Archive for November, 2008


The Ghost of FDR

November 23, 2008

Few past presidents have been invoked as many times in the last month as Franklin Delano Roosevelt. His ghost hovers over every conversation about how to extract ourselves from the current economic abyss. While I did not experience the world of FDR, my mom did. She was very young at the time, but his legacy graces the edge of her memory. Her father, a Democratic organizer, smiles confidently at me from a sepia picture that hangs in my home; his over-sized FDR button worn like a badge. While my mom is conservative by both disposition and political leanings, that conservatism comes to an abrupt end when she tells me of FDR. For her, he was hope in a time of darkness, a fireside companion in a time of cold, and a champion of public policies that put the working man and woman back at the front of the line. He was, and will always remain, a hero.

And that hero enacted policies that are widely regarded as pulling us out of the Great Depression. Did they? Most economists believe that they did not.  World War II started the process of bringing us out of the Depression and the pent-up demand that was created from government-mandated rationing and what amounts to forced savings during the war pulled us the rest of the way through the end of the depression. FDR was, by almost any measure, a great president, but the size of his austerity program, though large by the historical standards of the time, was nowhere near potent enough to pull the country out of the Great Depression.

The Great Depression was the hangover from the Roaring 20’s. In order to bring the country back to economic stability households had to go through a period of rebalancing their financial lives, of reducing debts and building assets. Only when that occurred, largely by coercion because of the urgent need to provide funding and material to the armed forces, did consumers reemerge to take the economy onto their backs, to begin spending and to bring finality to more than a decade of material scarcity. 

Economic stimulus packages that speak of short-term fixes have little hope of success. American households are in a far more serious debt position than households of the 20’s. If you hand Americans money right now, they will save it. They will ignore politicians who exhort them to spend it. The American consumer cannot pull us out of this downturn, at least not yet. Over the next months or even years, we will experience a rapid decline in household debt and an increase in savings. It will take time, and savings, to resurrect the economy. If we do spend government money to help our economic prospects it should be focused on long-term programs that have the capacity to lift everyone’s quality of life in the years to come; energy, education, and our nation’s transportation infrastructure. It is a time for investment, not for handing out money.


American Optimists

November 21, 2008

My posting today is published by Forbes. Its title is “American Optimists” and it discusses why some of the successes our country has had in the past make it more difficult for us to save.

I thank Forbes for taking an interest in my writing.


Interview on “The Takeaway”

November 17, 2008

“The Takeaway” is a radio show produced by WNYC and Public Radio International in conjunction with the New York Times and BBC.  They interviewed me this morning on material related to the book. It aired live on WNYC, New York; WGBH, Boston and on several other radio stations in the U.S.


Eat Your Leftovers

November 14, 2008

I had occasion to have lunch yesterday with the owner/operator of a chain of grocery stores, one well-known in the Southeast U.S.  He told me that business was down, and down considerably in the last couple of months. I expressed surprise at this remark, indicating that I thought an economic downturn might be good for grocery stores as fewer people would eat out and more would cook at home — helping the grocery business.

“No,” this 60+ year veteran of the grocery industry said, “when people get scared they eat out of Tupperware.”  He went on to explain that he thought it was just a natural reaction that people hoard and save food during fearful times. During normal times, they throw that last bit of macaroni and cheese away. But, when they sense even the slightest possibility that food might be a more difficult for them to get in the future they put that small portion of mac and cheese in the refrigerator for tomorrow’s lunch.  This grocery executive did not couch his explanation in the language of evolutionary psychology, but that was the thrust of its content — a long-established natural reaction to save food for survival.  His terabytes of scanner data were telling an ancient story, of a very human reaction to this economic mess.


A Progressive Consumption Tax

November 13, 2008

One of the most persistent questions I get when I write or am interviewed about consumption taxes is how to make them progressive. In most people’s minds, this is either difficult or impossible. Consumption taxes, it is assumed, must be regressive because poorer people spend more than wealthier people on the necessities of life. The tax will hit them harder.

The belief that a consumption tax must be regressive arises from the, very understandable, notion that a federal consumption tax must be levied like a state sales tax. In other words, it would be a point-of-sale tax that would be paid at the time an item is purchased. Some politicians, Mike Huckabee being the most recent example, have advocated this form of taxation. It has its advantages, but one large disadvantage to this particular incarnation of the consumption tax is that it is indeed difficult to make progressive. But there are other ways to accomplish a consumption tax and to do so without moving towards a more regressive tax system.

Here is the most straightforward way to accomplish this. It is similar to the “Unlimited Savings Allowance” proposed by Senators Domenici (R), Kerry (D) and Nunn (D) about a decade ago. Allow all Americans to designate an account or set of accounts “Unlimited Savings Accounts.” These accounts, much like other tax-sheltered vehicles, could contain anything (stocks, bonds, CD’s etc.). But, unlike retirement accounts, there would be no restrictions on when or how much money one could put into these accounts nor restrictions on when or how much money one could withdraw.  At the end of each tax year the financial service provider at which your account(s) is held would be required to inform you, and inform the government, your total net contributions or net withdraws from the account. Net contributions could be deducted from your income taxes and withdraws would be added to your income taxes. Because there are no restrictions on additions to or withdraws from these accounts everyone would put all of their savings under this tax shelter — there would be no reason to do anything else. Only money that you did not save would be taxed under the current income tax system. You can make the marginal tax rates on that income as progressive as you would like; set the top tax bracket to 50% or more if that makes sense. My point is not to suggest what that rate should be, but to point out that you can engineer a de facto consumption tax that is highly progressive, high regressive or anything in between.

Are there any problems with this? Not huge problems, but as with any fundamental tax reform you have to think some things through carefully. The biggest issue to solve with this type of tax system is how to treat borrowing. Allowing individuals to borrow and at the same time contribute to this account would lead to some savvy, but socially counterproductive, tax strategies for individuals. But this is a problem that can be solved.

Moving to consumption taxes would encourage savings, discourage conspicuous consumption, increase economic efficiency by building a domestic base of investment capital……and could be done without increasing tax burdens on the poor.


How the Government Discourages Savings

November 11, 2008

This post was picked up by Forbes and they have asked me to pull it from my own blog site, at least temporarily. You can follow this link to the published version at


They Let Him

November 5, 2008

Standing in line, waiting to cast a ballot, is the real 4th of July for me. It is the only time all year that I go out of my way to wait. My job is busy, but flexible. I could go vote at 10 AM or 2 PM, but instead get up and go early — exactly the time when there will be many other people there. I see friends, neighbors and new kids of old neighbors. There is free coffee, lots of signs and stickers, and a gym full of volunteers.  Everyone is happy. Voting before the election, which is easy to do in Charlottesville, has no appeal. Why vote in 2 minutes when you can spend 45 minutes celebrating the incredible reality of being an American?

And it is a reality that is easily lost in the somtimes bitter aftermath of an election. Each Summer I teach a group of senior executives from around the world. They come to Darden to learn new ways to think about their business. In addition to teaching, I eat dinner with them and talk to them in settings less formal than the classroom. I remember distinctly a conversation last summer with one participant, a senior executive of a major industrial company headquartered in the Middle East. When casual conversation turned to politics I offered the opinion that Barack Obama would win the election. He scoffed. “They won’t let him,” he replied. I pressed, “Who won’t let him?” He shrugged. Subsequent conversations with him laid bare the political reality that dominated his mental model of elections. He did not know who “they” were, only that “they” existed and always determined who was fit to be elected. And they would not like Barack Hussein Obama, and would not allow him to become President.

If you are happy this morning, rejoicing in the election of Mr. Obama, you do so with the knowledge that your vote changed history. That line outside your polling place mattered, and utimately is the only thing that matters when we chose our leaders. And, if you are upset this morning, distraught that a genuine American hero was sent home without the prize, remember that you can start today to work for a different political outcome. They cannot stop you. They don’t exist. They never made it to the shores of America.