Happy New Year to followers of the Ownership Society! I look forward to a robust year of consensus-building around our three objectives: reduce income inequality, increase personal freedom, and solve the fiscal crisis. President Obama is expected to bright line income inequality and the lack of economic mobility as social priorities in his State of the Union address next week. The issues should drive public debate through the 2016 Presidential election. I quantify the ‘State of Our Government Dependence’ in this post and submit that the solution is more educated workers who own assets which can appreciate over a long career.
The chart below makes the point. Let’s assume a US worker earning $52,000 in 2013 median household income could invest his/her annual inflation-adjusted Social Security and Medicare tax payments into a personally-owned and directed, government administered savings account that owns a low cost stock index fund that tracks the S&P 500 or Russell 3000 performance. That invested amount is roughly $8,000, or 15.3% of income which includes the 7.65% employer contribution (2014 Social Security tax rate). Let’s assume this stock index fund generates an annual 7.5% gross and 5.3% real return equal to historical averages over the next 30 years. The worker’s retirement account value would be $1.045 million in 30 years or $544,000 in present value terms using 2.2% discount rate for inflation. That amount represents a secure retirement for the average income family. Instead today, workers pay taxes into an unfunded entitlement program in which government spends that money to pay today’s beneficiaries and whatever is left on other spending needs. What do today’s taxpayers receive for Social Security? A paper IOU from Uncle Sam.
The reason for the President’s sudden focus on the issue is a direct consequence of the Federal Reserve’s printing, with his full support, of $3.8 trillion (24% of GDP) over the last four years (6% GDP/year) to inflate the economy. The Fed has purchased $1.5 trillion of troubled home mortgages bailing out commercial banks (without any compensation) and another $2.3 trillion of US treasury bonds to pay federal bills and fund the historical $1.0+ trillion deficit. The Fed has been very successful inflating financial, home, and commodity asset prices to all time highs in 2013. And through no fault of their own, the net worth of asset owners are at all time highs. The simple economics lesson here is people who own assets become wealthier when asset prices rise. The solution to remedy income inequality and economic mobility is not to blame and tax wealth creators and asset owners. The solution is to have more asset owners on Team USA, Inc. who care about economic growth, limited government, and personal freedom. Workers can’t easily create wealth when their retirement and Medicare tax payments pay government bills today. The government is investing nothing today for their retirement, nor should they.
The way forward starts by reducing Americans’ dependence on today’s unfunded entitlement programs and taking direct ownership in the fruits of their labor, a true birthright. A relevant measures: a May 2013 Gallop poll suggests only 52% of Americans own stocks and a July 2013 Census Bureau report suggests 64% home ownership. According to January 1st USA Today story and January 22nd Fox News poll, roughly 74% of Americans feel the economy is still in recession. With the exception of certain high tech growth markets, there has not been any appreciable increase in wages and benefits, or general employment levels outside of government jobs. Only asset owners have experienced financial gain, but most understand the gain is derived from Fed stimulus not underlying economic dynamism. 2013 stock market appreciation was from valuation expansion, not earnings growth. This means the Fed’s money printing to keep interest rates low left only the stock market as an attractive place to generate a meaningful return in excess of inflation rate.
I developed the following ‘State of Government Dependence’ chart, which suggests up to 81% of the US population (255 million Americans) receives some benefit from federal government. Benefits include Federal Reserve purchase of troubled collateralized mortgage obligations (eg troubled home mortgages), and Fannie Mae and Freddie Mac home mortgage guarantee; Medicare, Medicaid, and Social Security; and recently government guaranteed student loans. There is certain to be some double-counting in the 81% number so please look at the table itself.
My analysis suggests America today has a $24 trillion national obligation from government guarantees. On the asset side, there are $9 trillion in US bank deposits (not all US-owned); $18 trillion of stock market value (not all US-owned), and about $4.5 trillion in US-owned Treasury securities. In addition, according to on-line real estate firm Zillow.com, there is roughly $25 trillion in US housing stock value or $12 trillion in net equity value after deduction of $13 trillion of home mortgage debt (Federal Reserve December 2013 home mortgage debt report). In total, there are $43 trillion of US-based assets (again not all owned by US taxpayers) to backstop $24 trillion in a growing state of government dependence. 56% debt/assets ratio…not healthy for America, Inc. The national debt/household is roughly $139,000 and the total government obligation is $214,000/household when compared to median household income of $52,000. The government obligations are growing right along income inequality. Equally troubling is the average retiree today depends on Social Security for 70% of their monthly income. This March 2012 AARP survey suggests 52% of retirees depend on Social Security for up to 90% of their income. This 2013 Employee Benefit Research Institute Retirement Savings survey suggests only 57% of current workers are saving for retirement mainly through work-based 401(k) programs and 76% of those saving have less than $100,000 in their account (66% with less than $50,000) excluding home equity.
There are three inter-dependent solutions: 1. All Americans need access to high quality education starting at pre-K; 2. All employers need more incentive to create jobs in America and share ownership with workers; and 3. All workers need ownership in their labor so they can enjoy compound capital appreciation over their career.
1. Education: We must end education discrimination immediately in which children are locked into a local public school by virtue of their zip code. My Proposed Solution: Education includes school choice with means-tested vouchers; freedom to hire and fire without regard to tenure; federal tax waiver for first $100,000 of household income for K-12 teachers especially in districts needed most; and public-private education trusts to reward high performing schools and teachers for improving poorest performers and achieving best practices in top schools.
2. Work: Proposed Solution: Work. Government must reward business owners to cooperate with labor out of natural enlightened self-interest by waiving capital gains taxes on stock sales to employee ownership programs or 20%+ owned employee businesses; accounting for all stock options as qualifying options; and offering interest-free ESOP debt if paid through taxable income growth. Instead of paying capital gains taxes to government, let businesses transfer wealth to the people working hardest to generate taxable wealth for their business, community, state, and country: their workers!!
3. Retirement: Proposed Solution: Retirement. Just like Sweden, Americans should be mandated to invest pre-tax social security taxes into a personally-owned and controlled, and government administered retirement fund that could also pay for Medicare premiums at the time. 15.3% of their income up to $117,000 could be invested in federally-qualified equity, bond, or money market funds which can appreciate over a long career and allow the worker to retire free of government. Individuals could have the option to invest in separate non-regulated 401(k) accounts as we have today. There is general public consensus that Americans older than 55 could keep their current benefits and those under 55 could join this new program. Let’s do it.
4. Fannie/Freddie reform: The current government guarantee confers roughly 60-100 basis points of interest rate savings on a 15-year home mortgage (depends on credit scores). In all cases, I would require all new Fannie/Freddie-backed mortgages have a 20% downpayment and ensure existing mortgages conform to the requirement (in other words, no home equity loans that would reduce equity below 20%). Going forward, I would means test new mortgages for coverage to 150% of the poverty level. For existing mortgages, I would accrue the risk premium of 60-100 basis points based on credit score and pay back to federal government out of sales proceeds as a tax recovery. 60-100 basis points on today’s $6.3 trillion government guaranteed mortgage market would generate $37 to $63 billion of annual new tax revenue. This would only be paid upon sale of home out of net equity value. Homeowners could always sign a waiver to opt out of the government guarantee and accrued tax.
5. Federal Reserve purchase of troubled collateralized mortgage obligations. The Fed simply printed $1.4 trillion and whitewashed the balance sheets of several large US commercial banks without any compensation for eliminating the risk when no other buyers were available. Now that banks have recovered to substantial profitability, Congress should craft a law that applies the equivalent of a retroactive insurance premium charge payable after the banks meet Tier 1 capital ratios. Americans would feel much better that banks and their executives are not getting off free of charge.
6. Student loan reform: The government should not guarantee student loans, but make student loan repayment much easier. First, loan repayment could be tax-deductible. Employers could receive federal tax credits up to capped amount/year for year-end matching to employee loan repayment amounts, sort of like a 401(k) matching contribution. Universities could ask students to work more hours on campus for tuition relief.
The key to economic mobility is to be qualified for a good paying job in a growing economy with a government that materially rewards work and capital investment, the two drivers of taxable wealth generation. Requiring entitlement taxes to pay for unfunded IOU programs; mandating and publicly subsidizing new health insurance entitlements at costs and to people who may not need them; adding new business regulations; encumbering interstate commerce; supporting today’s public school monopoly; and rewriting bankruptcy laws by executive order to serve political supporters vs business lenders (GM bankruptcy) all damage economic mobility because capital has less incentive to invest in productive workers business by business, community by community across our great land.
The Ownership Society demands government by, of, and for the people which upholds are two most sacred natural rights: the exercise of free choice in all aspects of life and the ownership of the fruits of our labor. Ownership is the social organizing principle of a truly free people. It’s a hard litmus test of freedom and our genetic birthright. President Obama, the State of the Union is weak and getting weaker because too few fellow Americans are on board Team USA. I submit the Ownership Society is the solution to create a sustainable, prosperous society enjoyed by all.