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Jubak's Journal
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5 big questions for the last debate
Promises to grow jobs or protect retirees don't mean much without specifics. Here's what I need to hear from Bush and Kerry on the financial issues they haven't yet touched.
By Jim Jubak
I give up. After months of campaigning and one vice presidential and two presidential debates, its clear that no candidate for national office is going to talk about the economic issues that I want to hear about.
Why? Not because these issues are unimportant or peripheral to the lives of most Americans. On the contrary, theyre even more important than how to stimulate job growth or the future of Social Security. Unless we address the five problems I outline below, we dont stand a chance of coming up with effective policies on the economic issues the candidates are talking about.
U.S. voters deserve the whole economic truth and nothing but the truth from President Bush and Sen. Kerry, especially since were about to vote on who will lead this country for the next four years. Complex issues should be discussed on the stump and in debates, not filed away as position papers that no one ever reads.
So here are the economic issues that I think are most critical to our future -- and that no one is talking about in this election.
Unchecked pork-barrel spending
On Oct. 6, House and Senate negotiators approved $145 billion in tax cuts to fix what they claimed was a $50 billion tax problem. The original goal was to compensate U.S. exporters for the loss of tax breaks that the World Trade Organization had declared illegal and that had led the European Union to impose retaliatory tariffs.
Once again, Congress demonstrated that once it starts spending money -- and a tax cut is an expenditure -- it cant stop handing out the goodies, like $20 billion in tax cuts on foreign earnings, $500 million in tax breaks for railroads and $26 billion in tax breaks for exporters like oil and gas producers who dont export anything.
Reining in Congress isnt impossible. A first step is to get the candidates to pledge to veto pork-barrel spending bills. Without fiscal restraint from Congress and the president, Alan Greenspan and the Federal Reserve wind up with all the economic power that counts. When is the last time you voted for Greenspan or any other Federal Reserve member?
Outsourcing and offshoring of jobs
The demographic logic isnt hard to follow: A 28-year-old worker and a 55-year-old worker who lose their paychecks because their jobs have been sent abroad face very different problems. The younger worker isnt likely to have as many financial obligations as the older employee, and he has a much longer time horizon to make up lost financial ground after retraining, which can take up to two years to complete.
Neither candidate has even broached a plan on how to fill that gap for demographically challenged workers. And that seems a terrible oversight given the rapidly aging U.S. workforce.
The failure of private pensions and health benefits
Fixing Social Security is relatively simple (raise the taxable income ceiling, raise the retirement age, raise the tax rate or lower benefits). Its the government health-care trust funds that are in the really deep red ink.
Thats an especially big problem for the older population, because its those workers who are most likely to have a private, defined-benefit plan. (Younger workers probably never had a defined-benefit plan to begin with and commonly rely on plans such as 401(k)s.) If their private pension plan falters and their payments are reduced or wiped out, the U.S. Pension Benefit Guarantee Corp. (PBGC) will pay a maximum benefit of only $44,386 (in 2004) to workers who retire at 65. It does not, however, pay or guarantee any health-care benefits to retirees.
The PBGC has already been overextended by the steel and airline industries consolidation and bankruptcies, and it was never intended to meet the needs of an entire generation as the country made the tough transition from one type of retirement coverage to another.
The decline of the U.S. dollar
The financial crisis that gets all the attention is the governments $415 billion deficit. Thats a startling figure in absolute terms but, as 3.6% of the Gross Domestic Product, were not in the historical danger zone yet. (The trend is certainly troubling since the government has gone from a surplus of 2.4% of GDP in 2000 to a deficit of 3.6% in just four years. And, mind you, all these figures use government accounting which is, shall we say, creative.)
At 3.6% of GDP, the government deficit is much smaller than the U.S. trade deficit (or the current account deficit, to be precise), which now stands at 5% of GDP. To keep accounts in balance, the United States ships money overseas in exchange for goods, and since the U.S. household savings rate is now a paltry 1.5% of disposable income (down from a high of 11% in 1984), the money that we ship abroad is usually borrowed.
That works as long as foreigners are willing to sell us their things for dollars, but over time, its a good bet that the constant flow of dollars overseas will lead to a cheaper dollar. Some part of the current run-up in oil, which is priced in dollars, may indeed be related to oil producers desire to get more dollars for their oil. A falling dollar makes U.S. goods cheaper for overseas customers to buy, which is how trade deficits eventually get resolved.
But a cheaper dollar also means that U.S. consumers wind up paying more for everything they buy from abroad, whether its oil or computer chips or flip flops. The question isnt whether the dollar will decline, but how fast and by how much. Estimates by economists range from 10% to 30%. At the high end of the range, a dollar decline would produce massive cost increases for some American consumers. The burden is likely to fall hardest on low-income households and fixed-income retirees who stretch the buying power of their retirement checks by buying cheaper imported goods.
The need for national economic security.
No one is talking about the threat to the extraordinary era of domestic economic peace that the United States has enjoyed for the last 60 or 70 years.
The foundation of that peace has been the promise that each generation of Americans would be better off than the preceding generation. That made possible the intergenerational transfer of wealth from young to old that is at the heart of our existing Social Security system and the rising national debt. It was OK to pay the oldsters more out of the pockets of younger workers, for example, because those younger workers knew their future was going to be more comfortable than that older generation's present.
But that implicit economic contract is in danger. Looking at my own two young children I feel that there is a real possibility that their generation won't do as well as mine did. It's hard to overestimate the dangers of breaking this implicit contract with younger workers just when an aging society and growing twin deficits makes the international transfer of wealth much more critical -- and much more burdensome.
While we're all worrying about how to pay those bills, we also need to be debating a plan that would give the bill-paying younger generation hope for their own future.
Okay, thats my list. I dont expect that the readers of this column to agree with any or all of them. And I invite you to e-mail me your own nominees of critical economic issues that youd like to see discussed in this campaign but that have been ignored so far. (Economic, remember. So yes for Third World debt forgiveness, for example, but no for reviving the draft.)
Ill publish the most thought-provoking in a follow-up column as close to the date of the third debate on Oct. 13 as I can. Remember that anything you send me might wind up on the Internet. (I always try to ask for permission before I publish, but the soundest policy is, dont e-mail anything you wouldnt want your mother to see.)
New developments on past columns
8 stocks to watch in a wandering market
On Sept. 30, PepsiCo (PEP, news, msgs) reported earnings of 66 cents a share (after excluding tax benefits). That was a penny above Wall Street projections and 14% above earnings in the third quarter of 2003. Sales of soft drinks in the companys home North American market actually fell by 4% for the quarter that ended on Sept. 4, but strength in the snack and noncarbonated drink (Gatorade, for example) businesses picked up the slack. Snack and drink volumes soared in China and India, helping drive PepsiCos international operating profits up by 29%. Overall revenue grew by 6% from the second quarter and 8% from the third quarter of 2003. In guidance to Wall Street analysts, PepsiCo upped its earnings projections for all of 2004 to at least $2.35 a share, up six cents a share from the previous target. As of Oct. 12, Im raising my target price a dollar to $62 a share by May 2005 from the prior $61 a share by December 2004. (Full disclosure: I own shares of PepsiCo.)
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: PepsiCo. He does not own short positions in any stock mentioned in this column.
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