At Westover, our clients often share articles with us on topics that engage and inspire, or from time to time, challenge or support our best thinking. We believe this dialogue and discussion better inform all of us as thinkers, decision-makers, and stewards of our client’s financial resources.
Recently, a client shared an opinion piece from the Wall Street Journal, “I Won’t Ride the Trump Train into a Trade War.” The article reinforces some of our own opinions about the Trump economic agenda; specifically, that corporate and individual tax reforms, along with the elimination of burdensome regulations, have been tremendous positive forces for U.S. job growth, increased corporate earnings, and expansion of Gross Domestic Product (GDP).
As we’ve mentioned many times and as economic history has shown, these “beggar-thy-neighbor” protectionist policies do not work and often lead to escalating, retaliatory tariffs that can spill over into economic recession.
However, recent trade and tariff policy initially thought to be de minimis both in its size and scope has grown and felt more like a device used to fulfill election campaign promises rather than sound economic practices. As we’ve mentioned many times and as economic history has shown, these “beggar-thy-neighbor” protectionist policies do not work and often lead to escalating, retaliatory tariffs that can spill over into economic recession.
In our opinion, the Trump administration is reverting to a policy that is dangerous for the U.S. economy and the international commerce system. We continue to monitor the short and long-term effects of these policies on U.S. and global markets as well as on our client portfolios. We welcome your questions and thoughts.
I need to share a little ‘60s and ‘70s autobiographical background to give my subsequent story context. In this recounting there is nothing I mean to imply about my experiences or events that are either good or bad. They are simply mine, and thus became the lenses through which I have subsequently experienced, seen and interpreted the world.
We All Start Somewhere
Randy and I were married while I was a junior in college. With that event we were pushed from the shores of familial financial support into a lifeboat kept afloat solely through our use of the oars we found on the boat. Our initial honeymoon abode was a modest, furnished trailer on Airport Road in Chapel Hill, NC. In order to support us and our daughter and while also taking a full course load at UNC, I worked early mornings and late evenings as a janitor for Saffelle Cleaning Service, starting most days at 5AM and ending around 11PM.
Upon graduation I went directly to law school at Vanderbilt in Nashville where another daughter promptly arrived. Scholarship assistance and government loans covered tuition obligations. To support my ever-growing family, and carrying a full course load, I also worked thirty hours per week for the state government in their planning and budget office. On weekends I took pictures of houses insured by a local insurance company. All the while Randy dutifully took in a handful of my fellow law school students’ infants at “Sawyer’s Day Care Service.”
Returning to my hometown Wilmington in 1971, I soon left a large corporate law firm, Richards Layton & Finger, for the Delaware Attorney General’s office. Then at the age of thirty-one on January 1, 1978 I opened shop as a solo practitioner. My law “office” consisted of two window-less rooms totaling 300 square feet.
I had a mortgage, car and law school loans to repay, family mouths to feed. By then our third child was almost three. Our safety net was the $1,250 that was squirreled away in our savings account. We were about to embark on another life adventure.
Six months later Randy announced that she wanted our children to attend a private day school rather than the public one. The educational opportunities and intellectual challenges would be far greater for them, she argued. Intuitively I knew I needed to find another income stream and fast.
Thinking about my legal background, I decided that Delaware’s reputation as the “Corporate Capital of the World” offered a potential avenue for that second revenue stream. Accordingly, I started American Incorporators, Ltd., (AIL for short), a corporate filing and incorporation service. It’s initial office: My legal assistant’s second right hand desk drawer. And yes, over the years the profits from AIL did cover tuition costs for all three children and all the way through college! That company now provides corporate filing services in all 50 states for clients who live in every state in the U.S. as well as all over the world.
Although I had left the Attorney General’s office I still had many friends who were police officers. So, in response to Randy’s we-need-tuition-money plea, and as a hedge against the possible failure of AIL, I also started a civil investigation business at the same time. I called it Professional Investigators, Ltd. (PIL for short). Its business purpose was to provide professional, trained investigators — my police officer friends who would work on their own time– to my fellow lawyers who were in the need of witness interrogations, or needed car crash measurements, or required fact or forensic investigations done for their trial cases.
The main difference between the two businesses was that when not practicing law I focused just about all my time and energy on AIL while PIL withered on the vine. Sure enough, it soon died a quiet death. The point is this: both the success of AIL as well as the failure of PIL can be laid at my feet. That wasn’t my only whiff.
Tom, my best friend from North Carolina, called me about this same time. He lived in New Jersey and wanted to exit the corporate world to buy and run a bar. Neither one of us knew the first thing about the bar business, and the TV reality show, Bar Rescue, had not yet been created. In retrospect, we were enthralled with a quixotic, romantic and naïve idea, but at the time I was sure of its success. Would I try to raise the funds necessary to buy one in return for a fifty percent ownership stake in that venture? Absolutely, I said.
Jumping onboard, I soon had raised enough capital from my lawyer-friends that Tom and I were able to buy a bar we christened Nicky’s Pub. It sat on the White Horse Pike in Cherry Hill, New Jersey, about 90 minutes from Wilmington. Tom quit his corporate job. Most weekends I would drive to Nicky’s to help Tom run our place — man the cash register, draw a beer, flip a burger, clean out the men’s room. There remained however this one issue: we could do the menial stuff, but neither of us knew a damn thing about nuts and bolts of really running a bar.
Failure taught me a valuable life lesson: Stick to what you know.
Sure, enough we ran it into the ground in 18 short months. Turns out it was seriously undercapitalized and embarrassingly mismanaged by us. We were two plumbers who didn’t know a hose cutter from a pipe wrench. While I was ultimately able to pay back my investors that failure taught me a valuable life lesson: Stick to what you know.
The Right to Have a Go
This brings me to the present.
Two weeks ago, we hosted Westover’s Eighth Annual Investors’ Summit. James Pethokoukis, the DeWitt Wallace Fellow of the American Enterprise Institute, was our featured speaker. He addressed the importance of GDP growth. Specifically, he queried whether our current economy can grow at the 3 percent rate which had been the “old historic norm” going back to the 1950s up until 2008, or whether we are constrained to grow at the “new normal” of 2 percent, which has been the average from 2008 through 2016.
If we grow at 3 percent, then living standards for our citizens double in just 20 years, but if our economy grows only at 2 percent, we will see those same standards double only once every 35 years.
Pethokoukis noted that our free enterprise system has generated more wealth than that realized from any other civilization or government system. He made the point that this has been done in the U.S. without relying on “State-sponsored 5-year plans, government-planned industrial policy, or other onerous top-down directives.” Think Russia, China and the EU respectively.
He said the key to our success was bound up in what he called our “culture of economic freedom.” It’s what one economist-philosopher, Deirdre McCloskey, called quite simply, “the right to have a go.”
Pethokoukis cited America’s “ethic of entrepreneurialism.” He traced its lineage from the great companies of our past to the giant firms of the present. From Carnegie’s steel and Rockefeller’s oil to Bill Gates’ Microsoft, Steve Job’s Apple and Jeff Bezos’s Amazon.
From where I sit, it’s the spirit of entrepreneurialism that fuels our economic engine. I believe this is true not only thanks to the genius of the brilliant founders of those few large companies, but also because of the hearts, minds and sweat of millions of small business owner Americans. They diligently work, invent and produce goods and services in every corner of our nation every day of the year. In America we have that entrepreneurial energy thanks to our free enterprise system and our system of democracy.
From where I sit, it’s the spirit of entrepreneurialism that fuels our economic engine. I believe this is true not only thanks to the genius of the brilliant founders of those few large companies, but also because of the hearts, minds and sweat of millions of small business owner Americans.
Sadly, and much to my surprise, Pethokoukis also warned of a worrisome demographic shift in attitudes by our young people. He said that “more than 30 percent of the millennial generation — those roughly 35 and younger today — say that democracy is not essential in our society.” He also noted “some 42 percent of the millennials say capitalism is not essential.” My own research led me to a Harvard University poll with similar results. Conducted in 2016, it found that 51 percent of 18-29-year-olds in the U.S. said they oppose capitalism while only 42 percent express support.
Bhutan or Boston
To my surprise, I experienced what I took to be a misunderstanding of entrepreneurial capitalism in the observations of a fellow Baby Boomer two days later.
It happened when I was working out on a stationary bike, exercising my brand-new titanium left knee. A longtime friend came up behind me and tapped me on the shoulder. We go way, way back . . . more than fifty years . . . back to our days together in high school. His business life was experienced as a manager of a very large company headquartered in Wilmington.
“Bill’s” shoulder tap led to a philosophical discussion. My buddy advised that in a happiness survey measuring one country against another that the U.S. was somewhere in the middle of the pack on something he called the “Nations’ Happiness Scale.” Smiling somewhat smugly, he told me Bhutan was at the top of the list.
I subsequently did a little research on Bhutan and Bhutan has some good things going for it.
In case you’re not up on your geography, it is a small, landlocked country in South Asia in the Eastern Himalayas, bordered by China, India and Tibet. It’s slightly larger than Maryland. It has a population of approximately 750,000, making it smaller when measured by that metric than Delaware.
Its government is a constitutional monarchy. Buddhism is the predominant religion.
Per capita income is $8,100, which is very good for that region. Twelve percent live below their poverty line compared to 15 percent here. That’s also good. On the not-so-good side we find these statistics: Life expectancy is 9.7 years less than that of United States citizens. The Bhutanese average 5 more children per 1,000 people than we. Thirty-four children per 1,000 are likely to die in infancy compared to six in the U.S.
Compared to its South Asia neighbors, Bhutan ranks first in economic freedom, ease of doing business and peace; second in per capita income; and is judged the least corrupt country in the region as of 2016 according to Wikipedia.
Bill reminded me of the “the pursuit of happiness” phrase in the Declaration of Independence, suggesting that in the 21st century we had failed our forefathers’ test. He listed a litany of problems we have in the United States and in Wilmington: excessive shootings and murders in Wilmington; poor national and local educational outcomes; middling health care; seemingly, intractable political views in Washington, both from the left and right.
I thought about his thesis for a few seconds as I continued to pedal.
With the thought of those millennials who don’t believe in capitalism, free markets or democracy ringing in my ears, I asked “Would you like to move to Bhutan?” He stared blankly ahead and after a few seconds gave me a non-answer.
I continued to pedal.
Bhutan is one of the “happiest” nations in the world. But would you move there?
One exchange led to another and then he said, “Remember President Obama said ‘If you’ve got a business, you didn’t build that. Somebody else made that happen.’”
That was my hot button. I was racing so fast Dale Earnhardt would have needed a lead foot just to try to keep up.
“Bill, I acknowledge all of us stand on the shoulders of those who came before; you and I had the good fortune to be born in the United States; we are the sum total of our heritage, experiences and the opportunities we have been afforded and taken. I could never have achieved what little I have without the assistance I was given by my parents, the education I was afforded, the financial assistance I received from Vanderbilt and Uncle Sam. But I, and I alone, took the risk to build my law office from those tiny two rooms. I was the one who took the risk to start AIL. Nobody else made those things happen. To coin a phrase, I was the one who ‘built that.’”
I reminded him of the Pethokoukis view of the American ethic and belief in the importance of entrepreneurial exceptionalism.
Offering a disapproving smile, he suggested that my entrepreneurial spirit wasn’t the reason for my success, but rather our society’s and government’s “collective benefits” were, coupled with my good fortune in being born here. They had been what he called the senior partners in each and every one of my successes, while I was merely their junior associate.
That was my Lexington-Concord moment.
“Were they also my partners when I failed?” I knew I’d brought him up short. He looked shocked. Then I told him the story of PIL, one he didn’t previously know. I spared him the story of Nicky’s Pub. “Free market capitalism gives all of us the right to succeed and also to fail. Can I recover the loss of money and time I invested in PIL from society or the government, my so-called senior partners?” He hesitated. Didn’t give me an answer.
And in that instant, I understood our difference. He’d focused on the end result while ignoring the risks which attend any undertaking in the competitive, free market world in which we find ourselves. Success might arise from the initiation of an enterprise, but so might failure.
Some believe in the power of the collective and ascribe to it the eternal flame of success and happiness. Others believe in the primacy of the individual, his or her spirit, and willingness to undertake new ventures. Me? I’ll take the system we have here in the U.S. For better, for worse. For richer, for poorer. For success, for failure. And on a Happiness Scale of 1 to 10, put me down as an 11 for what we have here.
I’ll end with this: Call me an optimist. I think those millennials will come around eventually.
– by Matt Beardwood, CFP®, Director of Wealth Planning
“Thinking is one thing no one has ever been able to tax.” – Charles Kettering*
It’s March Madness time and I’m not talking about basketball. I’m talking about the 2017 tax reporting season and it’s full on! By now you have received your W-2, corrected 1099s and K-1s (hopefully). You haven’t even seen your accountant yet and I’m already talking about the 2018 filing season? Yup, it’s true and what better time than now to start thinking and planning for the impact of the recently passed Tax Cuts & Jobs Act. Here are some thoughts to ponder:
2018 Tax Preview
Ask your accountant to run a mock 2018 return after you have filed your 2017 taxes. You can also use TurboTax’s TaxCaaster tool (I downloaded it for free from the App Store and ran a 2018 tax estimate in about 10 minutes) to forecast a 2018 refund or payment due based on the new laws. Please note: The IRS and state tax divisions are still working through interpretation of various provisions of the new law. The IRS plans to provide further guidance throughout the year. Expect some changes.
The IRS came out with new withholding tables on January 11th and just released a revised W-4 form and calculator (You can find a link to the IRS website HERE). If you leave your W-4 as is, you could wind up withholding too little. Workers in higher tax brackets who receive large bonuses could see higher tax bills if they don’t adjust withholdings on “supplemental income.”
A significant change that could affect many taxpayers is the cap on state and local income tax (SALT) deductions. The deduction, which used to be unlimited, will be capped at $10,000 in 2018. The new law’s near-doubling of the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly does mean fewer will itemize, but residents of high-tax, high-income states could end up paying much more. States are busy devising workarounds to try and keep those residents from seeing a big spike in federal taxes next year or moving to a lower tax state. Strategies being explored include replacing state income taxes with an employer-side payroll tax and a scheme of tax credits for charitable donations made to state funds that support areas like education and health care. It’s unclear whether these attempts will prove administratively or legally feasible; I wouldn’t count on it.
In an effort to get around new deductions limits (e.g. SALT), many folks who make regular charitable donations may bundle gifts in one year what they would have given over multiple years. For those who itemize, charitable donations remain deductible on federal returns and can help lift married taxpayers who file jointly above the $24,000 standard deduction hurdle. By putting these bundled donations into a donor-advised fund, individuals can take the deduction the year the money goes in and distribute the money to charity over multiple years. Having said that, there are numerous tax-advantaged giving strategies to consider and Westover has the experience and wisdom to help you choose the right one. Let’s talk.
Home Equity Loan Deductions
The deductibility of interest on home equity loans and lines of credit (HELOCs) is a big area of confusion. The new tax law lowered the amount on which interest expense on “acquisition indebtedness” could be deducted but eliminated the interest deduction on loans that are not used to buy, build or substantially improve a primary home (aka “home-equity indebtedness”). Caution: seek tax advice on this one. There are numerous caveats, grandfathered provisions, rules regarding “mixed-use mortgages” and partial deductions. Clear recordkeeping and documentation will be critical if you plan to take a deduction.
529 College Savings Plans
The new tax law expands the allowable use of tax-exempt 529 college savings plans for education costs from kindergarten through 12th grade. While some states automatically follow the federal code, others choose to decouple from certain parts of it.
In other words, the U.S. government may say you can use 529 money for K-12 expenses, however, your state may consider such a withdrawal as a non- qualified distribution. Confusing? Tell me about it. When I called my state tax department for clarification, they weren’t even sure what a 529 was. I’m hopeful more guidance will be coming out this summer. In the meantime, be careful.
Retirement Readiness Rundown
Does the tax law present any retirement strategies for consideration? Possibly. Withdrawals from tax-deferred retirement savings plans such as 401(k)s or traditional IRAs are considered “ordinary income” and will raise your taxable income, however, lower tax rates may make a Roth IRA conversion even more attractive than in the past. Pay some of the taxes now and take advantage of lower tax brackets while avoiding a potential “tax time bomb” when you are required to take required minimum distributions (RMDs) in retirement.
Maybe it’s true that you can’t tax thinking but thinking can certainly minimize taxes. I think Charles Kettering was on to something.
*Charles Franklin Kettering (August 29, 1876 – November 25, 1958) was an American inventor, engineer, businessman, and the holder of 186 patents. He was a founder of Delco and was head of research at General Motors from 1920 to 1947. Among his most widely used automotive developments were the electrical starting motor and leaded gasoline. In association with the DuPont Chemical Company, he was responsible for the invention of Freon refrigerant for refrigeration and air conditioning systems. At DuPont he also was responsible for the development of Duco lacquers and enamels, the first practical colored paints for mass-produced automobiles. In 1927, he founded the Kettering Foundation, a non-partisan research foundation.
I just heard the story that Carson Wentz, the talented second-year quarterback of the Eagles, was diagnosed with a torn ACL to his left knee and is out for the season. That inspired me to write about an interaction between two people, strangers to each other, which I was told last summer.
This is a story about two things: the first is the beauty of living in Delaware, a tiny state where “everybody knows everybody.” As an example, Randy and I own a home in a neighborhood where a former U.S. Senator lives half a block away, where our state representative lives across the street from us and where a former Vice President lives literally no more than one-quarter of a mile away from the entrance to our development. People from large states can’t comprehend what this intimacy sometimes brings to us. This story is an example.
This is a story about two things: the first is the beauty of living in Delaware, a tiny state where “everybody knows everybody.” More importantly, this is also a story about character, and what is revealed about one’s heart.
More importantly, this is also a story about character, and what is revealed about one’s heart. I’m of the mind that one’s character is revealed when we think no one else is looking. It was told to me late this summer by my daughter Ann,
My granddaughter Sawyer Chilton, age 20, underwent ACL surgery on Monday, August 21st. It put an end to a promising two-sport hockey and lacrosse college career for this beautiful young student-athlete.
She and her mother, daughter Ann, went to Walgreens to pick up a prescription in the Greenville shopping center six days post-surgery on Sunday, August 27th. They parked by the front door. As they returned to their car they noticed that a car had pulled into the parking space parallel to theirs on their passenger side.
Sawyer was hopping on two crutches and had a cast mid-thigh to ankle which immobilized her right knee and prevented it from bending. She couldn’t maneuver herself into her car with the other car parked as it was. Seeing her predicament, the unknown driver backed up out of the space, thereby permitting Sawyer to hop onto the parking pavement and then crab-walk into the back seat. Sitting with her back to the rear-driver side door, she was able to extend her legs across the seats without bending her knee. The stranger then pulled his car back into the parking space.
Ann rolled down her passenger side window and thanked him for his thoughtfulness. Alone, dressed in shorts and a Wilmington Country Club polo shirt, the gray-haired senior walked one step to their open window. He said to Sawyer, “I see your cast on one knee and multiple scars on the other. You look like an athlete.”
In response, Sawyer told him that she had torn her left knee ACL once in high school as a junior, then again two years later in a non-contact drill before the hockey season of her freshman year at college. The cast he saw on her right knee was because this past spring she had torn that one in another non-contact drill before lacrosse season of her sophomore season. She told him that as a consequence of these three tears she was no longer medically cleared to participate in college athletics. The worst part was that she missed her teammates, their camaraderie, being a part of their teams.
Quietly listening to her story, he empathized. Then he lauded her for her determination to come back from the second ACL injury as a freshman and, especially, the rigorous and grueling 18-month rehab process she went through, only to be struck down once again. He mentioned that he had tried to play football at the University of Delaware “back in the day” but really “wasn’t as good as he thought he was”, and talked of the life lessons sports teaches all its participants no matter how gifted or ungifted they might be.
After more than a few seconds of silence and looking reflectively into the distance, he then whispered that he had a granddaughter who had torn her Achilles heel and still another who had torn the meniscus in one of her knees. Ann said to me, “Dad, his voice was quiet as a leaf on a pond.”
Sawyer told him that she was attending Washington College in Chestertown Maryland where she would return to opening day classes as a junior the very next day. He mentioned that he knew that former F.D.I.C. Chairwoman Shelia Bair had recently been its president and revealed that he’d spoken there on several occasions.
As he turned to go he extended his hand through the open window, asking her name. In response, he said “Hi Sawyer, I’m Joe Biden. I wish you well in school. I know that your knee will get better soon. Stay strong.” Then he walked into Walgreens.
At this time of year, my wish is that each of us should make it a point to reach out to a stranger and to extend our helping hand with an open heart.
Only Ann and Sawyer knew what had just transpired. Ann told me the concern that he expressed in those five minutes for Sawyer’s well-being was palpable. And it lifted a young lady’s spirits just when they needed it most.
No one was looking that Sunday afternoon when Joe Biden took to the time to reach out and engage a stranger. But in that encounter, his character was surely revealed.
At this time of year, my wish is that each of us should make it a point to reach out to a stranger and to extend our helping hand with an open heart. Best wishes for a joyous holiday season.
I’ve been fortunate for the life lessons I was taught by my parents. Both the big ones and the little ones. The one I have the earliest memory of is the one I learned the most from: Giving.
When we were young, we started volunteering as a family. My earliest fond memory of this was of our annual trip to the Boys & Girls Club to volunteer and sell Christmas trees in the tennis court next to the Clarence Fraim Club. That experience was the way the Beardwood family got into the Christmas spirit. Giving helps to pass along important values, informs family culture and fosters a sense of caring and responsibility.
Maybe the tree lot isn’t for you. There are other ways to get involved. A donation is the most certain way of helping the Boys & Girls Club.
What are Qualified Charitable Distributions (QCDs)?
Here’s an innovative technique that pays big benefits but few are talking about. It’s called the Qualified Charitable Distribution (QCD). Why hasn’t the QCD gotten much attention? That’s because for nearly 10 years Congress made this provision part of a package of their infamous “tax extenders” which would lapse only to be reinstated, usually at the eleventh hour, for another year or two. This on-again, off-again approach made intelligent charitable planning unnecessarily complex and tricky.
For years, the on-again, off-again approach of “tax extenders” by Congress made intelligent charitable planning unnecessarily complex and tricky.
Generally stated, a QCD is a nontaxabledistribution made directly by your IRA custodian payable to a charity chosen by you. Importantly, the IRS says that QCDs can be counted toward satisfying the required minimum distributions (RMDs) you must take from your IRA. That is, you can use the QCD to satisfy all or a part of your RMD for the year.
What does this tax-speak mean? If you really don’t need all of the annual income you get from the forced RMD coming out of your IRA with its federal and state income tax bite, you can direct a QCD to a charity instead and get the pleasure of seeing the charity you love enjoy your gift, income tax-free.
Other Tax Benefits of QCDs
QCDs may offer other tax benefits too. Unlike regular withdrawals from a traditional IRA which are included as income, because QCDs are excluded from taxable income they effectively lower adjusted gross income (AGI) and may create favorable tax outcomes through credits and deductions, including Social Security and Medicare. But remember, because the transfer is not recognized as income, there is no charitable deduction you can take if you itemize deductions. And also remember the funds must be distributed by your RMD deadline.
If you really don’t need all of the annual income you get from the forced RMD coming out of your IRA with its federal and state income tax bite, you can direct a QCD to a charity instead and get the pleasure of seeing the charity you love enjoy your gift, income tax-free.
The mechanics, as well as tax reporting of a QCD, can be complex and confusing. Westover has guided clients in this endeavor for many years and stands ready to assist.
Giving is good, but smart giving is great! If a cause or charity inspires you, consider a QCD to make the most of your generosity.
Equifax, one of the three major credit bureaus, was the victim of one of the largest data breaches in history. Information exposed included Social Security numbers, home addresses, credit card numbers, drivers license numbers and birth dates. The company estimates that the data of over 140 million people are at risk which equals roughly half the U.S. population. That means that the chances you are affected are pretty high.
At Westover, we take great care in safeguarding all sensitive and confidential information and we encourage our clients to take proactive steps to protect your personal information. Below are the steps you need to take to ensure your information is protected.
1. Enroll in Equifax’s identity protection program, Trusted ID. The program is designed to help prevent identity theft and tampering with your credit. To access Equifax’s site to determine if you were impacted, visit www.equifaxsecurity2017.com. Whether you are affected or not, U.S. consumers can get a year of credit monitoring for free.
2. Check your credit reports from Equifax, Experian, and TransUnion for free by visiting annualcreditreport.com. Accounts or activity that you don’t recognize could indicate identity theft. Visit IdentityTheft.gov to find out what to do.
3. Consider placing a credit freeze on your files. A credit freeze makes it hard for someone to open a new account in your name. Keep in mind that a credit freeze won’t prevent a thief from making charges to your existing accounts.
4. Monitor your existing credit card and bank accounts closely for charges you don’t recognize.
5. If you decide against a credit freeze, consider placing a fraud alert on your files. A fraud alert warns creditors that you may be an identity theft victim and that they should verify that anyone seeking credit in your name really is you.
6. File your taxes early — as soon as you have the tax information you need, before a scammer can. Tax identity theft happens when someone uses your Social Security number to get a tax refund or a job. Respond right away to letters from the IRS.
At Westover, we take great care in safeguarding all sensitive and confidential information and we encourage our clients to take proactive steps to protect your personal information.
If you have questions or need assistance with implementing any of these measures, please contact us.
Writers Note: I hesitated to write this epistle because I feared some would choose to interpret it through their own political prism. Please don’t. I subscribe to no political agenda in writing this piece. That is not my purpose. This is an article written to be viewed through the kaleidoscope of economics, and economics only. Westover is entrusted with the financial assets and well-being of many clients. It is for the purpose of better safeguarding and growing your assets that I write this article. I respectfully ask that you read it in that light.
– Murray Sawyer
Gross domestic product or GDP is the best way to measure the health of a country’s economy. It measures the total dollar value of all goods and services within a country’s borders produced over a specific period of time.
This past spring we featured an economist at our annual Westover Spring Summit. That speaker, Joel Naroff, opined that the United States was stuck in an economic rut, where annual GDP growth would not exceed 2% for the foreseeable future. The last eight years of the previous administration had seen yearly GDP growth at 1.47%. Naroff’s thesis was that going forward a 1.5%-2% rate of economic growth will be our country’s “New Normal.”
I beg to differ.
This week voices from both the left and the right have also taken exception to the Naroff Narrative. First, former United States Senator Phil Gramm (R-Texas), who is also an economist by trade, argued in an opinion piece in the Wall Street Journal that growth at 3% is not only possible but our historic birthright. He pointed out that plus 3% GDP growth on average had been historically achieved for over 150 years…until the start of 2009 and the policies put in place by the administration in power at that time.
Then, just two days later on September 13th, Jamie Dimon the CEO of JP Morgan Chase and a Democrat, declared at the Delivering Alpha conference “If we did things right, we’d be growing at 3%.”
So what’s it to be? 2% or 3%?
Here are some facts and arguments. What do you think?
I’ll See You Two
First, The Naroff Narrative: GDP is a function of two things – labor and productivity. As to the first, the demographic changes in the United States show that our population is aging relative to its historic norms with a very large bubble of Baby Boomers who are just starting to leave and who will continue to exit the workforce for years to come. That loss of aged workers will be larger than we have ever experienced before. In addition, the traditional influx of immigrants has been and will continue to be reduced through Trump immigration policies. Finally our country’s declining birth rate is an historical anomaly but nevertheless a trend that does not seem likely to abate, particularly if immigration is restricted. The combination of those three labor observations will have a deleterious effect on labor force participation in the future.
As to the productivity component, Dr. Naroff is of the view that technology has effectively reduced the ability of our labor force to be anything but marginally productive going forward. Hence his prediction that our GDP would continue to fall in the 1.5 to 2% range for the foreseeable future.
Naroff is not alone in taking this view. Six months ago the Congressional Budget Office (CBO) slashed its 10-year growth forecast for the United States to 1.8% per year. But remember, this is the same CBO that predicted 10-year GDP growth at 3% in 2009, as did the Federal Reserve. With the benefit of hindsight we now know how those predictions fared.
From a Where-is-America-Going–in-Our-Next-Generation perspective, 3% growth rather than 1.8%, is critical to the concept of American Exceptionalism. In the famous words of John Winthrop, the Puritan preacher who uttered those words onboard the Arabella headed to the Massachusetts Bay Colony in 1630, will we still be that “City on the Hill”a generation from now?
Both JFK and Ronald Reagan returned to that question and that phrase during their administrations when facing great national challenges. I, for one, think we face an equal challenge today. How we set Washington policies to resolve that GDP debate will set the table for the economic success or failure of our next generation.
I’ll Raise You One
Next, the Gramm Rejoinder. Gramm received a PhD in economics from the University of Georgia and taught economics at Texas A&M University for 11 years before entering the political arena. So he carries genuine bona fides as an academic economist.
He started his political life as a Democrat, serving in Congress in 1978. But, like Ronald Reagan, he switched parties joining the Republican Party before becoming a U.S. Senator in 1984. To some on the left he is viewed as a partisan and, as such, they say his ideas should be dismissed. I understand that point of view when he speaks from a political point of view, but disagree with it when considering his economic observations. I am of the mind that even those with whom we may disagree should be heard, their ideas fairly considered. And the truth thereof acknowledged when we are persuaded.
Gramm notes that 3% annual growth is akin to our “national birthright”. He points out that our country’s real growth averaged 4.2% from 1820-1889. It averaged 3.7% from 1890 to 1948 and came in at 3.4% from a 1948 to 2008. That’s through periods including the Civil War, World Wars I and II, the Great Depression, Vietnam, and 39 recessionary times. Do the math. For 187 years the United States GDP growth rate averaged 3.79% annually. By comparison, from 2008 to 2016 GDP averaged a measly 1.47%.
Gramm ascribes the change to several government policies occurring simultaneously which affected both labor and productivity.
First, he looks to an explosion in rules and regulations across many sectors, including healthcare, energy, manufacturing and financial services. Companies were forced to spend billions of dollars on new capital and labor which served the government but which did not serve consumers. “Banks hired compliance officers rather than loan officers. Energy companies spent billions on environmental compliance costs and none of it produced energy more cheaply or abundantly. Health insurance premiums skyrocketed but with no additional benefit to the vast majority of covered workers.” The sum total of these policies severely constricted worker productivity.
Speaking personally, Westover’s federally mandated compliance regulations now cause us to spend 10 times what we spent ten years ago. And no economic benefit has befallen either our clients or ourselves in return for that regulatory overkill.
Second, he addresses the Naroff reduced labor force argument. Dr. Gramm acknowledges the significance of an aging American population. He points out that labor force participation rates were 66.2% in 2006 and that the Bureau of Labor Statistics predicted that Baby Boomer demographic changes would push it down to 65.5% by 2016. However, under the policies extant from 2009-2016, labor force participation actually felt significantly further, to 62.8%. The number of working- ge Americans who were not in the labor market spiked to 55 million during those years.
As to the low birth rate observation, he replies that if the current population above age 16 were to grow at a modest 1%, a reversion to the 2006 labor force participation rates (66.2%) rather than 2016 rates (62.8%) would supply more than enough workers to generate 3% GDP growth for years to come. “With 3 percent growth, the American dream is achievable and virtually anybody willing to work hard can live it”. But “let 3 percent die and a lot of what we love most about our country will die with it.”
Finally, on the labor question, this is his observation. He points out that during the period (2009-2016) that work requirements for welfare were eliminated or reduced, that food stamp eligibility requirements were lowered and that standards for receiving disability payments were eased. Disability rolls expanded 18.6%. The end result of those policies “disincentivized work.” Work. That’s the operative word. It’s the necessary ingredient, the sine qua non, to creating a country’s healthy GDP.
This debate is what I refer to as the “heart versus head” tension in the American body politic. When the head ascends, GDP goes up; and when the heart ascends, GDP goes down. We need policies which bring us a combination of both, not just one or the other.
And I’ll Also Raise You One
And what is Jamie Dimon’s view? The Delivering Alpha conference held in New York City is an incomparable who’s who of the investor community. Hedge fund honchos, private equity giants and leading institutional investors offer their candid views along with illustrious political and economic commentators. In my profession it’s a big deal. This is the group Jamie Dimon was speaking to yesterday. He ripped the current state of the US economy, and said that growth had been constrained by years of inaction in Washington.
He noted that congressional gridlock and excessive regulation, coupled with the absence of tax reform, has led us to our current state of lethargic growth. “There’s something wrong. All I’ve ever said is if we did things right, we would be growing at 3%.”
Dimon’s prescription for a strong growth path is slightly different and broader than the Gramm agenda, but nevertheless is solid. He calls for changes to immigration, education and labor force laws in addition to tax and regulatory reform. As to the latter he made my day by saying “Hey, ask any small business, any of you in this audience, what have regulations ever done? They are crippling certain businesses.”
Personally, and speaking as a registered Democrat, I don’t care who’s in the White House or who gets the credit for economic policies which could bring us 3% growth. President Clinton brought the country 3.9% GDP growth during his 8 years. That’s better than either Presidents Bush or President Reagan and, yes, significantly better than President Obama.
Maybe there’s something to this recent Trump-Schumer and Pelosi romance. The President has a three-pronged approach which he asserts will get this nation’s growth agenda moving at 3% or more: (1) private-public infrastructure spending, which is traditionally a Democratic idea; (2) reduced regulatory oversight, typically Republican dogma; and (3) tax reform. In the old days this was a bipartisan idea. Do you remember that Congressman Dick Gephardt (D-Missouri) and Senator Bill Bradley (D-NJ) were the leaders and co-sponsors of what was called the 1986 “Reagan” Tax Reform Act? It should be again.