Thursday, October 8, 2015

A Higher Rate of Return

Invest in our Now and in our Future

So as you begin to read this let me assure you that I'm not suggesting we push grandpa out of his wheelchair or force grandma to eat cat food. But let me suggest that our best investment as a country is in our future, not our past.

Looking at the federal budget, two-thirds of outlays benefit seniors and those claiming tax deductions and exclusions -- known together as tax expenditures. Contrary to political scare tactics, seniors are wealthier than the general population. And the benefits of tax expenditures mostly accrue to the wealthy in higher tax brackets.

Larry Summers, economist and former Secretary of the Treasury, had a pretty good piece in the Financial Times and elsewhere this week. Boiling it down to its basics, Mr. Summers argues that, with interest rates near zero, now is the time for fiscal stimulus – that is, government spending – to rouse the economy from its sluggishness. I don't always agree with Mr. Summers but in this case I do, with a caveat: shift spending from intergenerational transfers to areas where it will spur growth.

One of the great lies perpetrated by politicians and lobbyists is that workers today pay "into" Social Security and Medicare and receive an old-age "pension" and health coverage in the future. False. Workers and their employers today pay an equal share to retirees today through Social Security and Medicare. There is no saving, no pension, no big pot of gold; just pass through and overhead.

A house built and purchased today is often viewed as an investment. But it's a dead asset. Jonathan Clements of the Wall Street Journal offered his account of the payback of homeownership: 22 years of investment yielded $5,000 in return. But for maybe 15 years that house sits there and makes few contributions to the economy as its structure, equipment, and appliances purr smoothly along. Sure, the added value to the land generates local tax revenue and those proceeds go to the provision of local government services. Yet we continue to subsidize homeownership through the mortgage interest deduction as if it's a great boon to the economy.

Perhaps my view is skewed by my circumstances: my wife and I have never been without a job, we're aggressive savers, and we have no mortgage. And perhaps I project that good fortune on others in our situation.

Sorry if this post is a little disjointed but let me leave you with three thoughts:
  • Spend less on dead assets and those that don't need our help
  • Spend more on things that help the economy grow now and in the future
  • Resist the urge to spend more on groups just because they vote more frequently

This post may make a few people angry. But my responsibility as a parent and as part of the previous generation is to leave the world a little better than I found it. I hope you're with me.