Retirement Security: All Articles and Books

The Right's Social Security Scare Tactics

Cecille Isidro — Tue, 19 May 2009 07:47:00 -0400

Let's Cut Social Security to Pay for Banker Bailouts!

Cecille Isidro — Tue, 12 May 2009 08:19:00 -0400

On Tuesday, May 12, the trustees who oversee Social Security and Medicare will issue their annual report. I don't know what will be in the report. But I do know what the response will be. Conservatives, libertarians and center-right Democrats will take whatever the report says as evidence that there is an "entitlement crisis," which should require us not only to address spiraling healthcare costs (a genuine issue, affecting the private sector as well as Medicare and Medicaid) but also the alleged "crisis" of Social Security (an imaginary problem).

Which Party Will Attract the Busted Boomers?

Cecille Isidro — Sun, 05 Apr 2009 12:40:00 -0400

While 2008 will go down as a year of hope and change in American politics, the collapse of Wall Street and bursting of the housing bubble will probably mean that fear and anger take center stage in the 2010 elections. If so, the most coveted swing voters may soon be the Busted Boomers - individuals 50 and older who placed supreme faith in the financial markets and now find their long-held dreams of a comfortable retirement eviscerated.

Obama's Timid Liberalism

Cecille Isidro — Fri, 06 Mar 2009 09:39:00 -0500

Barack Obama's bold, ambitious budget plan proves that he is the true heir of Franklin Roosevelt and the New Deal. Consider Obama's Rooseveltian energy plan. In 1939, President Roosevelt decided to mobilize Americans to create a new source of energy: atomic power. Although he was urged to focus on government-funded R&D, FDR chose a different route. He wisely encouraged private capital to invest in atomic energy research by a variety of tax incentives. To make atomic power investment more palatable to private capital,

The End of the Ownership Society?

Cecille Isidro — Mon, 16 Feb 2009 10:08:00 -0500

In his second inaugural address, President Bush offered a vision of an "ownership society"

Rethinking IRAs

Cecille Isidro — Thu, 17 Jul 2008 06:33:00 -0400

A Department of Labor retirement guide notes: “For many Americans, retiring in this new century is a mystery.” They’re living longer, they’re more personally responsible for their own retirement savings and they have many more savings options than previous generations did, which exacerbate the confusion. In June 2008, a House Ways and Means Subcommittee hearing explored options for expanding IRA participation. This article presents data about the mystery and IRA participation, highlights of the hearing and considerations for reform.

For general information about IRAs see IRS Publication 590 (PDF) and IRS FAQs.

Data

In 1974 when IRAs were created, life expectancy was 71.9 years (PDF) while in 2006 it was 78.1 years (Centers for Disease Control and Prevention).
People are working longer. About 70 percent of baby boomers (born 1946 to 1964) expect to keep working during normal retirement years (AARP, Reimagining America, 2005). From 1995 to 2006, the employment rate of individuals ages 55 to 64 increased 7.4 percentage points (California Budget Project, More Californians Are Working Later in Life (PDF), April 2007). Reasons for the change include greater longevity, insufficient retirement assets and personal desire.
In 2004, $3.5 trillion in assets was held in IRAs while defined contribution (DC) plans held $2.6 trillion and defined benefit plans (DB) held $1.9 trillion (GAO (PDF), June 2008).
Plan participation: (Labor Secretary Elaine L. Chao, June 2007)

Period	DB (private)	DC
1980	30 million	19 million
2005	22 million	57 million
Change	26.7% decrease	200% increase

In the same speech in which she provided this data, Secretary Chao noted:

Every year about one-third of workers change jobs.
Today’s workers are highly mobile.
From 1998 to 2004, less than 20 percent of IRA contributions were new retirement savings; over 80 percent of contributions were rollovers from other retirement accounts (GAO (PDF)).
From 1999 to 2002, 1.4 million individuals contributed to their traditional IRA each year while about 16 million individuals made annual contributions to their 401(k) plan (GAO (PDF)).
For 2004, 79 percent of all taxpayers were eligible to make an IRA contribution (about 145 million taxpayers), but only 10 percent (14.7 million taxpayers) actually did. Participation was highest among taxpayers with $200,000 or more of AGI and that group also made the largest average contribution. For eligible taxpayers with positive AGI, participation was greater among higher income taxpayers.

AGI	Number taxpayers	%	% of eligible	Contribution (000)	%	Avg.
$0	105,045	0.7	13.4	$339,361	0.7	$3,231
< $10,000	457,638	3.1	2.2	$878,336	1.8	$1,919
< $20,000	752,288	5.1	3.8	$1,286,603	2.6	$1,710
< $30,000	1,250,381	8.5	7.1	$2,498,356	5.1	$1,998
< $40,000	1,310,584	8.9	8.9	$3,052,654	6.3	$2,329
< $50,000	1,401,947	9.6	11.4	$3,677,978	7.5	$2,623
< $75,000	2,977,444	20.2	12.3	$7,932,144	16.3	$2,664
< $100,000	2,370,275	16.1	15.3	$7,503,213	15.4	$3,166
< $200,000	3,005,607	20.5	19.8	$12,982,307	26.7	$4,319
> $200,000	1,074,851	7.3	28.9	$8,577,702	17.6	$7,980
Total	14,706,060	100.0	10.1	$48,728,654	100.0	$3,314

Participation and contributions were also greater for older taxpayers. In 2004, 4.5 percent of eligible taxpayers under age 30 contributed an average of $1,875 while 16.8 percent of eligible taxpayers ages 60 to 69 contributed an average of $3,849 (Bryant, Accumulation and Distribution of IRAs (PDF), IRS, 2004).

A 2007 Department of Labor (DOL) compensation survey found variances in retirement benefits available to private industry workers based on the type of work and employer:

Category	Access	Participation	Take-up*
Full-time	70	60	85
Part-time	31	23	73
Goods producer	70	61	86
Service provider	58	48	83
< 100 workers	45	37	82
> 100 workers	78	66	85
Avg. wage < $15/hour	47	36	75
Avg. wage > $15/hour	76	69	90
All	61	51	84

* Percent of workers with access who participate.

Looking from the provider perspective, 46 percent of employers in the private sector offer retirement benefits. Just 44 percent of employers with less than 100 workers offer retirement benefits compared to 85 percent for those with 100 or more workers (DOL, National Compensation Survey (PDF)).

In 2005, only about one in four (27%) individuals with IRAs contributed the maximum allowable amount (Employee Benefit Research Institute, Notes (PDF), May 2008).
In 2001, 60 percent of taxpayers either had assets in, or income from an IRA or employer-sponsored plan. Thus, 40 percent of taxpayers have no retirement accounts although they may have other assets for retirement (Sailer & Holden, IRS, 2004 (PDF)).

Hearing

The June 2008 congressional hearing focused on a GAO (PDF) report on IRAs, the role IRAs play in the retirement system and proposals for improvements to employer-provided IRAs. One such proposal, H.R. 5160 (110th Congress), calls for various simplifications to employer-established IRAs as well as reduced restrictions and allowance of automatic enrollment.

The GAO report explains some of the barriers that prevent small employers from providing IRA options to employees — either ones that are employer-sponsored (Simplified Employee Pension plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE)) or a payroll-deduction IRA. These barriers include:

Costs
Confusion about the employer’s role in encouraging IRA contributions
Insufficient incentive for employers
Lack of awareness

The DOL (PDF) and Treasury (PDF) pointed out that they provide publications, seminars and model plans. The DOL’s Interpretive Bulletin 99-1 (PDF) provides guidance on the actions an employer can take with a payroll deduction IRA so as to avoid becoming subject to ERISA rules. Also, the employer may be reimbursed by the IRA sponsor for the reasonable costs of managing the program.

While those testifying tended to agree that automatic enrollment would help increase participation, additional problems were noted with the current system. These included complexity due to varying types of IRA plans, some contribution limits being too restrictive, tax benefits skewed to higher income individuals, high account management fees for individual accounts and risk.

Retirement Considerations for the 21^st Century

The 21^st century workforce will challenge traditional notions of retirement savings arrangements. Employer costs, business competition and employee turnover will continue to make DC plans the preferred retirement benefit. Worker mobility and turnover though will continue to challenge access and effective participation in employer-sponsored plans. Increased options and desire to work past the traditional retirement age will challenge individuals to know how much to save.

New thinking is needed given the number of workers without employer-provided access to retirement savings opportunities, low participation by those eligible to contribute to IRAs and greater retirement savings needs caused by greater longevity. The old models are not working effectively today. Minor changes may not be enough to adequately serve either employers or workers.

Consideration must be given to how existing tax breaks for retirement savings can be utilized to lead to broader coverage in a more equitable and simple manner. Individuals will need greater understanding of investments, savings strategies and budgeting as they take on greater responsibility for managing their own retirement assets.

The American workforce’s dearth or retirement saving knowledge and participation presents many opportunities for CPAs. Policymakers need help understanding where existing rules fail to generate adequate retirement savings and cause challenges for employers. The growing number of individuals managing their own retirement plan and savings decisions will require a higher level of financial literacy than most workers needed years ago. More individuals may turn to the CPA profession for help in creating and maintaining their retirement plans. Yet, the data indicate that many individuals may not know they need to take charge of their retirement planning or how to do it.

Retirement Saving For All

Ron Tang — Thu, 19 Jun 2008 21:35:00 -0400

Once a land of savers, America is now the home of the thriftless. Americans' personal saving rate, in steady decline over the last quarter of century, finally plunged into negative territory this year. No surprise there. In modern America the struggle between debt and saving is a rigged contest. It's never been easier to borrow -- credit cards, subprime home mortgages, home equity loans, payday loans. But when it comes to saving, about half of American workers, including more than 8 million Californians, are denied the opportunity to save the way people save best: on the job, through payroll deduction to a retirement plan. That is a critical problem.

Retirement saving is one of the twin pillars, along with homeownership, of household wealth and security. With home equity declining -- for the first time ever Americans' equity in their houses has fallen below 50 percent -- money tucked away in pensions, 401(k) plans, and individual retirement accounts has become, in aggregate, the largest item on household balance sheets. The retirement savings system works reasonably well for well-paid workers and large businesses. They are likely to have the best pensions, and they receive most of the $100 billion in annual tax subsidies for retirement saving. But for workers in the bottom half, many of them working for small businesses that offer no retirement plan, the news is bleak. Under the current system, more than one-third of the young Americans will reach old age with no retirement savings at all, the Government Accountability Office projects. And because retirement savings also serve households as fail-safe protection against emergencies such as illness, disability, and death, the inability of many workers to save through their jobs leaves them vulnerable throughout their lives.

To tilt the balance back toward saving, the Assembly recently approved, and the state Senate will soon consider, legislation to create Golden Dream Accounts -- voluntary, portable, retirement accounts available to every worker not covered by a retirement savings plan on the job.

The bill, AB2940 by Assemblyman Kevin DeLeon, D-Los Angeles, authorizes the California Public Employees Retirement System to offer the accounts, which would be invested in a short menu of low-cost indexed mutual funds. Every worker in California without access to a workplace retirement plan would be able to open an account and contribute to it, including by payroll deduction. The accounts, structured as IRAs, would be owned by the worker and move with her from job to job. The bill also authorizes CalPERS to offer what are called SIMPLE IRAs, plans that allow employers to match employees' contributions. But the accounts would be totally voluntary for both employees and business; employers' only obligation would be to transfer workers' contributions to the account through the state payroll tax system or other mechanism the state provides. All costs of the program would be covered by fees paid by accountholders.

Golden Dream Accounts would be a big step toward closing the retirement savings gap, helping workers and small businesses alike. That's why the legislation also enjoys strong support from Gov. Arnold Schwarzenegger, small business, local chambers of commerce and AARP. The only opposition comes from Wall Street, which recently took time out from seeking federal bailouts for its missteps in the subprime mortgage debacle to warn against interfering in the market to help more workers save. But here the market has plainly failed. It manages to provide employer-sponsored retirement plans to only half the workforce.

Three decades of market failure is enough. It's time to try something new: Let's leverage government systems already in place to offer, at no public cost, a retirement saving opportunity to every California worker and small business that doesn't now have one.

Bankrupt Nation

Ron Tang — Sun, 15 Jun 2008 10:57:00 -0400

For a married couple, talking about money can be hard. But the cost of using a credit card to put off the conversation is almost always worse. So it is with a company, a city or a country. In While America Aged, financial journalist Roger Lowenstein uses the stories of three deeply encumbered institutions -- General Motors, the New York City subway system and the City of San Diego -- as examples not only of the way most individual Americans conduct their personal finances, but also of how the country as a whole has long lived beyond its means. What these institutions have in common is a sad history of over-confidence in their financial futures, combined with a pattern of half-conscious decisions by all involved -- labor and management, politicians and voters -- to avoid tough choices at the expense of tomorrow. And, as it happens, that tomorrow is now.

Lowenstein's account of how pension debt undid General Motors is particularly telling. In 1949, management and the United Auto Workers were battling over the terms of their next contract. Times were flush as Americans flocked to buy autos in the postwar boom, so GM management was eager to avoid a strike. Meanwhile, autoworkers lacked pensions and feared correctly that the country was still far away from adopting universal health care. These circumstances created an opportunity for a seemingly perfect bargain that came to be known as the "Treaty of Detroit."

GM jumped at a UAW proposal that, in lieu of large wage increases, would set up a pension plan and offer half-price health insurance. The short-term costs would be minimal because, as the UAW pointed out, the average GM worker then had only seven years of experience and a mere fifth were over 50. Left unconsidered was the inevitability that these workers would age, and that if GM did not put aside sufficient funds to pay for their future benefits, the next generation of GM managers and workers would be saddled with an impossible encumbrance.

And that's what happened. Time and again, management and labor struck deals for more generous future benefits without taking into account the resulting liability. As actuaries warned of a long-term buildup of pension debt, GM made the debt disappear on paper by using sunny assumptions about the company's growth prospects -- assumptions that ignored the competition GM would face from foreign automakers that did not have to build huge pension and retiree health care costs into the prices of their cars. By the mid-1990s, GM was compelled to pour so much into its pension fund to make up its deficit that, with the same money, it could have acquired half of Toyota or funded the development of market-dominating, high-efficiency cars to better compete.

This pattern recurred throughout American industry during the second half of the 20th century, and it accounts for much of the decline in the country's industrial competitiveness as well as for myriad market distortions. Railroads, for example, have always been far more energy efficient than trucks and in recent years have made spectacular gains in labor efficiency. Yet among the freight railroads carry is a huge legacy of pension debt under the industry's government-administered and historically underfunded pension plan, which now costs 16 percent of payroll. Most truckers, by contrast, don't even have pensions, let alone have to carry the burden of paying for drivers long since retired. That difference in legacy cost is enough to keep a lot of freight barreling down crowded highways on energy-guzzling trucks instead of going by rail.

The federal government's pension bailout agency, the Pension Benefits Guarantee Corporation, itself faces a liability of more than $14 billion as it pays off the benefits of more than 1.3 million people whose plans have failed. Many other businesses, from Sears to IBM, have frozen their pension funds and shifted workers into defined contribution, or 401(k) plans, which require workers to bear the full risk if their investments lose value. As Teresa Ghilarducci points out in When I'm Sixty-Four, another new book on America's crumbling pension system, these trends leave the next generation of retirees in sorry shape. According to Ghilarducci, the average balance in the 401(k) plans of people approaching retirement age is just $59,000. At today's interest rates, that buys an annuity yielding less than $500 a month, with no adjustment for inflation. A report released last Thursday by the McKinsey Global Institute finds that 69 percent of Americans approaching retirement age lack sufficient funds to avoid a significant decline in their standard of living.

Lowenstein also chronicles the enormous debts now coming due for state and local pension plans. Ever wondered why it costs $2 to ride the New York City subway? Lowenstein will show you that much of the fare goes to cover rides taken in the 1960s and '70s -- that is, for unfunded pension debt. San Diego's municipal pension fund was $1.7 billion in the hole by 2005, a debt equivalent to $6,000 for every family of four in the city.

Having struggled for years to make my own writing on pension issues interesting enough for anyone to want to read, I particularly appreciate Lowenstein's use of real people to illustrate the deeper financial issues involved. Even if they sometimes contain too much detail, there is a kind of gripping, slow-motion train wreck quality to the long, sad stories Lowenstein tells about people and institutions in deep denial. And those stories certainly have a clear moral. Boiling it down to its essence on the book's final page, he concludes, "The most effective remedy -- in pensions, health care, and even in Social Security -- is to banish the credit card. Benefits should not be charged to a future generation; they should be paid for now." Sadly, though, even if we can refrain from borrowing more from our children, we will still bear the dead weight of past borrowing that now falls to us.

Book reviewed in this article

Roger Lowenstein, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis, 274pp., Penguin Press.

Tough Tax Questions for Presidential Candidates

Ron Tang — Thu, 14 Feb 2008 00:00:00 -0500

The current crop of Presidential candidates sound a lot like they did in prior years with promises of new targeted tax breaks, loophole closures, increased taxes on the rich and new spending programs. Have the candidates not read the doom and gloom budget reports from the Government Accountability Office (GAO), Congressional Budget Office (CBO) and others?

The fiscal agenda for the next President and Congress must include some very difficult decisions that go beyond just tweaking the tax system. Below, we’ll look closer at some key fiscal issues that have tax implications. Questions are posed that could help gauge how well candidates understand the fiscal quagmire the country is heading into and the remedies they would pursue.

What’s in Store

David M. Walker, head of the GAO, describes the current federal budget as being “on an imprudent and unsustainable path” (January 2008 testimony, GAO-08-411T (PDF)). CBO Director Peter L. Orszag observes that economic growth will not solve the impending budget problems. “A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy or some combination of the two will be necessary to maintain the nation’s long-term fiscal stability” (January 2008 testimony (PDF)).

The dire outlook stems from imploding healthcare costs and a population bulge of retiring baby boomers (born between 1946 and 1964). The likelihood of extending tax cuts that expire after 2010 and alleviating the alternative minimum tax (AMT) hit that millions will face, further aggravates the problems. The nagging tax gap dampens the outlook even more.

Healthcare Spending

Healthcare costs are a significant cause of impending budget problems.

In 2006, total healthcare spending represented 16 percent of GDP, almost double what it represented in 1976. And it is expected to represent almost 20 percent of GDP by 2016 (GAO testimony (PDF)).
Medicare and Medicaid costs represented one percent of GDP in 1970, four percent in 2007 and will continue to grow. Cost increases are not due solely to our aging population, but to increasing costs per beneficiary due to improved diagnosis and treatment techniques (CBO, The Long-Term Budget Outlook (PDF), December 2007).

Per Walker (GAO testimony (PDF) January 2008), increasing healthcare spending is “eroding the ability of employers to provide coverage to their workers and undercutting their ability to compete internationally.” Growing healthcare costs also impact the national debt, savings rates and economic growth adversely (for more information, see CBO, Growth in Health Care Costs (PDF)).

There are various tax implications of healthcare spending. The Hospital Insurance (HI) tax of 2.9 percent helps fund Medicare. One of the largest federal income tax expenditures is the exclusion for employer-provided health insurance that the Joint Committee on Taxation estimates as $628.5 billion from 2007 -- 2011 (JCS-3-07 (PDF)), not counting payroll taxes. This tax break can increase healthcare spending by reducing the relevance of cost in making healthcare decisions, which also leads to higher insurance costs for employers and others.

Question -- What are your plans for controlling rising healthcare costs and how will the HI tax and the income and payroll tax exclusions for employer-provided health insurance factor into solutions?

Baby Boomers Retiring

Retirement of baby boomers starting in 2008 as well as increasing longevity of the U.S. population will strain our Social Security system. Without changes, Social Security will grow from 4.3 percent of GDP in 2007 to 6.1 percent in 2030. Today there are 3.2 workers per Social Security beneficiary, but that ratio is expected to drop to 2.1 per beneficiary by 2030. (CBO, The Long-Term Budget Outlook, (PDF) December 2007)

Question -- What changes do you propose for Social Security taxes, retirement age, benefits and/or structure of the system to address the problems stemming from the decline in the ratio of workers to beneficiaries?

The Tax Gap

The annual federal tax gap is estimated at $345 billion. Congress and the IRS have increased their attention to this problem and possible solutions. Yet, little change has occurred. Numerous reports from the GAO (PDF), IRS and others offer specific suggestions for reducing the tax gap.

Questions -- What is your timeframe for implementing techniques to reduce the tax gap and will new information reporting be part of your plan? How do you think existing enforcement tools can address the problem?

AMT, Expiring Tax Cuts and Related Matters

Adjusting the alternative minimum tax for inflation and extending the 2001 and 2003 tax cuts would lead to a $617 billion deficit in 2018 rather than a $223 billion surplus (CBO, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (PDF), January 2008). The deficit scenario also increases the national debt and interest expense.

If the tax cuts are allowed to expire after 2010, AMT liabilities would drop by about two-thirds in 2011 (due to higher regular tax liabilities), but would continue to increase due to the lack of inflation adjustments in the AMT brackets. Over 31 million individuals would be subject to AMT in 2018 compared to less than seven million who were subject to it in 1987. Individuals subject to AMT are predominately in the $75,000 to $1 million adjusted gross income range (Joint Committee on Taxation, JCX-38-07 (PDF), June 2007).

In February 2007, the Center on Budget and Policy Priorities (CBPP) estimated that factoring in increased borrowing, extension of the tax cuts and indexing AMT for inflation would cost $4.3 trillion over 10 years (2009 through 2018).

A 2007 report of The Brookings Institute (Achieving Progressive Tax Reform in an Increasingly Global Economy (PDF)) notes that to alleviate budget problems including those arising from extension of tax cuts and adjusting AMT for inflation, would necessitate a 34 percent reduction of all government spending in order to attain “long-run fiscal balance.”

The GAO uses the following graph to emphasize the need to address fiscal issues earlier rather than later. The revenue line is based on extending the tax cuts, maintaining the 2006 AMT exemption amounts and keeping revenues at a historic level of 18.3 percent of GDP after 2017 (GAO-07-1261R (PDF)).

Dealing with expiring tax cuts and growing AMT will also involve consideration of the distribution of taxes, tax breaks and benefits. While Treasury (PDF) reminds us that expiration of the tax cuts will result in tax increases for millions of individuals, the distribution of the benefits varies among different income categories and filing units. For example, repeal of the estate tax skews the benefits to individuals in higher income groups. The CBPP and others note that the tax cuts made the tax law more regressive. These topics will surface in discussions on extending the tax cuts. For more information on distribution of the tax cuts, see reports by the Tax Policy Center (PDF), Congressional Research Service (PDF), and others.

Questions -- What are your plans for addressing the AMT and expiring tax cuts? Why? How will extension of the tax cuts, AMT relief or any new tax breaks be paid for? How progressive should the tax system be and how would you achieve that level?

There’s More

The next President and Congress also have various structural issues, such as complexity, as well as reform issues, such as ensuring that the tax system does not impede international competitiveness for U.S. businesses, to deal with. These tax reform matters cannot be addressed in isolation from the budget and distribution issues. These are all challenging issues that call for asking tough questions of candidates.

Five Myths About Sick Old Europe

Cecille Isidro — Sun, 07 Oct 2007 04:22:00 -0400

In the global economy, today's winners can become tomorrow's losers in a twinkling, and vice versa. Not so long ago, American pundits and economic analysts were snidely touting U.S. economic superiority to the "sick old man" of Europe. What a difference a few months can make. Today, with the stock market jittery over Iraq, the mortgage crisis, huge budget and trade deficits, and declining growth in productivity, investors are wringing their hands about the U.S. economy. Meanwhile, analysts point to the roaring economies of China and India as the only bright spots on the global horizon.

But what about Europe? You may be surprised to learn how our estranged transatlantic partner has been faring during these roller-coaster times -- and how successfully it has been knocking down the Europessimist myths about it.

1. The sclerotic European economy is incapable of leading the world.

Who're you calling sclerotic? The European Union's $16 trillion economy has been quietly surging for some time and has emerged as the largest trading bloc in the world, producing nearly a third of the global economy. That's more than the U.S. economy (27 percent) or Japan's (9 percent). Despite all the hype, China is still an economic dwarf, accounting for less than 6 percent of the world's economy. India is smaller still.

The European economy was never as bad as the Europessimists made it out to be. From 2000 to 2005, when the much-heralded U.S. economic recovery was being fueled by easy credit and a speculative housing market, the 15 core nations of the European Union had per capita economic growth rates equal to that of the United States. In late 2006, they surpassed us. Europe added jobs at a faster rate, had a much lower budget deficit than the United States and is now posting higher productivity gains and a $3 billion trade surplus.

2. Nobody wants to invest in European companies and economies because lack of competitiveness makes them a poor bet.

Wrong again. Between 2000 and 2005, foreign direct investment in the E.U. 15 was almost half the global total, and investment returns in Europe outperformed those in the United States. "Old Europe is an investment magnet because it is the most lucrative market in the world in which to operate," says Dan O'Brien of the Economist. In fact, corporate America is a huge investor in Europe; U.S. companies' affiliates in the E.U. 15 showed profits of $85 billion in 2005, far more than in any other region of the world and 26 times more than the $3.3 billion they made in China.

And forget that old canard about economic competitiveness. According to the World Economic Forum's measure of national competitiveness, European countries took the top four spots, seven of the top 10 spots and 12 of the top 20 spots in 2006-07. The United States ranked sixth. India ranked 43rd and mainland China 54th.

3. Europe is the land of double-digit unemployment.

Not anymore. Half of the E.U. 15 nations have experienced effective full employment during this decade, and unemployment rates have been the same as or lower than the rate in the United States. Unemployment for the entire European Union, including the still-emerging nations of Central and Eastern Europe, stands at a historic low of 6.7 percent. Even France, at 8 percent, is at its lowest rate in 25 years.

That's still higher than U.S. unemployment, which is 4.6 percent, but let's not forget that many of the jobs created here pay low wages and include no benefits. In Europe, the jobless still have access to health care, generous replacement wages, job-retraining programs, housing subsidies and other benefits. In the United States, by contrast, the unemployed can end up destitute and marginalized.

4. The European "welfare state" hamstrings businesses and hurts the economy.

Beware of stereotypes based on ideological assumptions. As Europe's economy has surged, it has maintained fairness and equality. Unlike in the United States, with its rampant inequality and lack of universal access to affordable health care and higher education, Europeans have harnessed their economic engine to create wealth that is broadly distributed.

Europeans still enjoy universal cradle-to-grave social benefits in many areas. They get quality health care, paid parental leave, affordable childcare, paid sick leave, free or nearly free higher education, generous retirement pensions and quality mass transit. They have an average of five weeks of paid vacation (compared with two for Americans) and a shorter work week. In some European countries, workers put in one full day less per week than Americans do, yet enjoy the same standard of living.

Europe is more of a "workfare state" than a welfare state. As one British political analyst said to me recently: "Europe doesn't so much have a welfare society as a comprehensive system of institutions geared toward keeping everyone healthy and working." Properly understood, Europe's economy and social system are two halves of a well-designed "social capitalism" -- an ingenious framework in which the economy finances the social system to support families and employees in an age of globalized capitalism that threatens to turn us all into internationally disposable workers. Europeans' social system contributes to their prosperity, rather than detracting from it, and even the continent's conservative political leaders agree that it is the best way.

5. Europe is likely to be held hostage to its dependence on Russia and the Middle East for most of its energy needs.

Crystal-ball gazing on this front is risky. Europe may rely on energy from Russia and the Middle East for some time, but it is also leading the world in reducing its energy dependence and in taking action to counteract global climate change. In March, the heads of all 27 E.U. nations agreed to make renewable energy sources 20 percent of the union's energy mix by 2020 and to cut carbon emissions by 20 percent.

In pursuit of these goals, the continent's landscape is slowly being transformed by high-tech windmills, massive solar arrays, tidal power stations, hydrogen fuel cells and energy-saving "green" buildings. Europe has gone high- and low-tech: It's developing not only mass public transit and fuel-efficient vehicles but also thousands of kilometers of bicycle and pedestrian paths to be used by people of all ages. Europe's ecological "footprint," the amount of the Earth's capacity that a population consumes, is about half that of the United States.

So much for the sick old man.

The Problem with GM's UAW Deal

Cecille Isidro — Mon, 01 Oct 2007 13:13:00 -0400

In 1946, Peter Drucker’s intimate, multiyear examination of General Motors (GM), Concept of the Corporation, was published. GM hated it.

Drucker’s take -- that the then-wildly-successful automaker might want to reexamine a host of long-standing policies on customer relations, dealer relations, employee relations, and more -- was viewed from inside the corporation as hypercritical. GM’s revered chairman, Alfred Sloan, was so upset about the book that he "simply treated it as if it did not exist," Drucker later recalled, "never mentioning it and never allowing it to be mentioned in his presence."

The United Auto Workers didn’t exactly embrace Drucker’s thinking either. Among his specific recommendations was for GM’s hourly workers to assume more direct responsibility for what they did, adopting a "managerial aptitude" and operating within a "self-governing plant community." The UAW’s powerful president, Walter Reuther, greeted that notion this way: "Managers manage and workers work, and to demand of workers that they take responsibility for what is management’s job imposes an intolerable burden on the working man."

Six decades later, were Drucker alive to set down the latest chapter in the GM saga, my guess is that, once again, neither the company nor the union would care much for what he’d have to say. At the least, Drucker would surely be skeptical of how transformational the four-year contract reached last week between GM and the UAW really is.

Obsolete Industrial Model

Yes, the restructuring of GM’s massive obligations for UAW retiree health care, along with wage and benefit concessions made by the union, promise to bring the company’s cost structure more in line with that of its Asian rivals. That may well allow GM to become consistently profitable, which is no small thing.

Yet on some level, the agreement clings to an industrial model that is already obsolete. And it runs counter to GM Chief Executive Rick Wagoner’s previously articulated strategy of designing new vehicles so they can be put together anywhere across the globe.

In particular, according to news reports, GM has pledged to invest billions of dollars to keep making certain cars, trucks and engines in the U.S., providing a boost to facilities in Wisconsin, Michigan, and Indiana and, the UAW hopes, a measure of job security for its 74,000 unionized workers. As the company characterized the contract, it "paves the way for GM to significantly improve its manufacturing competitiveness" while simultaneously "strengthening its core manufacturing base in the U.S."

Shifting Away From Manufacturing

But these two principles -- preparing for the future while locking into a made-in-America mindset -- are fundamentally at odds.

As Drucker saw it, huge economic and demographic forces have set the U.S. and other developed nations on a course in which manufacturing jobs are destined to play a lesser and lesser role. Much of this work, he said, will invariably keep moving offshore.

To try to thwart this change through what amounts to bargaining-table protectionism is folly. The 21st century shift from traditional lines of manufacturing to what Drucker called "knowledge work" -- laboratory analysis, software design, and so on -- is as inexorable as the 20th century transition from agriculture to manufacturing.

After World War II, about one in three U.S. workers was employed in manufacturing. Today that figure stands at about 1 in 10 [although manufacturing output, as a share of total economic output, has remained steady, thanks largely to rising productivity].

Education Over Apprenticeship

"Most people continue to believe that when manufacturing jobs decline, the country’s manufacturing base is threatened and has to be protected," Drucker wrote in 2001, four years before he died. "They have great difficulty in accepting that, for the first time in history, society and economy are no longer dominated by manual work, and a country can feed, house and clothe itself with only a small minority of its population engaged in such work."

Drucker didn’t mean that people would cease using their hands altogether; in fact, in many cases, they might use them more. But their work will be "based on theoretical knowledge that can be acquired only through formal education," he explained, "not through apprenticeship."

All of this suggests that whatever investment GM is making in solidifying its manufacturing presence in the U.S. would be better spent on launching programs to retrain and redeploy its younger workers for a fate that, ultimately, many of them won’t be able to escape.

The End of the Assembly Line

This must not be some halfway initiative, either. Indeed, imagine a major corporation creating a lifelong learning curriculum that had as much energy and talent and financial strength behind it as the building of a battery of new factories. Imagine a retraining effort so robust and path-breaking that the union could never dismiss it as some corporate sop.

In 1983, in a new epilogue to Concept of the Corporation, Drucker wrote: "GM may, within a decade, develop into a true transnational company that integrates markets of the developed world and their purchasing power with the labor resources of the Third World.

"And while it is much too early even to guess what GM’s labor relations will look like," he added, "the assembly line, that symbol of industry during the first half of the century, will, by the year 1990 or the year 2000, probably have faded into history."

Drucker was, obviously, a little off in terms of timing. But there’s no denying the trend -- even for those who’d like to pretend, as Alfred Sloan once did that it just isn’t there.

The New Economic Insecurity -- And What Can Be Done About It

Cecille Isidro — Wed, 17 Jan 2007 03:56:00 -0500

Over the past generation, the economic risks American families face have increased substantially. Yet public programs have largely failed to adapt to these new and newly intensified risks, and private workplace benefits have eroded. As a result, Americans increasingly find themselves on an economic tightrope, without an adequate safety net if, as is ever more likely, they lose their footing. This tightrope both creates anxiety about the future and causes hardship when families do lose their balance.

It's Not the Economy, Stupid

Cecille Isidro — Mon, 30 Oct 2006 06:50:00 -0500

In the final days of this fall’s campaign, Republicans have turned to an unexpected issue: the economy. President Bush touted the nation’s prosperity last week, insisting that "a strong economy is going to help our candidates."

And why not? The Dow is soaring. Unemployment is low. Inflation is tame. Gas prices are falling. And the overall economy has been growing steadily. If Americans practice what political scientists call "retrospective voting" (captured by President Ronald Reagan’s famous question: "Are you better off today than you were four years ago?"), then one would think that incumbent politicians should be cruising to victory.

There’s just one problem: Despite the sunny talk and favorable numbers, voters aren’t happy with the economy. Though they’ve become somewhat more positive in recent weeks, they remain strikingly dissatisfied -- and favor Democrats by wide margins on economic issues.

Many observers have attributed the disconnect to the war in Iraq. Unhappiness over the conflict, they argue, is coloring voters’ economic perceptions. Yet a similar disconnect played out in the early 1990s, when voters also felt much more negative about economic conditions than the numbers would have suggested. Then, as now, conventional economic indicators didn’t seem to capture voters’ fundamental anxieties -- the sense that their jobs, health care, pensions and family finances were ever more at risk.

In this climate, Republicans bragging about the economy may appear not as saviors, but as out of touch -- much as the administration appears on the other dominant campaign issue, the war in Iraq. Just as events in Iraq undermine GOP reassurances about the conflict, so anxious financial discussions in American homes help explain why Republicans are gaining so little from today’s economic numbers -- numbers that once would have seemed like tickets to victory.

In the past, the link between economic conditions and election results seemed simple. Economist Ray Fair’s landmark 1978 paper "The Effect of Economic Events on Votes for President" in The Review of Economics and Statistics showed that a simple forecast based on election-year economic numbers (primarily inflation and economic growth) did a remarkably good job of predicting the result of presidential elections in the 20th century.

But models such as Fair’s are becoming increasingly less reliable, according to Dartmouth political scientist Joseph Bafumi in a recent paper, "The Stubborn American Voter." For example, Fair’s approach overshot President Bush’s margin of victory in 2004 by 6.5 percentage points. And the last president to lose an election when the raw economic numbers predicted otherwise in Fair’s equation was George H.W. Bush, running for reelection in 1992.

Some analysts have described current voter angst as a hangover of economic success. "Americans have developed perfectionist standards," economics columnist Robert J. Samuelson has argued. "We expect total prosperity and are disappointed by anything less." And conservative pundit George Will recently decried the nation’s "economic hypochondria" -- an entitlement mentality characterized by a low threshold for economic pain.

But the problem isn’t the public -- it’s the standard statistics used to judge the economy. Inflation, unemployment and economic growth all capture economic performance at a particular moment or period. Yet a growing body of theory and evidence suggests that to understand public perceptions, one should look at the security and stability of family finances over time. With that perspective, the grounds for unease suddenly look much clearer.

Consider the evidence of rising income inequality in the United States. In a path-breaking recent paper, "The Evolution of Top Incomes: A Historical and International Perspective," Thomas Piketty of Écoles Normales Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley have shown that the share of national income held by the richest 1 percent of Americans -- stable at about 32 percent throughout the middle decades of the 20th century -- began to rise sharply in the late 1970s and by 2002 had surpassed 40 percent. In the past few years, most income gains have gone to people at the very top of the income ladder, with middle-class Americans seeing only a small boost in their economic standing.

Yet there’s another reason for middle-class dissatisfaction. Many assume that growing income inequality means that rich people are becoming steadily richer. But virtually all income statistics are based on annual snapshots of Americans’ finances, so they cannot tell us whether rich people stay rich -- or whether poor people stay poor. In other words, these statistics tell us about inequality, but not about mobility -- either up the income ladder or down it.

This is a major oversight, because there’s good reason to think that our economic lives are more unstable than they used to be. Bankruptcy, for instance, is much more common today than it was just 25 years ago, and research by Elizabeth Warren of Harvard Law School -- presented in a 2003 law review article, "Financial Collapse and Class Status" -- shows that many of those who file for bankruptcy were once squarely middle class. Princeton economist Henry Farber, in his article "What Do We Know About Job Loss in the United States?" has found that the likelihood that a worker will lose a job over a three-year period has been rising -- and is now about as high as it was in the early 1980s, which saw the worst economic downturn since the Great Depression.

In my own research using the Panel Study of Income Dynamics -- a survey that has traced a large sample of Americans over time -- I’ve found that family incomes have become much more unstable since the 1970s; the gap between our income in a good year and our income in a bad year has expanded. Increasingly, it seems, Americans are living on a financial roller coaster.

Of course, roller coasters go up as well as down, so it’s tempting to think that the net effect of economic instability is a wash. But instability causes hardship even when the "average" experience stays constant. In their seminal 1979 article "Prospect Theory: An Analysis of Decisions Under Risk," psychologists Daniel Kahneman and Amos Tversky showed that people dislike losing things they already have much more than they like gaining things they don’t have -- a phenomenon known as "loss aversion." As a result, losses in income are psychologically difficult even when followed by equal or even larger gains. And, of course, it’s on those downward trips that people lose their houses, their jobs, their retirement savings and other staples of middle-class life.

Loss aversion is surprisingly strong. In a recent nationwide survey by the polling firm Lake Research Partners, respondents were asked whether they preferred "the stability of knowing your present sources of income are protected" or "opportunity to make money in the future." By a two-to-one margin, Americans chose stability over opportunity.

This helps explain why Americans are so dissatisfied with the current economy. They see the overall gains, but they don’t think that those gains have translated into greater security for their families, and they’re worried about the risk -- whether it be the loss of a job, unexpected medical costs or some other setback. A majority of registered voters say the economy is getting better, according to a Washington Post-ABC News poll last week. But more than three-quarters still say they are either falling behind or just holding steady. The actual or possible erosion of safety nets (such as Social Security, guaranteed pensions and workplace health insurance) only heightens such concerns.

Loss aversion may also help explain the muted public reception to Bush’s "Ownership Society" agenda, which was shelved after his proposal for private Social Security accounts crashed and burned (though, much to the dismay of Republican candidates, Bush recently said he wants to tackle the issue again). According to polls, many voters thought they would do better with private accounts. Yet they intensely feared the risks, such as a stock-market downturn or outliving their savings.

Does all this foretell a major shift in U.S. politics, as increasingly insecure Americans demand change? Democratic pollster Nancy Wiefek thinks so. "The main political cleavage now is no longer income but risk," she said. And in Europe, according to recent studies by Harvard scholar Torben Iversen, voters appear capable of figuring out how at risk they are, and supporting or opposing specific social policies in response.

However, competitive left-of-center parties in Europe put ambitious alternatives on the agenda. In the United States, despite public unease, Democrats have talked mostly about the minimum wage and Wal-Mart, rather than trying to mobilize the risk-fraught middle class.

The continuing economic disconnect carries a clear prescription: Republicans would do better to acknowledge middle-class strains, rather than to just repeat the strong-economy mantra. In a 2005 strategy memo, Republican political consultant Frank Luntz put "insecurity" at the top of his list of "words that work" in connecting with voters on the economy. It still works -- but it’s likely to be working for Democrats, not Republicans, on Nov. 7.

The Great Risk Shift

adminn — Thu, 05 Oct 2006 01:08:00 -0400

America's leaders say the economy is strong and getting stronger. But ordinary Americans aren't buying it. They see what the rosy statistics hide: We are all struggling under the weight of terrifying economic instability. No matter how well educated and hard working we are, we know that the bottom can fall out at any moment. Meanwhile, the safety net that once protected us is fast unraveling. With retirement plans in growing jeopardy while health coverage erodes, more and more… more

The Real Issue is Risk

Cecille Isidro — Wed, 13 Sep 2006 15:13:00 -0400

Having just finished a book entitled The Great Risk Shift: The Assault on American Jobs, Families, Health Care, and Retirement -- And How You Can Fight Back, I have no doubt that Stephen Rose will accuse me of offering a "message of misery." My defense, already laid out in greater length on the website of "The Democratic Strategist" in response to three of Rose’s colleagues, is that political candidates and leaders should, first and foremost, offer a message of truth. And the truth is that, after a generation in which more and more economic risks have been shifted onto the shoulders of hardworking middle-class Americans, the middle class is insecure and in need of a serious agenda of economic change.

Rose offers up a good deal of statistics to show that American incomes are higher than in the past -- which is hardly in dispute (though I am not sure how cheered most middle-class families will be to discover that their incomes would have risen by less than 10 percent in a quarter century if family work hours had stayed constant.) But, ironically, since he has carefully analyzed income dynamics in the past, Rose is almost completely silent about the biggest and most important trend: the rising risk to the economic well-being of families posed by the post-1970s transformation of our economy, including the substantial decline of employer and governmental policies of insurance (which Rose vastly understates). As I show in my book, the size of year-to-year swings of family income has skyrocketed since the early 1970s. Meanwhile, the chance that families will experience large income drops has risen dramatically. Indeed, this sort of instability -- how far people move up and down the income ladder over time -- has grown much faster than income inequality -- the gap between people on different points on the income ladder. And while low-skilled workers have long borne the brunt of these changes, the educated are getting hit harder and harder. People who went to college now experience as much income instability as people without a high-school degree did in the 1970s.

This risk is completely invisible in most of the statistics that Rose cites (and, indeed, in most of the statistics that economic commentators routinely throw about). But it is at the heart of the increasingly negative verdict of most Americans -- and, yes, married Americans with degrees and kids -- about the direction of the economy. And it is the issue with the greatest potential to unify Americans across lines of class, race and education behind a new economic agenda that provides a basic foundation of security so as to guarantee true opportunity. It is also, not incidentally, the issue with the greatest potential to create a powerful new coalition behind the Democratic Party -- that is, if the party shakes off its timidity and speaks to Americans’ growing concerns in a way that is both true to their legitimate worries and faithful to their fundamental aspirations.

Debating the Middle

Just how is the middle class faring in the modern American economy, and how should progressives tailor their message and program accordingly? TAP Online is hosting an ongoing debate, with contributions by Stephen Rose, Lawrence Mishel, Jeff Madrick, Jacob Hacker, and others.

The New Biopolitics

Cecille Isidro — Sat, 01 Jul 2006 22:20:00 -0400

Will globalization destroy itself? Every few years, another crisis suggests it might. The Internet, satellite phones, and intercontinental air travel help terrorists cross the world in an instant. The global spread of democracy shakes authoritarian governments -- and opens the way for Islamists in Tehran and Cairo, a populist strongman in Venezuela, and nuke-happy nationalists in New Delhi. Open capital markets wreck the economies of Southeast Asia. Divisions between Muslim immigrants and the rest of Europe explode in French riots and Dutch assassinations.

These unhappy stories are familiar by now. An open, mobile, interconnected world creates new threats, or amplifies familiar ones, and countries throw up new borders in self-defense. The uncertainties of political and personal freedom make invented traditions seductive: pure Islamic states, India for the Hindus, premodern idylls available for free download.

But, along with electronic commerce, transnational fanaticism, and increasingly fluid borders, there is a missing piece in the current picture of globalization, one that puts the familiar paradoxes in a new light: biopolitics, the politics of human life and reproduction. Around the world, people are taking control of childbearing in new ways, which could produce serious consequences for global politics. In Europe, Russia, Japan, and South Korea, women are having too few children to sustain the current population. A shrinking workforce means too few taxpayers to support the next generation of retirees. The only obvious solution is greatly expanded immigration -- which, recall, is already the source of riots, xenophobia, and deep political anxiety. All this threatens a perfect political storm of bankrupt welfare states, struggles over immigration, and crises of national identity. Meanwhile, in India, China, Taiwan, Pakistan, and Afghanistan, a very different problem is growing. Abortion of female fetuses, along with other causes, has produced a population with roughly 100 million more men than women -- men who are a prime constituency of extremist political movements in that volatile part of the world.

The demographic crises of globalization express a deep, troubling question. The crises emerge from hundreds of millions of free choices that earlier generations could not make: whether and when to bear children, and which children to bear. In other words, the two demographic crises express a dramatic new form of freedom, part of the unprecedented control people have gained over their lives in the several centuries of the liberal, modern experiment. The question is whether we have gained more freedom than we can handle. Liberal modernity is all about expanding human freedom, not so much in the mystic chords of George W. Bush's foreign-policy speeches as in the expanding realm of personal choice. Communication and mobility make traditions optional, not mandatory -- by moving, or just watching and listening and mimicking, people decide who they will be as never before in history. And, as ideas and desires expand, technology increases our power to make wishes come true: hopping around the world, meeting a partner from another continent, choosing the most promising of a dozen embryos or 3,000 sperm donors. None of this has to be forced on us; people run headlong toward every one of these new choices.

Technology, with the liberal international economy that ensures its rapid spread, has made all this possible. But technology doesn't care whether you use it for an anti-landmine campaign or to wreck world climate and vaporize a neighboring country. It is as benign or destructive as the wishes it makes true. And free choice often turns out to be more choice than people want. Modern democracy is the great marketplace of easy answers to hard questions: nationalism, fundamentalism, and any other halfway believable story about how the world makes more sense than in fact it does. Critics of freedom and democracy have always argued that people are too selfish, frightened, and confused to bring these hopeful principles to life. The last several hundred years have been a test of the question, with mixed evidence -- good results from North America and the last 60 years of European history, disasters in Europe between 1914 and 1945, and Russia, alas, showing that no system, from monarchy to authoritarianism to democracy, is guaranteed to work. Globalization takes the same question to a new scale.

Do the biopolitical crises of Europe and Asia suggest that globalization makes the pessimists' argument? Is control over reproduction more freedom than we can handle, a kind of private selfishness that undermines politics and public institutions? Maybe. The answer will depend mostly on the intelligence and boldness of the political response. A pure laissez-faire approach to biopolitical problems might well mean a broken Europe, an inflamed Asia, and a failed globalization. On the other hand, a takeover of reproductive choices by the state might mean an even worse outcome, a return to the disastrous eugenic policies of twentieth-century totalitarianism. However, a political response that enhanced rather than cut back the personal freedom that drives the new biopolitics would make globalization fairer and more humane than it is now. And innovative financial arrangements could link the biopolitical fates of regions in a new model of an international and intergenerational bargain that would pave the way toward a governable globalization for mutual benefit.

The Biopolitical Atlas

Three biopolitical regions are emerging in the twenty-first century. First is an axis of inequality, including India, China, Taiwan, Pakistan, Afghanistan, and parts of nearby East and Central Asia, which now have approximately 105 men per 100 women, with ratios among younger cohorts running as high as 118:100. Second is an axis of decline, sweeping in almost all of Europe along with Japan and South Korea, where fertility rates -- the average number of children born to an adult woman -- are well below the replacement rate of 2.1 required for a stable population. In a third group of countries, fertility presently hangs around the replacement rate: the United States, major Latin American countries like Brazil, Argentina, and Chile, and even giant Indonesia are all somewhere in this band.

The Missing Women and Surplus Men

What do people in modernizing cultures do when they take reproduction out of the realm of luck and nature and put it under self-conscious control? In much of Asia, the answer has turned out to be that they have sons. For those conditioned by U.S. abortion politics to think of reproductive choice as always and entirely pro-woman, this is a disconcerting irony. Even more troubling is that millions of individual reproductive choices produce a massive demographic distortion -- scores of millions of men with no one to court, love, or marry.

Nobel laureate Amartya Sen first drew attention to what he called "missing women" in 1990. Sen estimated a worldwide deficit of 100 million women relative to the natural distribution of sexes at birth. Although later research has adjusted his estimates modestly downward, the phenomenon has only accelerated. Official Chinese statistics now put the ratio of boys to girls under age six at 119:100. In India, the sex ratio at birth now approaches 114:100.

Observers have offered a number of competing explanations for Asia's sex ratios, including poor official record-keeping (suggesting the numbers may be a mirage) and the biological tendency of both improved maternal nutrition and hepatitis B infection to increase the share of male fetuses surviving to term. None is nearly adequate to explain Asia's dramatic numbers, however (in particular, the reported share of males has increased even as public statistics have improved and hepatitis B prevalence has fallen). And, in any case, although reliable figures are hard to come by, no one seriously disputes that sex-selective abortion and a bias toward sons in feeding and medical care contribute a great deal to Asia's sex ratios. Increases in the share of young men in the population have come with diffusion of inexpensive techniques for prenatal sex-identification. While aborting fetuses based on sex has been illegal in India since 1994, enforcement relies mainly on voluntary reporting by prenatal clinics and is all but meaningless. The first criminal sentence handed out under the act was in March 2006, and there are presently 37 criminal actions in process in a country of more than one billion people. Indian ads for prenatal sex-determination (which are technically illegal under the same law) trumpet how much less the procedure costs than a daughter's dowry -- a clear reference to the motive of ensuring that a family has sons. A study in one hospital in India's Punjab state found in the 1980s and 1990s that almost 14 percent of mothers of sons admitted having sexed their fetuses -- with reticence that may suggest underreporting. The comparable figure for mothers of girls was 2 percent. Presumably, the rest of the female fetuses were aborted.

The preference for sons in Asia has several interwoven sources. One is the cultural esteem given boys, men, and the parents of boys in societies where women's positions remain pervasively inferior. Another is economic: parents rely heavily on their children for retirement, and men's lifetime earnings remain much higher than those of women. China's one-child policy, which is strictly enforced in cities and often caps rural families at two children, intensifies both motives by raising the stakes of each birth. A daughter under those circumstances is not merely the first child, but the child.

Besides overwhelming sexual inequality, there is another problem with missing women: surplus men. For every absent 10 million women, there are 10 million men who will never marry and consequently will miss the main pathway to adult social integration. Unmarried men tend to unemployment, violent crime, and drug and alcohol abuse, and toward subcultures built around these. If they avoid these problems, they often swell the ranks of the army -- a potential source of instability in politically volatile societies. Most significantly, single young men are the prime recruitment targets of extremist political movements, from Hindu nationalists to Islamist cells. Those movements give the shiftless something to do and, often, material support to do it. They give displaced and disrespected men recognition and status. Their ideologies, built around clashes of good and evil with their own cadres in the vanguard, insert an element of heroism into disappointing lives. Marches, riots, and even terrorism offer violent adventure to restless spirits. When a general in the military of the Palestinian Authority sketched the social profile of a suicide bomber for terrorism expert Jessica Stern, he described a surplus man: "He can't find a job. He has no options and there is no social safety net to help him. ... He has no girlfriend or fiancee ... he has no money to go to the disco and pick up girls (even if that were acceptable). ... Marriage is not an option -- it's expensive and he can't even take care of his own family."

The next few decades look to be particularly sensitive ones for the politics of the countries with the largest numbers of surplus men. Pakistan's fragile authoritarian regime may or may not keep at bay Islamist forces that can expect to find their hardest men among the surplus males. While India's nationalists have a mainstream face that substantially kept control during the Bharatiya Janata Party (BJP)'s recent time in power, they also encompass large paramilitaries and thug bands that have led genocidal riots against Muslims. Even in government, the BJP has sometimes pressed an illiberal and aggressive form of nationalism, hostile to Muslims at home and obsessed with standing up to Muslim Pakistan. Fast-growing and restive China is a political black box at present. No outside observer knows how the country's political establishment will fare with its ideological cocktail of nationalism, residual socialist rhetoric -- and that essential fortification, economic growth. An economic crash, an open clash among a political elite that has been remarkable for its unified public face, or a confrontation with Taiwan could inspire political appeal to popular nationalist sentiment: then the "bare branches," as China calls its surplus males, could become a critical constituency.

Falling Fertility in the North

What do people in developed countries do when they take conscious control of reproduction? In Europe and much of North Asia, they stop reproducing. Or, more exactly, they have so few children that the population, after centuries of fairly rapid expansion, stabilizes and begins to shrink. Italy's fertility rate now stands at 1.28 children per woman, Germany's at 1.32, and Japan's at 1.33. Italy is typical of the Mediterranean countries -- Spain comes in a bit lower at 1.27 -- while Germany's neighbor Poland manages only 1.26. France and the Nordic countries are much more fertile, but still range between 1.64 (Sweden) and 1.87 (France).

Welfare states that depend on growing, or at least constant, populations are suddenly in serious jeopardy as relatively small numbers of current workers struggle to support their parents' larger (and now longer-living) cohort in its retirement. This, too, is unsettling to people who learned to think about reproductive politics in the United States, where we tend to regard childbearing decisions as a matter of personal morality. When millions of individual choices produce demographic shifts with major consequences for public institutions, the personal becomes political in a way that the feminists who coined that slogan would hardly have imagined.

And this political crisis does begin with the personal. Europe's declining fertility rates express changing priorities and ideas about the good life. Fertility has fallen as Europeans have put more emphasis on personal growth, the exploration of identity deep into adulthood, and nontraditional intimate relationships; fewer have chosen the traditional course of early marriage followed by childbearing. The wave of falling fertility has moved south in the last five decades, accompanying growing adherence to the "post-traditional" values that emphasize rich personal experience over customary roles and responsibilities. Even within countries, fertility is higher among traditionalists, lower among post-traditionalists. Reports from Japan suggest that an intense consumer culture and a cult of childhood have played a similar role there.

The difficulty for Europeans is a blown-up version of the familiar "baby bust" that promises to intensify the Social Security crunch in the United States. Falling fertility rates will not soon mean an absolute decline in population, although demographers predict that the populations of Italy, Germany, Japan, and Korea will slip by 2050. They do, however, mean relatively large cohorts of retirees will share those countries with relatively small populations of employed adults. That translates into a high "dependency ratio," the share of the population that does not work but depends on the productivity of others for its income. The share of Europeans eligible for pensions is expected to rise from 35 per 100 working-age adults today to 75 per 100 workers in 2050, with one-to-one ratios in Italy and Spain. Those figures represent a cruel drag on a productive economy. The European Commission estimates that pension and health care payments to retirees may drive up public spending by five to eight percentage points of GDP by 2040, crowding out productive investments.

If this were merely a technical problem, it would already be a technocrat's nightmare. Unhappily, rising dependency ratios threaten political consequences that go far beyond managing deficits, into the shadow regions of European nationalism and xenophobia. The post -- World War II social democratic order in Europe rests on strong social guarantees: employment protection, health care, and pensions. It is now clear that these guarantees were haunted all along by problems of efficiency and budget constraints -- although those might be surmountable on their own terms. The subtler taint on the European social order was its implicit reliance on ethnic sameness, the premise that the benefits one paid for in taxes would go to people like oneself. This interlacing of ethnic solidarity with public spending reached its apogee in West Germany's nearly crippling decision to absorb the former East Germany, extending one of the world's strongest economies and most generous welfare states to a dysfunctional authoritarian society. The European problem with immigration is not only racism or incompetence at managing assimilation, but also the fact that joining a European polity brings a hefty batch of entitlements, which Europeans balk at extending to new arrivals.

Paradoxically and perhaps tragically, the only straightforward way to ease the shock to Europe's social spending is a massive increase in immigration, importing working-age taxpayers to reduce the dependency ratio and support retired Germans and Italians. Yet Europe seems less able to handle immigration sanely than to take on just about any other problem: the riots that locked down French cities and spread to other parts of the continent last fall were only the visible edge of a continent-wide discomfort that led the Rand Corporation's European division to conclude that "the sheer numbers of immigrants that are needed to prevent population aging in the EU and its member states are not acceptable in the current socio-political climate." Even if Europeans managed to press past their ethnocentric politics, it is not clear that new citizens would vote to keep supporting aged Europeans to whom they felt limited allegiance -- or that native-born Europeans, retired or otherwise, would endorse anything like the current level of social guarantees for the increasingly diverse working population as it aged.

The American Oddity

The remarkable thing about the United States, in the midst of the world's biopolitical crises, is how well our lack of a population policy works. Although politically embattled, abortion is widely available, along with a sophisticated array of birth-control techniques and technologies for all manner of prenatal screening. We enjoy as much power as Europeans to enforce our preferences for long childhoods, longer adolescences, and freedom to explore our own personalities and intimate relationships rather than change diapers and break up toddler fights. Yet the fertility rate of native-born Americans is just slightly below the replacement rate, and higher rates among immigrants keep the country's overall fertility above replacement level. Although our Social Security system needs fixing, its demographic stresses are within reason: in 2050, demographers predict, the average American will be 36, compared with the average European, who will be 52. Those are different universes for pension policy.

We also have far more power than most Indians or Chinese to select among embryos to avoid disfavored traits and try to give an advantage to the children we bring to term, much to the alarm of conservative social critics who have predicted that a laissez-faire eugenics will result. But there is no evidence yet of any systemic distortions in the children Americans choose to bear: by and large we -- like the Europeans -- love, or at least live with, the children we have, and we do not try to ensure in the womb that we get children we will love.

What works for us highlights basic differences between the United States and Europe. If the United States were less immigrant-friendly, our native-only demographics would resemble those of France -- although our birthrate would still be higher than the French rate and much higher than those of Germany, Italy, and other low-fertility societies. On the one hand, the demographic advantage of immigration rewards an American virtue that many commentators pointed out after last year's French riots: a flexible and inclusive idea of national identity that makes room for just about anyone who is willing to "act American," which means holding a job, raising a family, participating in consumer culture, speaking English, and expressing patriotism. That is a much looser standard than the language-and-culture essentialism that has replaced blood and soil in European national identity. On the other hand, the contrast with Europe is a reminder that American membership guarantees very little: limited health care, expensive higher education, no permanent support for poor families or the unemployed. As a matter of fiscal accounting, the American friendliness to immigrants comes cheap, welcoming low-wage and usually eager workers with strictly limited rights to social support. An immigrant may take your job, which is the crux of resentment in the rural and working-class populations that are least welcoming to immigrants, but there is not much more he can take from you.

Dysfunctional Globalization -- and a Solution

Taken as a whole, global demographic trends portend a dysfunctional world order. The threats to U.S. interests are at least two. The first is a weak and politically fractious Europe, its attention focused inward on fiscal crises and immigration conflicts, its resources drained by pension and health care payments, its population old and tired. If this were 1900, with Europe the world's main source of instability and imperial adventure and the leading competitor to U.S. power, that might be a cause for relief. In this century, though, despite recent (and narcissistic) attention to trans-Atlantic differences, the United States and Europe are allies almost perforce: Europe is the one other region of the world stably committed to liberal democracy, human rights, and some version of lawful international order. It is also massively weakened in international affairs, relative to its population and wealth, by its relentless attention to internal and neighborhood problems attendant on the ambitious project of uniting the continent.

A Europe that could put its own house more or less in order would be a major force for orderly international relations as it and the United States enter an inevitable decline relative to newly rich and powerful countries elsewhere. A Europe too distracted by its own failures to act effectively abroad would leave the United States alone to try to manage the transition to a multipolar world -- a task we have so far engaged in fecklessly and with some disastrous results, such as the Iraq war, which a stronger European partner might save us from repeating.

The other threat is more dramatic. India is now a relatively liberal and stable nuclear power, however unsettling the nationalist undercurrents of its politics. China is a more or less reliable rational actor in international affairs, however shaky its internal ideological consensus. Imagine an India that more closely resembled Pakistan: a country with an illiberal and undemocratic government hemmed in by extremists who, if they came to power, would take its politics in a scarier direction still. India approached that level of domestic repression and international paranoia when Indira Gandhi assumed emergency powers in the 1970s, a time when nationalist forces were much less politically developed than today. If that scenario still seems a stretch, then instead imagine either India or China in the grip of nationalist fervor strong enough to produce disruptive foreign adventures. Those scenarios do not require much imagination: a Chinese government willing to satisfy widespread popular sentiment by invading Taiwan, or an India determined to deal once and for all with Pakistan, is hardly more fantastic than, say, a U.S. government willing to settle old scores and indulge ideological visions by launching a unilateral invasion and occupation of Iraq. While the United States undertook its disastrous adventure only when the politics of September 11 and the Bush Administration's fixation on Iraq combined to overcome popular skepticism about war abroad, China and India may be carried forward on waves of popular sentiment.

Laissez-Faire and the Bargain Model

One element of globalization is the worldwide spread of modernity -- mobility, individual choice, uncertainty about what kind of life to lead, and technology that gives new power to human desires. The demographic gap between men and women in Asia arises from the technology of modernity operating in the absence of the cultural values that modernity has brought in the North Atlantic: above all, egalitarian individualism, in which men and women share in reproductive decisions and, much of the time, women make the final choice. Instead, the power to control reproduction now operates in settings where women are devalued and profoundly disadvantaged. How people use the technology reflects these inequalities. The problem of missing women and surplus men comes from an uneven spread of freedom, in which women exercise new choice in hierarchical and oppressive situations -- choices made in corners, you might say. The more real control women exercise over all dimensions of their lives, the more likely it is that they will raise daughters in place of sons, pushing the demographic balance back into place. There is even evidence that the more power women have, the less likely a society is to tilt toward authoritarianism. In this respect, if there is a paradox in modern freedom, the answer is to become even freer.

But how do we get from here to there? The problem is familiar: globalization increases overall wealth and overall choice, but often in ways that produce social and economic disruption, political conflict, and terrible paradoxes like the missing women. Some of this is inevitable in an imperfect world; but part of the reason we have politics, rather than only markets, is to try to manage the gains, harms, and dangers of sweeping change. Is there a way to balance the effects of globalization without curtailing its benefits? And does biopolitics suggest part of an answer?

Take Europe's demographic, fiscal, and immigration crises as a starting point. Two major features of globalization, capital movement and labor migration, are partly responses to differences in wage rates across nations. Those rates reflect, among other things, the ratio of capital to labor in each economy, with employers in high-capital countries paying more for relatively scarce labor and plentiful labor taking low wages in low-capital countries. In a borderless world where the cost of migration were zero, workforces would rearrange themselves -- as capital has begun to do -- until a single, global wage prevailed in each industry. If Europe did liberalize immigration, that move would enable workers in low-wage countries to take advantage of high European wages. Immigrant workers would drag European wages down somewhat, but with the offsetting benefit of increasing the working population paying into pension systems.

But Europe is not likely to liberalize immigration radically, and if it did, the political results might be ugly. Is there is a way to get some of the same benefits without moving people across borders? The best chance of doing so would be an example of what, drawing on proposals developed by Yale economist Robert Shiller, I call the bargain model of globalization: the use of international, market-based arrangements to manage the costs and benefits of economic integration.

Imagine a contract in which the governments of Germany, Japan, and Italy agreed to subsidize investments in education, public health, and infrastructure in India and China. In return, the Indian and Chinese governments would commit a share of future GDP to subsidize the public pension plans of the investor countries as their dependency ratios rise. The effect would be international and intergenerational burden-sharing that acknowledged and addressed what each region lacks. Today's rising generation in developing countries would get some of the public-investment benefits of living in a capital-rich society, by way of investments from such societies. Tomorrow's retirees would then harvest some of the benefits of living in a country with a large and dynamic working-age population, without actually living in such a country.

A bargain like this one would have some of the virtues of a market arrangement. No party would enter if it didn't expect to wind up better off as a result. The payments would reflect the best available judgments about the economic and demographic prospects of each country. There would be incentive for inclusion: a contract that included India, China, Thailand, Indonesia, and others would spread risk and increase the likelihood of an adequate payoff.

This bargain could also fit into a strategy for women's empowerment: properly targeted, the public investments in the first stage could do a lot for women's literacy, access to family planning, job training, and other aspects of sexually egalitarian development. Such investments would help women in developing countries push back against their increasingly male-dominated societies: skills and employment give women control of resources and an exit option from the family. Literacy also brings women into contact with a broad world of aspirations and ideas about what they might do and who they might be. Globalization that equalizes power in economic, social, and intimate life is less likely to produce perverse results like the problem of missing women. There is also some evidence -- far from conclusive, but still provocative -- that women's empowerment is good for democracy. Political scientist M. Steven Fish has found that indicators of women's status, particularly literacy and employment, correspond to democratic political culture as measured by the research organization Freedom House, even adjusting for the well-recognized correlation between democracy and social and economic development. Another political scientist, Karen Stenner, reports that susceptibility to authoritarian political appeals is highest worldwide among people with a hierarchical view of family structure, suggesting a link between the way intimate decisions are made and the way political culture develops.

Can It Work?

There is nothing novel in a bargain model of globalization except the size of the bargains. From health insurance to mutual funds, modern social life rests on complex markets in risk that distribute the impact of costs and benefits that we cannot individually control. These are among the most humane features of market life: voluntary, mutually advantageous devices to check some of the arbitrariness of luck. A bargain model of globalization would extend the logic of voluntarily sharing costs and benefits to countries undergoing one of the most disruptive transformations in world history.

Other trial runs for a bargain model might include a similar arrangement between the United States and India. Imagine if the money sunk into the Iraq adventure had gone instead to the front end of a bargain that purchased medium-term payments into Social Security, beginning 25 years out, taken from India's current 7 percent annual growth. Another frontier for a b

A Labour Shortage Can Be a Blessing, Not a Curse

Cecille Isidro — Fri, 09 Jun 2006 00:00:00 -0400

Do rich nations need more poor workers? The answer is yes, according to the conventional wisdom, which finds expression in a new United Nations report on migration and development. The UN says that in developed nations 10 years from now there will be only 87 young entrants to the labour force for every 100 retirees. To forestall a labour shortage in the developed world, the report says that rich nations should turn to developing countries, which will have 342 new labour market entrants for every 100 first world retirees.

This assumes that a labour shortage in the developed world is an evil to be averted. But is it? In the ageing nations of the first world, the benefits of a labour shortage, in the form of higher productivity growth and higher wages, might outweigh the costs. Where labour is scarce and expensive, businesses have an incentive to invest in labour-saving technology, which boosts productivity growth by enabling fewer workers to produce more. It is no accident that the industrial revolution began in countries where workers were relatively few and had legal rights, rather than in serf societies where people were cheaper than machines.

We witnessed this cause-and-effect relationship in the US in the 1990s. Because the bubble economy created a tight labour market, there was a wave of investment in labour-saving technology -- from automated self-checkout at supermarkets to the replacement of security guards with computerised systems. The availability of low-wage immigrant labour has caused the US to lag behind Japan, Australia and others with advanced mechanical harvesting. And thanks to a glut of cheap labour, home construction in the US remains low-tech and inefficient. A tight labour market would force rapid productivity gains in non-traded domestic industries that today are labour-intensive.

To be sure, a growing percentage of the workforce in advanced nations is employed in services such as nursing, lawn care and toenail painting, which cannot be done by machines. In these fields, wages would go up as a result of a tight labour market. What is wrong with that? The trend towards inequality in western societies would be ameliorated, as the affluent paid more for necessary services (nursing) and spent less on conspicuous consumption (lawn care and toenail painting). Would higher wages not drive inflation? Not if productivity growth were adequate.

It is a myth that affluent countries must import vast numbers of immigrants to maintain the age ratio between tax-paying workers and retirees to prevent the collapse of social security systems. The immigrants themselves will retire, requiring an even greater expansion of immigrants. According to the UN, in order to maintain its current worker-retiree ratio, the US would have to absorb 10.8m immigrants per year (10 times the present amount) until 2050, when its population would be 1.1bn.

Productivity growth can solve much or all of the pension funding problem. In the US, for example, the ratio of workers to retirees will go from 3 to 1 today to 2 to 1 in 2080. This is quite minor, compared to the shift from an 18 to 1 ratio in 1950 to the 3 to 1 ratio of today -- a shift made smooth and painless by productivity growth in the past half century. If productivity growth is not adequate, moderate benefit cuts and longer careers can do the rest.

But doesn't national prosperity depend on population growth? Here a final economic fallacy rears its head -- the confusion between gross domestic product and per capita income. GDP is the sum of a nation's labour force multiplied by output per worker, which explains why the countries that lead the list in GDP tend to be the most populous ones: the US, China, Japan, India and Germany. Compare the quite different list of countries with high per capita income, measured by purchasing power parity: Luxembourg, Norway, US, Ireland, Iceland, Denmark. Then there is the list measuring social equality: Denmark, Japan, Sweden, Belgium, Czech Republic, Norway. The individual is arguably better off in a less populous country with a higher median income than in a more populous one that combines a larger GDP with extreme poverty and inequality.

Ageing populations and shrinking workforces present challenges to developed countries. But those challenges can only be met by technology-driven productivity growth, not immigration-driven population growth. If it stimulates automation, raises wages for poor workers and reduces inequality, the impending labour shortage in the advanced industrial nations may be a blessing rather than a curse.

There Goes the Rug

Cecille Isidro — Sun, 15 Jan 2006 00:00:00 -0500

The announcement by IBM that it would freeze its traditional pension plan, shifting all workers into 401(k) plans by 2008, passed through the news cycle with nary a ripple. It was, after all, the latest in a string of increasingly desperate attempts by companies as diverse as GM, United and Verizon to get out from under mounting pension and healthcare burdens.

The terms of discussion are mind-numbingly complex, a thicket of acronyms and arcane benefits jargon. Yet the basic story is simple--and momentous. We are seeing the death throes of a corporate insurance system that, for decades, set the United States apart from other rich capitalist nations. And with this system's slow but steady demise comes a massive shift of risk from employers onto workers and their families.

Contrary to conservative complaints about an unrestrained government, the United States has one of the smallest public welfare states in the advanced industrial world. Yet many times more is spent on private benefits than in any other nation--almost a tenth of the nation's economy. And benefits offered by employers are extensively subsidized and regulated by government. In 2005, the government gave more than $300 billion in tax breaks for benefits.

Indeed, if America's tax code and private benefits are taken into account, U.S. social spending is slightly higher than average compared with other rich countries--higher, in fact, than the spending of Denmark.

Yet this distinctive private system is in peril. In the last generation, corporations have trimmed and restructured benefits, shifting more and more risk and cost onto workers.

Employers once championed private benefits as an alternative to overbearing public programs. The editors of Life magazine described them in 1949 as "ransom devices to buy off the welfare state." Today, however, the workplace welfare system that once stood as a shining beacon of America's singular path looks more like a dimming light on a failed byway.

Take retirement pensions. In 1975, the vast majority of pensions looked like mini-Social Security systems. They promised a guaranteed benefit based on pay, years of service with the firm and other fixed factors. These were the kinds of pensions for which the federal government created a backstop insurance program in 1974, the Pension Benefit Guaranty Corp.

Twenty-five years later, almost all pensions are of the "defined-contribution" variety now touted by IBM: private investment plans, such as 401(k)s, that are voluntary, uninsured and have no guarantees. Much ink has been spilled comparing the investment returns of 401(k)s and old-style pensions (according to a study of returns from 1985 to 2001 by economist Alicia Munnell, the dinosaurs have actually won, outperforming their upstart competitors by about 1% a year). But the central issue for economic security isn't the return but volatility. Some people do well with 401(k)s; others do poorly. The difference, in a word, is risk.

Employers also want to cut back health insurance coverage, which they say hurts their competitiveness. In 1979, nearly 70% of workers received health insurance coverage from their employer. Twenty years later, the proportion had dropped to just over 50%, and it continues to fall. Among workers earning roughly $8.50 an hour, the drop has been even steeper: from 46% coverage to 26% coverage.

Even companies that have retained coverage have made workers pay a larger share of the costs--in essence shifting some of the risk from their own balance sheets to employees' checkbooks. Not surprisingly, the ranks of the medically uninsured have expanded steadily--to 45 million in 2004-- and health costs and crises are now a factor in nearly half of America's 1.5 million personal bankruptcies a year.

Still, faith in America's unique system lives on, whether in calls for corporate responsibility by the left or paeans to spontaneous market solutions by the right. The harsh truth suggested by IBM's pension freeze, however, is that no amount of hectoring or tax breaks will resurrect the old bargain that once provided tens of millions of American workers with a private umbrella of economic protection. The unanswered question, in an age of growing economic insecurity, is what, if any, bargain will take its place.

California Schemin'

Cecille Isidro — Sun, 08 Jan 2006 04:00:00 -0500

In each era of modern American history, California has been at the forefront. It emerged from the Depression and World War II as the nation's archetype of the suburban middle class. It marked the end of government expansion with Ronald Reagan and Proposition 13. And it ushered in the age of technology, as the birthplace of Apple, Intel and Hewlett-Packard.

Californians are still willing to push the envelope, as they demonstrated with the unprecedented recall of a governor in 2003 and the passage of an ambitious but untested stem-cell initiative the following year. But the creativity and risk-taking in the population is not matched in government.

The policy debate in Sacramento remains trapped in an outdated Cold War between the traditional left and right. Solutions in health care, education, energy and budget are stalled because both sides have the power to kill a big idea but not to pass one.

As Gov. Arnold Schwarzenegger said in his State of the State speech on Thursday evening, "California is innovation." And his call for a 10-year building boom at a staggering cost of $222 billion is bold and inspiring. But it was not innovative.

Innovation means policies that recognize the new opportunities and demands created by emerging technologies, a growing population and a globalized, economic transformation. It would break the left vs. right stalemate by drawing from the best principles and goals of each side. And it would describe a new way to teach students, or treat patients or develop communities that were not possible during the last California building boom.

"Bring me your innovative ideas," the governor said in his speech.

So, as California enters an historic election year, let's look at seven big ideas especially well-suited for America's most entrepreneurial state. Each one cuts across left-right polarities and could be ripe for picking by candidates in either party--or both parties.

--The next generation's Homestead Act: Today's middle class owes much to the Homestead Act of 1862 and the GI bill in 1944. Fully one-quarter of adults today can trace their wealth to the Homestead Act, and the GI Bill has returned $7 to the nation for every $1 invested.

Similarly, expanding the ownership of financial assets should be the cause of the 21st century.

British Prime Minister Tony Blair set the example last year by establishing a law that bestows upon every British newborn a government-funded savings account. And in Kentucky, a bipartisan group is working on a "Cradle to College" program that would donate state funds to a pretax savings account for every child born.

This is a rare opportunity to redefine the role of government in a way that meets the liberal goal of new opportunity for youth--particularly the disadvantaged--and President Bush's vision to make "every citizen the agent of his or her own destiny."

--Lower prices for greater efficiency: Energy is simultaneously a tremendous curse and an enormous opportunity for California. Growing demand and shrinking resources have made fuel prices exceptionally volatile in the state, resulting in price spikes last year that cost Californians $6.5 billion more than in 2004. But few places are better positioned to develop the revolutionary green technologies that are in growing demand worldwide.

Right now, California should adopt a plan called "Three in three," with the goal of reducing the state's fuel consumption by 3 million gallons a day--or 5 percent--within three years. The benefits would be enormous, with lower fuel costs, cleaner air and a new, cutting-edge industry.

The goal is also well within reach. For example, Californians today are already driving 300,000 alternative fuel vehicles, but they're stuck running regular gasoline because there's only one ethanol station in the state.

-- Legislature that looks like California: California's political dysfunction is clearly demonstrated by voter trends. Participation is alarmingly low, the Republican and Democratic parties are shrinking, and their future is ominous, because more than 40 percent of voters under age 23 are registering outside the two major parties.

A new and vibrant California democracy would allow more candidates a viable chance and offer more choices for voters. Election systems in place around the world could help.

Instant Runoff Voting, used for the first time in San Francisco last year, is designed to encourage voter participation by reducing negative campaigns, giving voters a wider range of choices and broadening support for election winners.

Proportional voting systems also promise a greater representation of California's rich political diversity, including voices that are nonexistent today, such as urban Republicans, rural Democrats and independents.

--Hiram Johnson redux: Nearly a century ago, Gov. Hiram Johnson created the state's initiative process because he believed lawmakers were failing to act in the people's interest. Today, as demonstrated by the utter lack of competition for district seats in California, lawmakers still have a conflict when it comes to the rules for their own offices.

Like the initiative, the Citizens' Assembly is a populist tool to address issues where legislators are conflicted. As demonstrated in British Columbia last year, 160 adults were randomly chosen to participate in an 11-month Citizens' Assembly that was assigned the task of improving the province's democracy.

In the end, the group placed its recommendation on the ballot. And the success of the model was affirmed by the dedication of the participants and the 58 percent support their recommendation received from the electorate.

--Universal coverage for universal responsibility: Employer-based health coverage is an anachronism in a new economy where the average job tenure is shrinking and companies compete globally.

The most promising and politically feasible route to universal coverage is to make an adequate level of health insurance mandatory, accessible and affordable for all individuals.

That means government, employers and individuals each share responsibility for extending insurance to the 7 million Californians left out today.

California could also take a first step toward such a universal system by ensuring that all children have access to affordable care and--like immunization or education--hat parents take responsibility for enrolling their children.

--Rethinking "smart growth:" For decades, smart growth doctrine has opposed suburban sprawl and directed enormous resources to urban centers and structures for moving many workers over increasingly long distances. But the attraction of lower prices, bigger homes and better schools has defied this strategy.

Between 1990 and 2000, 93 percent of all growth in the Bay Area occurred in suburbia. And with recent population loss in the cities, the suburban growth trend has increased to 140 percent since 2000.

In the future, "smart growth" should attempt to make suburbs work better by creating regional "villages"--essentially mini-cities--that can serve as pockets of culture, mixed-use housing and commerce.

Combined with increased telecommuting, these strategies offer the best hope for ratcheting down the demand side of traffic.

--Greater retirement savings options: For those workers who have them, 401(k) savings accounts provide a simple and valuable opportunity to ensure adequate resources in retirement. But largely because most small businesses don't offer the pretax accounts, barely 40 percent of California workers participate in one.

For a modest cost, California could ensure that every worker in the state has access to the important benefits of pretax savings. In Washington state, officials are in the process of creating a government-sponsored 401(k)-style account that will be available to every worker.

Officials estimate that the startup cost of the program will be $13 million over five years, after which it will be self-sustaining.

Californians could certainly be forgiven for voter fatigue, since this will be the state's fifth consecutive election year. And despite all of the money and attention directed to voters in recent years, there has been remarkably little progress.

If the upcoming election becomes another messy blame game between the candidates, California will suffer yet another setback. But a gubernatorial campaign also offers an opportunity for candidates to describe their vision for the next administration. It's a chance for them to step back and consider the unique promise of an exceptional state.

It's clear that Californians are willing to think creatively and take risks. The opportunity for candidates is to do the same.

Homeowner Tax Breaks are Breaking the Budget

Cecille Isidro — Sun, 30 Oct 2005 00:00:00 -0400

President Bush's tax reform panel has ventured into political no man's land. It wants to limit the tax deductions for home mortgages, employer-provided health insurance and state and local taxes.

Individuals and businesses love these tax breaks. Democrats and Republicans embrace them for their own ideological reasons. The constituencies backing them are powerful. But these sacred cows are in desperate need of reform. The Treasury needs the money to close the growing budget deficit, and these tax breaks often benefit the wrong constituencies, even hurting the very economic strata they are intended to help.

The money involved is astronomical, more than $700 billion a year, the Government Accountability Office says. In many years, the tax breaks cost more than the entire discretionary budget, including defense. Of the annual total, health insurance and pension deductions cost $126 billion and $48 billion, respectively. The mortgage interest deduction funnels $76 billion to homeowners.

In reality, these tax breaks are closer to spending programs than tax cuts. By giving deductions and exemptions, the government "spends" part of its potential revenue on programs for everything from housing to education to child care. The programs are run through the tax code to make them look like tax cuts. What's more, tax breaks shift the burden from taxpayers who can claim exceptions to those who can't.

The President's Advisory Panel on Federal Tax Reform is to make its final recommendations by Tuesday. Here are five reasons for reform:

The benefits often help third parties more than the primary taxpayers. For example, the national homebuilders and realtors associations champion the mortgage interest deduction not because they care about helping low-wage earners own homes but because the tax break inflates housing prices, which leads to higher profits. The perverse effect is that using the tax code this way actually pushes up prices, thus making houses out of reach for more people.
These poorly targeted programs often pay people to do what they do anyway, as in buying a home or saving for retirement. That creates little positive behavioral or economic effect, while draining significant funds from the Treasury.
Because many tax breaks are in the form of exemptions and deductions, they tend to be highly regressive. Often, only taxpayers who itemize realize the savings, and well-off taxpayers, who fall into higher marginal tax brackets, save the most.
The tax breaks rarely involve the type of thorough review that should go into any new government initiative. The country should engage in a discussion on the role of government in encouraging families to have children, for instance, before creating or expanding the popular child credit. If sufficient thought had gone into creating tax entitlements, would we really have a program that subsidizes millionaires by allowing them to deduct interest on second homes?
The government does not properly monitor these programs by subjecting them to annual reauthorization. Elected officials rarely even ask if these policies achieve their intended purposes. Once a tax break is adopted, political forces align against reform, arguing that any change amounts to a tax increase.

The path to reform should begin by changing the way we think about these breaks. The government should record them as spending programs, not tax cuts. That shift alone would reveal that the government spends far more than our current accounting methods show. Lawmakers pushing for reform could then show that they are reducing the size of government, not raising taxes.

Furthermore, multiple tax breaks for such things as dependents, education and saving should be consolidated. Turning deductions into credits would potentially save hundreds of billions of dollars a year by better targeting the programs. And Congress should build better oversight mechanisms into the annual appropriations process to monitor programs to see if they are meeting their objectives.

One note of caution: Though the tax reforms of 1986 broadened the tax base and lowered rates, many of those breaks closed corporate and individual loopholes. Today, exemptions and deductions are often linked to specific social and economic policies, whether for education, retirement or healthcare. If those breaks are eliminated merely to save money to pay for other tax cuts, it could harm specific social policies. If tax breaks for health insurance were curtailed, for example, the savings arguably would be better spent to expand and improve healthcare, rather than to pay for eliminating the alternative minimum tax, as the tax panel will suggest.

Because the panel is daring to suggest reform of these sacred tax cows, many opponents are pronouncing its findings dead on arrival. But as many tax economists will tell you, reform in this area is long overdue. If the president and Congress are serious about reform, they should consider going even further than the panel will recommend.