Saturday, March 31, 2012

Broccoli for the Free Lunch Society.

According to Wikipedia, the expression "there ain't no such thing as a free lunch", is now often reduced to TANSTAAFL.  As I consider the three days of  hearings this week at the Supreme Court (now often reduced to SCOTUS), this "free lunch" phrase keeps coming back to me.

The tradition of free lunches dates back about 130 years.  Saloon keepers would offer "free lunch" along with the purchase of at least one drink.  Although the lunch was often more valuable than the first drink, savvy business owners could rely on the likelihood that the customer would buy more than one drink.  This tradition lives on around the globe from the opulent "aperitivo" in Milan to "happy hours" convened throughout the USA.  Allowing potential customers to believe they are getting something for nothing is a profitable enterprise and is most popular in casinos.  Naturally, the "house" always wins or the practice would not continue.

Business works like that.

I wonder though, is that the way society works best?  And if society works best if citizens live in economically and socially sustainable communities; shouldn't everyone share the costs and benefits of access to good health?

In the Affordable Care Act (ACA) debate it's time to recognize what saloon keepers have known for over a century---TANSTAAFL.  In a brilliant paper by MIT professor Jonathan Gruber (available to subscribers at National Bureau of Economic Research), the impossibility of continuing to allow healthy citizens to opt-out of medical insurance is presented.

Even now,  when folks argue that individuals have a right to avoid paying into a system that could begin address the long-acknowledged health care distribution problem, I wonder who is "the house" in our current system.  Who are the individuals or businesses who, like the casinos, find the free lunch model so profitable?  Who are the winners who continue to cling to a system that is clearly broken?

There is no question incentives can alter behavior patterns.  For example, the modern health insurance sector blossomed in 1943 when the IRS recognized that employer-sponsored health insurance was a business expense and therefore deductible from taxes.  It doesn't take long to see the connection between good business practice---pay a small premium to keep your workforce healthy---and the creation of a tax policy incentive that reduced the tax bill of companies who chose to provide health insurance.  This is both good public policy and good business, the balance at the very heart of "sustainicity."

As Paul Krugman noted in his recent column Broccoli and Bad Faith"Here’s what Charles Fried — who was Ronald Reagan’s solicitor general — said in a recent interview with The Washington Post: “I’ve never understood why regulating by making people go buy something is somehow more intrusive than regulating by making them pay taxes and then giving it to them.”"

Thinking about Justice Scalia's broccoli-based musings,  I find the daisy chain that links the individual health insurance mandate to the individual produce mandate to be nearly impossible to imagine. In making the connection, I fear that this Justice disrespects the notion that access to health care is among the most basic rights for everyone in modern society.

When I think about sustainicity and the idea that the best economic systems build both social and economic capital---there is never a free lunch for our local, national or global communities. Whether or not broccoli is served it's pretty clear to me that---TANSTAAFL.



Saturday, March 24, 2012

Sustainable Retirement: Who's going to be a millionaire?

Like so many of my fellow baby boomers,  I grew up hearing the word "pension" and had a vague notion that is was money my dad would get when he stopped working. The generation that fought in World War II came home to industrial jobs that involved hard work and good wages. The word "retirement" evoked a wistful sigh of anticipation and all Americans agreed that these hard working men and women had earned the right to hang out the "gone fishin'" sign. My parents didn't worry about their retirement income. They hoped and prayed for enough good health to enjoy a long, comfortable retirement.

When did the idea that "retirement with dignity" change? When did retirement become a privilege, not a right?  When did we stop hoping for good health and long life when our working years were over and start wondering if we could ever stop working?

And why do we now think that privatizing risk makes sense? Sadly, my dad never collected his pension, succumbing to cancer in his early 50s; but he was part of an enormous pool of workers and his early death contributed to the actuarial calculations that provided balance and security for others who were more fortunate.  Shared risk works.

These days defined benefit plans, the "pensions" from my dad's generation, have become an anachronism at best.  A powerful business case is presented in Truthout's The Case for Defined Benefits and Retirement Security. After decades of companies shifting their long term pension plans to defined contribution plans, all 76 million of us Boomers are in trouble.  According to a  National Conference of Public Employee Retirement Systems (NCPERS), 75% of voters are worried about retirement with 42% very worried. And we should be.  According to the Employee Benefits Research Institute (EBRI), the average American has a retirement savings deficit of $48,000, with an aggregate national savings shortfall of nearly $4.6 trillion.

As taxpayers look for ways to shore up state coffers; public employee retirement plans are now under attack in what seems like a race to the bottom.  Rather than working together to re-imagine a society where average working people, like my dad, could count on a comfortable retirement, as long as they were blessed with good health; private sector employees who have lost their retirement are rallying against the last stronghold of real retirement security, public pension plans.

A few random facts:

  • Every $1 spent on public pension funds returns about $2.50 to its local community
  • The average American age 55-64 has $98,000 set aside for retirement; even though it will take $1.25 million in savings to provide $50,000 in lifetime retirement income
  • About $4 trillion in retirement plan equity assets were wiped between 2007 and 2008
  • There are 80 million Millennials, with an even larger savings gap
Rather than clamoring for retirement security for all, using public plans as an example of what our parent's generation expected from their private employers, it seems that public pension plans (not to mention the teachers, firemen, police officers and others who make our communities safe and strong) are increasingly under attack.

As someone who has never worked in the public sector, I just don't get it.

As a person with training and experience in finance, I still don't get it.

Apparently Professor Theresa Ghilarducci from the New School for Social Research doesn't get it either, as she explains in her recent Op-Ed piece Pension Funds for the Public.

The three-legged stool of retirement security; social security, pensions and personal savings is broken.  One alternative being proposed is a Secure Choice Pension that would spread risks and costs for private employees and bring back the real pensions that our parents' generation counted on.

Rather than encouraging further erosion of public pension funds and engaging in this "race to the bottom"  that is sure to create future problems for all those who hope to retire; perhaps we should take a closer look at the few remaining examples of plans that uphold the rights of all people to retire with dignity.

Do we really want to live in a society where no one can afford to retire?


Saturday, March 17, 2012

Smart Money v. Smart Kids: The Goldman Sachs Kerfuffle.

Since the publication of Greg Smith's now infamous Op-Ed, Why I am Leaving Goldman Sachs, I've been deluged with messages from many friends and former colleagues wanting to process this very public resignation in light of my much-quieter Wall Street departure nearly 11 years ago. They recognized my privately expressed concerns, "Wall Street is changing and I don't want to work here anymore," as similar to Mr. Smith's departure from a finance career that began about the time mine ended.

These have been fascinating conversations, rippling around the airwaves and cyberspace. Conversations that reminded me of the recent St. Paul's Institute Study Value and Values: Perception of Ethics in The City Today which investigates the attitudes of London's elite financial service workers about their work.  Like Mr. Smith, they perceive a type of "soulessness" when they view their work in light of their values. Unfortunately for most of us--- folks who do not participate in the annual compensation bonanza known as Wall Street bonuses---our experience as market participants has not been very profitable since my career change back in 2001.

Whether savers, investors or simply future pension beneficiaries hoping to someday retire with dignity, the phrase "Financial Innovation" has become synonomous with Warren Buffet's oft-repeated definition of derivitives as "financial weapons of mass destruction."

Through the lens of sustainicity, the most troubling aspect of Mr. Smith's provocative resignation tactic is summed up in the Kevin Roose's column in yesterday's Times, Wall Street Loses Luster On Campus.  I was encouraged to read that our nation's best-and-brightest are reconsidering the arc of their careers and are looking outside "The Street" to deploy their considerable intellectual capital.  They seem to be considering enterprises that are stimulating and well paid but which align more closely with their values---working on innovations that build social capital and help solve our world's most intractable problems.  Although some are motivated by altruism, most are simply trying to avoid risking their own reputations with an industry that still does not seem to get it.

If Goldman Sachs and other firms fail to recruit these young minds, how will they continue to innovate and build value for their investors?  How long can the firm retain its leadership position?

When I left Wall Street the decision was highly personal, the "service" part of financial services seemed to be on the decline in favor of dispersion analysis and modeling that had little to do with value creation or customer service.  Back then the derivitives floodgates were really just cracking open. Like Mr. Smith, I was one of thousands of Vice Presidents.  Unlike Mr. Smith, I was neither a disgruntled employee nor particularly visionary.  I just found myself increasingly uncomfortable with my firm's priorities and had a chance to exit.

Goldman surely won't miss Mr. Smith and yet in all their smug rebuttals to his inelegant departure, they may want to consider its impact as they recruit his replacements.  Through the scrim of breathtaking institution hubris I am compelled to ask---Goldman, are you listening?


Saturday, March 10, 2012

Brutal Contrast: What sustainicity isn't.

Having just returned from a few tours of duty at some of our nation's finest universities, I was struck by the contrast between two pieces that have both inspired and haunted me this week.  In one, The New Yorker's Adam Gopnik offers a breathtaking assessment of incarceration rates in these United States. http://www.newyorker.com/arts/critics/atlarge/2012/01/30/120130crat_atlarge_gopnik

The other was in yesterday's New York Times, where Andrew Delbanco offers an opinion piece that considers candidate Rick Santorum's recent claims that America's colleges and universities were nothing more than "indoctrination mills." http://www.nytimes.com/2012/03/09/opinion/colleges-and-elitism.html

Through the lens of sustainicity, this armchair economist found a striking contrast between these two enterprises that have astonishingly similar average costs, about $26,000 per year. Many folks involved in social change movements, both grassroots activists in neighborhoods all over our country and the "grass tops" folks as well, have noted the contrast. Policymakers frequently suggest that by front-loading investments in early childhood education and other investments, we give vulnerable children a fighting chance at educational success; at the same time significantly reducing our communities' future prison expenditures. Similar arguments are frequently made in the public health arena, another area rife with inequality and a continuing need systemic reform.

I recognize that this is not a novel concept but the approach has always made sense to me. What struck me about these particular articles is how they highlight the shortsightedness of current trends. By privatizing public institutions, we seem to be losing our ability to demand they produce public good.

If you want proof of the marketplace at its most dehumanizing and unsustainable, simply review the current "Letter to Shareholders" from Corrections Corporation of America (CXW). http://ir.correctionscorp.com/phoenix.zhtml?c=117983&p=irol-reportsannual. The self-congratulatory tone and predictions of ever-expanding prison populations represents everything that "sustainicity" rails against.

If however, you'd like to ponder the role of the institutions at the leading edge of elite education, I offer Delbanco's contemporary interpretation of the Protestant values that were in play when Harvard, Yale and Princeton were founded, "In secular terms, this means recognizing that people with good prospects owe much to their good fortune---and to fellow citizens less fortunate then themselves."  Perhaps a recognition of the responsibility that under girds privilege is the most potent response to Santorum's charge of elitism.  Perhaps we should see it as a call for stewards of capital to commit to rebuilding our eroding public capital?

When taxes go to zero, do we swap higher education for bigger prisons?

Suffice to say, I hope not.