Wednesday, August 24, 2011

Are We Turning Japanese?

Earlier today I heard Richard Yamarone, Chief Economist of Bloomberg speak on Bloomberg radio.  I have much respect for his insights and will paraphrase what I believe to be a critical observation of the US economy.  In comparing the US today with the lost decades of GDP growth in the Japanese economy, Richard said  "If we're following the same prescription for the same ailment, how can we possibly expect the progrnosis for recovery to be any different?"

I highlight his comment for several reasons, both in respect of forecasting the damage to US growth brought on by the deleveraging of excessive debt and also in understanding the role that demographic factors will play in shaping the recovery.  Economists have written at length about the impact of an aging population on the savings rate and on shifting investment objectives.  The theory being as aging boomers retire, they become net savers withdrawing invested funds from stock and bond markets, much as investors have done in Japan.  The net savings outflow exerts downward pressure on prices in financial markets.  But, unlike Japan, net savings in the US will worsen a problem that already exists of low net investment in the economy.

As these factors continue to play out in America, again, much as they have in Japan, sluggish growth and lowering GDP forecasts into 2012 will almost guarantee that our 9.1% rate of unemployment will continue to hold, if not rise.  There has also been much written about U-6, the rate of unemployment and underemployment, now at 16%.  We also now understand that the absolute rate of unemployment has been strangely biased downwards by a plunge in the participation rate. With a weak labor market, not surprisingly we're seeing stagnant personal income and, limited consumption demand.  

Taken together the factors of adverse deleveraging, adverse demographics, weak GDP forecasts and stubbornly high unemployment argue for dramatic action on the fiscal and monetary side.  Make no mistake, we have already seen dramatic response in four years of near zero interest rates, fiscal stimulus, buyer incentive programs, reduced tax witholding and the like.  Unfortunately, as we are seeing, with the economy much as it was in 2009, but now with $4 trillion of additional US indebtedness, it isn't working.  None of these programs will solve the combination of headwinds to the economy mentioned above.

What is necessary is a solution for accelerating the movement of the baby boomers into retirement and out of the labor force in an effort to create renewed labor demand and, with it, greater consumption for housing, goods and services.  This of course, presents its own unique problems as, with limited exception in the governmental sector, auto and airline industries, defined contribution plans in America are grossly underfunded.  The ERISA act of 1974 all but guaranteed that the problem of funding worker retirement would be neatly shifted from the corporate sector to the individual retiree.

And the outcome could not be worse.  Fidelity Investments, one of the largest holders of 401k plans assets, estimates that the average investor balance in 401k assets is $75,000, up significantly from the depths of 2009, but hardly enough for most families to fund a comfortable retirement. 

So where does this leave us?  A desperately weak economy, with chronically high unemployment and underfunded pensions for those seeking to leave the labor force!  Before we all start lining up for greeter positions at WalMart, perhaps there is something that can be done.

As the President returns from Martha's Vineyard and formulates a jobs program to jump start employment, he and Congress should consider allowing retirees to withdraw funds from IRAs and 401k plans on a fully tax-exempt basis providing, however, that they evidence no earned income.  Allowing families to access their retirement accounts on a tax free basis will change the economics of the retirement decision for millions of Americans.  To the extent that it promotes earlier retirement it will not only address the conundrum of underfunded retirement savings, but will create new vacancies and renewed demand in the labor force.

While this plan would diminish personal tax receipts on those withdrawals, to the extent that new jobs are created in the economy, personal tax revenues would also be boosted, while at the same time reducing the aggregate level of unemployment insurance and other transfer payments.

Let's hope the President's new plan incorporates this or other new ideas for addressing the multi-faceted problems of our economy, rather than relying upon the next shovel ready bridge to nowhere.