits as those provided to Gen X’ers.

By now, if you’ve actually read this far (and thank you if you have), you are asking yourself how the hell we are going to pay for all of this. My answer: repeal the Bush tax cuts for the wealthiest Americans and impose a windfall profits tax on oil companies. I can hear the supply-siders roar. They will say that this is exactly the wrong thing to do. Of course, I would ask them, ‘where were you when we were spending more than a trillion dollars in an ill-fated military adventure?’ But that is not the answer, really. We have been neglecting our human capital and infrastructure needs for twenty-five years. Further, recessions do harm the economy in both the short run and in the long run. Notice, I am not bailing out the banking industry, or the airline industry, or any other industry. I am proposing a stimulus plan that targets consumption in a very precise way using the idea that generations have very different needs and consumer habits. I am also proposing a stimulus package that spurs production here in the US, especially on those consumables that will begin to reduce our consumption of $100-a-barrel crude oil.

How would I address the charge that all of this spending could exacerbate the already serious inflationary pressures building in the economy? A lot of this pressure is coming, as it did in the 1970’s from skyrocketing energy prices. The only way to address this issue is to finally implement a serious energy conservation and alternative energy investment strategy. If we wait until the time when we are “fiscally sound” again, we may wait years. Thus, many of the core economic problems - in particular our insatiable appetite for oil - will go unaddressed and our economy will continue to bleed.

Let me be clear; this will involve sacrifice. In the near term, we will continue to pay more for oil. If inflation is essentially a hidden tax, we will have to pay it and hope that such costs would give us the necessary motivation to detoxify our economy from its addiction to foreign oil. Going through detox is never fun, but it is something through which we will have to suffer.

Will the world stand by while we go into detox? By this I mean, will those who now hold dollars be patient if prices rise putting even more pressure on the dollar? I do not really have an answer for this one, other than to say that we will need to undertake a major diplomatic initiative to convince the rest of the world that this time we are serious about reducing crude oil imports. And in this case I think actions speak louder than words. Included in such an initiative should be specific and realistic targets for reducing oil consumption enough to ease pressure on oil prices, thus dealing with the primary culprit that drives fears of inflation.

It has now taken you more time to read this post, if indeed anyone made it to this point, than it took Bush to announce his intention to propose an economic stimulus plan. But if anyone out there, particularly in DC, were to begin the apply a little Gen-Omics they would quickly realize that when it comes to saving our economy from calamity it will take more than the simple minded, one-size fits all economic rhetoric that is now pouring out of Washington and the campaign trail.

So let me ask you. How would you keep our economy from going over the cliff? Does Gen-Omics help you think a bit more creatively? I hope so.

This entry was posted on Wednesday, January 23rd, 2008 at 6:47 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.