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“How Long to the Point of Know Return?”

Can we finally talk about the $21 Trillion Elephant in the Room? I know its been an entertaining/incredible/painful/awful (pick your adjective) l7 months since Trump office between the Russia investigation, immigration dysfunction, the hush money payouts to a former porn star, the trade wars, the interminable tweets from the White House etc. But maybe we can actually do something that will shape this country’s future– whether marked by a worldwide depression of unprecedented levels or one where at least there continues to be improving growth in incomes and employment.? Federal debt outstanding totals an eye-popping $21.2 trillion with state and local debt totaling an additional $3.1 trillion.

In addition, total debt in the US has soared to over $70 trillion (almost 3 times the debt burden in 2000). which includes federal debt at $21 trillion, state and local debt at $3 trillion, personal debt (mortgage/ credit card/student loans primarily) of $19 trillion. In other words as bad as the government being awash in red ink is–and it is clearly our worst financial problem–individual debt is also soaring.

The US debt time bomb is still ticking. In fact now it is ticking even louder and faster, but is still silent to most Americans, Congress and the Presidency. The CBO released its ten-year budget projections in April which included the new tax law enacted by Congress at the end of 2017.

  • On the positive side, the projections show a steady growth in tax revenues from $3.33 trillion in 2018 to $5.52 trillion in 2028 or an average of 5.2% per year.
  • On the negative side, total government spending or outlays will grow much faster from $4.1 trillion in 2018 to more than $7 trillion in 2028! 
  • As a result, the projections show the annual budget deficit growing once again from our current estimated “low” levels of about $665 billion  in 2017 to about $1 trillion in 2020 and $1.4 trillion by 2027.
  • The national  debt is currently $21.2 trillion or 105% of US GDP. (See usdebtclock.org if you really want to get depressed!). According to CBO figures, this debt burden will grow to approximately $24 trillion by 2022 and to about $32 Trillion by the end of 2028 or a growth in our US debt of about 50% in the next decade. This means that the total US debt will more than triple in the 20 years between 2007 and 2027 ($31 Trillion vs. $9 trillion in US debt in 2007) and will more than quintuple from 2000 to 2027 ( $31 Trillion vs. $5.6 Trillion in 2000).
  • In a few cases, the CBO projections are overly pessimistic. For example, while real GDP grows at about a 3% rate during 2018 and 2019, it falls to 2% in 2020 and grows only 1.5% to 1.8% thereafter. With the stimulus of the tax cuts and particularly the likely capital spending and associated productivity gains associated with allowing expensing of capital investment under tax reform, along with the large deficit spending projected for a number of years in the future, I think real GDP will probably grow faster than this and this means tax revenues should also grow faster.
  • On the other hand, on the spending side, the CBO projections are in my view VERY optimistic. They assume almost no increase in inflation from current roughly 2% levels. (CPI grows to 2.4% from current levels of 2.2% per year). They also assume that the interest on long-term treasury debt will only increase to about 3.7% (from today’s 3.0%) in the next 10 years which is still well-below normal levels. This assumption is particularly important as federal outlays on just paying interest on debt are very likely to exceed $1 trillion per year by the middle of next decade assuming we move to more “normal” interest rates. Even the CBO’s conservative interest assumptions result in it reaching $0.9 trillion in 2028  ( I would estimate about $1.3 Trillion in 2028). Still even with CBO’s comparatively low-interest rate assumptions interest on the debt will become the 3rd largest budget item for the federal government, passing defense spending of $0.8 trillion and after Social Security $1.8 Trillion and Medicare’s $1.5 Trillion in 2028.

So why doesn’t anybody seem to care?

First, there is the ridiculous misnomer of comparing our total GDP to total federal debt as if this comparison is meaningful. The comparison suggests that somehow we have “covered” our debt with our total economic output. But as economist and investment advisor Bob Wiedemer points out, the correct comparison is annual federal revenues vs total federal debt. Thus our true debt coverage ratio is much scarier –only 15%. (vs the roughly 100% coverage using the fallacious GDP to total debt ratio). To put this into perspective, imagine someone who makes $60,000 per year deciding to go on a luxury 6 month around-the-world vacation costing $400,000 and trying to do so with no money down thru a $400,000 unsecured loan. Would any banker or finance company make this loan?

Of course, our federal debt situation is a bit better because the federal government controls the printing of money which means as we did during most of the Obama years we can monetize the debt. The Fed buys treasury bonds by printing money, simultaneously keeping interest rates lower and financing some of the debt. But printing money is a temporary solution at best and one that is fraught with risk (most notably much higher inflation) that we have managed to dodge at least for now. But greater and greater debt levels and rising interest rates likely will have even more dire consequences for the economy and the deficit in the future, making even more money printing likely and rapid inflation/economic depression a very likely consequence.

Second, there is a political situation in this country that is unprecedented. We have a two-party system where neither party seems to be able to even agree on the most basic of economic issues. Republicans generally believe that greater economic growth will lead to increasing tax revenues which will eventually allow deficits to disappear or at least diminish its significance. Tax cuts and reform (i.e. the Tax Reform Act of 2017) and reduced regulations are the Republican “Supply-Siders” main methods for increasing growth. Also, Republicans view that discretionary non-Defense domestic spending  can be reined in and cut to help control the long-term spending. In contrast, Democrats are generally against spending cuts, except for Defense, and Democrats are also for tax increases (though mostly on the wealthy few) and are generally against tax cuts. My own view is that to get us out of this mess we need to take the best of both sets of solutions in order to get us out of this mess.

Third, with elections in November and the polarized political environment NO ONE is willing to talk about either Social Security or Medicare (or for that matter Medicaid). Excluding interest on the debt, in 2028, CBO projects $4.5 trillion of the $6.1 trillion of government expenditures or nearly THREE QUARTERS of all government expenditures will be spent on Social Security ($1.8 Trillion), Medicare ($1.5 Trillion) and Medicaid ($0.6 Trillion) or other government/veterans retirement and income programs ($0.6 Trillion). But any Republican who dares talk about possible cuts or changes in these programs will be almost certainly punished in the elections, while any Democrat who talks about payroll or other tax increases to fund the difference fears the same retribution from voters.

Bottom line, I don’t see any current actions that will change the CBO dire forecast very much and if anything I think the situation will likely be even worse, when you factor the strong likelihood of a recession and perhaps a major depression in the next 3-5 years. The problem of course is the greater the debt the more likely we will see increases in inflation, interest rates and ultimately a major stock market decline and crash, which will in turn will result in a major decline in the dollar value, further increase $ inflation, further exacerbating the deficit and debt problems greatly increasing unemployment, and lowering incomes.

So what do we do to prevent this nightmare from coming true? Clearly, we must start doing something NOW to deal with our burgeoning deficit and debt to give the markets some assurance that the US will eventually pay down some of its large federal debt, BEFORE the markets lose confidence in US treasuries and the stock market. I have in mind a multi-faceted strategy on Social Security, Medicare/Medicaid and discretionary government spending. For this blog, I will post about the “easiest” to deal with Social Security and leave the more difficult Medicare/Medicaid discussion for later.

Social Security

Social Security is inherently the most fixable of our current bankrupt government programs and it can be done by spreading the pain across a few of the main categories of funding and benefits. I believe it can also be done without changing the monthly benefits that current and future retirees are depending on, though it would mean somewhat more taxes on current workers and retirees as well as a delay of the official retirement age:

  • Raise the Full Benefit Retirement Age – With Americans who make it to their 60s increasing living past age 90, Currently the last Social Security law (passed in 1983) is gradually increasing the full benefit retirement age from 66 years gradually to 67 years over the next few years but this still means that Social Security is being paid to many for 20-25 years or even more. This of course is far longer than originally intended with the law designed to cover the last 10-15 years of life. Notably, more Americans are working into their late 60s and even their 70s than ever before. One possible change would be to accelerate full retirement age to 70 in five years and to 72 in 10 years.
  • Increase Taxation of Social Security Benefits for middle and upper-middle income retirees. – Currently, social security income is tax exempt for lower-income recipients(for married couples those whose “other income” totals less than $32,000 and 50% of benefits are taxable for those with “other income” between $32,000 and $44000. Above $44000, 85% of Social security benefits are taxable. (The actual formulas are actually more complicated than this….hey its the IRS!…but this gives you the general idea.) Because the new tax law significantly reduces the tax rates for lower and middle-income brackets, this means there will be less revenue from federal income taxes on social security benefits. One way to raise back some of these lost revenues is to make 100% of benefits taxable at the $44,000 threshold.
  • Increase Payroll Tax Limits for Social Security -In 2018, there is a 6.2% payroll tax for employees and employers for the first $128,400 in income with this income limit rising by inflation every year. Clearly, this is no longer enough to fund social security recipients as it once was, particularly with the increasing retirement of baby boomers over the next decade. One way to plug this gap would be to raise the tax limit to $150,000 in 2020 and then by $20,000 per year between 2020-25 until one reaches $250,000 in 2025. These tax limits would be indexed to inflation per the current law.

In 2018, Social Security Tax Receipts are estimated at about $0.9 trillion which are already less than  $1.0 trillion in total Soc. Security outlays. But without changes in the system, tax receipts in 2028 will total $1.4 trillion while outlays will swell to over $1.8 trillion in 2028 – a funding gap of more than $0.4 Trillion. I estimate that the changes noted above would eliminate this future funding gap by reducing outlays (due to fewer recipients in 2028 by raising the retirement age) paid to $1.6 trillion and increase tax receipts to $1.6- $1.7 trillion. (NOTE: My estimates are very rough because I don’t have access to all the data the CBO or the Administration has in making their projections, however, they are accurate enough I believe). Further they can be fine tuned to those actually doing detailed studies of the data. In addition, there are other levers at our disposal that I haven’t included above. For example, one would be to raise the payroll tax % on all income (say from 6.2% to 8% on both employees and employers), another would involve reducing future benefits slightly by using CPI inflation -1% for indexing. The point is there are a number of solutions that can spread the burden across younger workers and retirees and put the Social Security system back on a financially viable footing.

Though politically difficult, I actually believe Social Security is the best program to tackle first for Congress. For one, reasonable things can be done to bring the system in balance and have it start building up a trust fund again. And just getting SOMETHING done on the long-term budget and debt issue will hopefully be enough to settle (for a time) the increasing concerns of the markets over the total burgeoning US debt. In other words, it’s a good place to start. Will we? I think it depends not on Congress but the voters. If we demand a bipartisan solution now, we are much more likely to see one in the foreseeable future. Lets hope so, because we are getting closer to the “point of know (no) return”.

 

1978 “Don’t Look Back”

Forty years ago, I had one of the best years of my life. 1978 was a year of change and excitement. It didn’t start out that way with a brutally cold and snowy winter in New York City and still mourning the end of my two-year relationship with my college girlfriend. But as Spring and early Summer arrived, I began to prepare for my escape from New York and my future at Stanford Business School.

In late June, I bought my first car– a Toyota Corolla, two-door sedan (only a 1.1 liter engine, with no AC and manual transmission to save money, but naturally a tape deck and stereo!).Then in August, I drove cross-country with my friend Dave Dorsey with all my possessions crammed in the small back seat and trunk of my car. Our trip was mostly on Route 80 across the GW Bridge thru the Delaware Water Gap, to Cleveland/Shaker Heights (my future stepfather’s home) to Buffalo Grove,IL (Dave’s parents house) to Sioux City, Iowa (friend of my mom’s) to Buffalo, Wyoming (Vassar classmate of my mom) to the Wind River Mts. for 3-4 days of hiking, to Elko, Nevada (first gambling experience) to Yosemite (another 3-4 days of hiking) to my final destination in Palo Alto, Ca. Within a day of moving into/renting a room in a condo in Palo Alto, I was off to San Fransisco with my new roommates to see the punk rock group The Dead Kennedys.

Disco Still Rules

Rock music was also undergoing significant change as well and mostly for the better,but like my personal life, music in 1978 did not start out that way. Saturday Night Fever, the soundtrack from the movie of the same name was atop the album charts for the first six months of 1978. Meanwhile, disco singles from the album dominated the charts. These included “How Deep is Your Love”(#1 Jan.), “Stayin’ Alive” (#1 Feb.) and “Night Fever” (#1 Mar.- May) by the Bee Gees, as well as “If I Can’t Have You” (#1 May) by Yvonne Elliman and Disco Inferno (#11 Apr.) by the Trammps.

I’ll admit “good” disco songs were catchy, generally upbeat and occasionally fun (“Stayin’ Alive” and “Disco Inferno” definitely fell into this category), but I found myself quickly yearning for rock music particularly after repeated listenings of these hit singles. But “Saturday Night Fever” had swept up America at least thru the Spring of 1978.

Rock Renaissance

However, rock was to rebound by the second half of 1978 with many of the best albums out in the summer of ’78. It was fitting as I enjoyed these songs while approaching the Rockies for the first time driving 75-80 MPH in states where speed limits were high and/or seldom enforced. (I would have driven faster but it was all my Toyota could physically muster unless heading downhill after mountain passes.)

Four albums emerged as standouts for the year. All were released during June-August of 1978:

My favorite album of the year was The Cars (June 1978) by The Cars. The debut album by this Boston area group is without question their best and perhaps the best album of the entire “new wave” of the late 1970s. It was my first purchase upon arriving in California just prior to my first year at Stanford Business School. I played it incessantly.

Side 1 begins with three superb tracks “Good Times Roll” (#41 Apr. ’79) , “My Best Friend’s Girl” (#35 Dec.)  and “Just What I Needed” (#27 Sep.) which not surprisingly were all released as singles. “Good Times Roll” signals that this album was going to be VERY DIFFERENT with a rock song melded into interesting techno-rock instrumentation and a slow driving rhythm. The pace picks up with the utterly fun “My Best Friends Girl” (“and she used to be mine, she’s so fine“) which immediately segues to the interesting rhythmic intro to the lively “Just What I Needed” (“I don’t mind you coming here and wasting all my time“). Wow! “”I’m in Touch With Your World” is next and although the weakest track on the album at least it provides a welcome respite. “Don’t Cha Stop” the most uptempo song on the album is just a pure rocker, not as interesting as the other songs on the album, but good nonetheless.

Side 2 is even better because ALL four songs are superb, while flowing together musically and lyrically which adds to their overall appeal. “You’re All I’ve Got Tonight” features a great new edgy techno-rock sound primarily using guitars and keyboards. Ironically, it ends lyrically with “I need you tonight” and then a six-note musical/lyrical reversal into the second track, “Bye Bye Love”, with bassist Benjamin Orr now singing lead “always with some other guy, it’s just a broken lullaby”, another great techno rocker. (I confess that for years I thought Orr was saying “always with some other guy, it’s just a fucking alibi”, which would have been a better line, but might NOT have been approved by the record company in the 1970s.) The crescendo of techno-rock ends with the same six-note sequence and moves more softly into “Moving in Stereo”, another great song that lyrically belies classification (“life’s the same I’m moving in stereo, except for my shoes”). The last song, another great tune, “All Mixed Up” fittingly provides at least some resolution of the tenuous, tempestuous relationship begun with “You’re All I’ve Got Tonight” (“she’s always out the window, when it comes to making dreams. It’s all mixed up”) but then it finishes (“she says to leave it to me, everything’ll be all right”).

Another excellent album was Who Are You? (August 1978) by the Who. The title track “Who Are You” (#14 Oct.) was the best song recorded by the group since 1971’s “Won’t Get Fooled Again” and in many ways was a throwback to that song’s style and message. It was a lengthy song, containing angry lyrics about fighting (allegedly an incident with the Sex Pistols at CBGBs ) and a hard rock style with an irresistible chorus and guitar hooks. Six and a half minutes of music heaven! But the album boasted much more. The self-deprecating rocker, “New Song” (“I write the same old song with a few new lines and everybody wants to cheer it….We sing the same old song  just like a vintage car, you can look but you never can drive it“) perhaps fittingly became an instant classic for Who fans. “Had Enough” was another excellent angry Who rocker in the mode in “Who Are You” but written by bass player, John Entwistle. (Entwistle wrote two other solid tracks on the album “Trick of the Light” and “905” ). “Guitar and Pen” was my second favorite song on the album, an autobiographical look at Pete Townshend life as songwriter and guitarist, as well as being an excellent catchy rocker. “Sister Disco” (“Goodbye Sister Disco with your flashy bright pants“) was also catchy, seemingly an homage to disco or an indictment, but according to Townshend, it was his view that the Who would never be part of the Bee Gees wave of disco popularity but instead remain British “old farts”. I choose to believe it was Townshend’s prescient belief that disco with Saturday Night Fever has peaked and would never be the same again.

Another favorite and also from the summer of rock heaven in 1978 was Some Girls  (June 1978) by the Rolling Stones. This was the Stones best single album since 1971 Sticky Fingers. The centerpiece was the disco influenced “Miss You” (#1 Jul.)  an excellent rock-disco song but my favorite was “Beast of Burden” (#8 Nov.) a song that reminded me of the rock-bluesy “Wild Horses” with Keith Richard’s ever extraordinary guitar work most evident. But the album had much more ranging from an excellent rock cover “Imagination” of the Temptations soul ballad “Just My Imagination”, a Jagger rock-rap “Shattered” (#31 Jan. ’79), and three more traditional but excellent rockers “Respectable”, “Lies” and “When the Whip Comes Down”. In fact, there was not a weak track on the album.

After three years, Bruce Springsteen emerged from his contract war with former manager Rick Appel with a new album Darkness on the Edge of Town  (June 1978). Though the album was not as good as Born to Run  (my favorite and arguably the best of Springsteen’s entire career), it was still quite good. The album was highlighted by the lively “Badlands” (#42 Sep.) and the rocker love ballad “Prove it All Night” (#33 Jul.). But “Adam Raised a Cain”, “Something in Night”, “The Promised Land” and “Darkness on the Edge of Town” were also very good songs. Springsteen with “Darkness…” continued to prove that you didn’t need to be a great (or even a very good vocalist) to produce excellent songs.

Boston‘s second album Don’t Look Back (August 1978) was not up to the standards of their superb first album. Nonetheless the album did boast several very good tracks: “Feelin’ Satisfied” (#46 Apr. ’79), “Party” and “A Man I’ll Never Be” (#31 Jan. ’79) all had nice tunes, strong vocals from Brad Delp and excellent, albeit very familiar, guitar licks from Tom Scholz. However, it was the more original and brilliant title track “Don’t Look Back”(#4 Oct.) that truly soared. Perhaps my favorite of all Boston songs, “Don’t Look Back” also had simple but very relevant lyrics to someone who was in the process of moving across country to where he knew absolutely no one. (“A new day is breaking. It’s been too long since I felt this way. I don’t mind where I get taken, the road is calling today’s the day”)

Foreigner‘s second album Double Vision (June 1978) was good as well, mostly due to the three excellent hit singles from the album. “Hot Blooded” (#3  Sep.) (“I’ve got a fever of 103“) , “Double Vision”(#2 Nov.) and “Blue Morning, Blue Day” (#15 Feb. “79)

By the fall, Billy Joel had a trio of excellent songs from his 52nd Street (October 1978) album including the catchy hit “My Life” (#3 Dec.), my favorite, the rocker “Big Shot” (#14 Mar. ’79) and the soft ballad “Honesty” (#24 Jun. ’79). 52nd Street went on to win the Grammy for album of the year in 1979.

New Groups and New Wave

In addition to the Cars, eight other new artists emerged or became popular in 1978 with the release of excellent albums and/or songs.

Outlandos D’Amour  (Nov. ’78) was the Police’s debut album and another headline of the new wave movement in 1978. All the songs on the album are interesting with “Truth Hits Everybody’ , “Next To You” and “Peanuts” particularly lively new wave rockers, with Police’s unique reggae-rock sound featured. However, three were standouts. “Roxanne” (#32 Apr. ’79) was the group’s first American hit and both “I Can’t Stand Losing You” and “So Lonely” should have been hit singles.  While “Roxanne” is perhaps the group’s most famous song from the first album, my favorite was “So Lonely”.

After two commercially unsuccessful albums, the New York city group, Blondie released Parallel Lines (Sep. ’78). The album spawned their first two hits in the US – the disco oriented “Heart of Glass” (#1 Apr. ’79) and my favorite, a pure rocker “One Way or Another” (#24 Jul. ’79) (“I’m gonna find you, I’m gonna getcha, getcha, getcha”). Blondie featured blond and beautiful, lead-singer Debra Harry whose soaring rock vocals continued a new trend started by Heart a couple of years earlier. Both a new wave and a pop-rock group, the group featured songs co-written by Harry and lead guitarist Chris Stein with several others from the album – “Picture This” “Sunday Girl”, “I’m Gonna Love You To” and “Hangin’ On the Telephone” – enjoying international success as singles.

While definitely NOT “new wave”, Dire Straits self-titled first album Dire Straits (Oct. ’78) first album demonstrated a unique rock style. The London-based group was described by Rolling Stone as “a groove band” with “low-key country blues rhythms”. I would describe Dire Straits as an all-guitar/ bass-rhythm section band with a very cool, mellow and unique rock sound.  It didn’t hurt that the group’s founder and lead Mark Knopfler was a great guitarist.  The album featured many good songs – no throwaway tracks on this album! I particularly liked “Down to Waterline” and “Southbound Again” and of course the best song on the album which put the group on the map  “Sultans of Swing”(#4 Apr. ’79).

A hard-rock party band from California, Van Halen burst onto the scene with their self-titled first album Van Halen (Feb. ’78)The album featured many of the groups most famous songs (though mostly in retrospect). These included most notably—“You Really Got Me” (#36 Mar.) a successful cover of the Kinks hit, “Runnin’ With the Devil” (#84 May), “Janie’s Cryin'” “Ain’t Talkin’ Bout Love” as well as the Eddie Van Halen electric guitar solo “Eruption”. I’ll admit it took until 1984’s “Jump” for me to become a full-fledged fan of the group, but it was their first album that remains their best.

“Surrender” (#62 Aug.) (“Mommies alright, daddy’s alright, they just seem a little weird”) was Cheap Trick‘s  first charting single and one of their best songs. The Illinois based new wave/rock group was to remain popular for much of the next dozen years.

Though Genesis had been around for about a decade, “Follow You, Follow Me” (#23 Jun.) was their first top 40 song in the US and a nice rock ballad at that.

Likewise, Warren Zevon had been working as a singer/songwriter/pianist since the mid-sixties but finally had a popular hit with the thoroughly enjoyable and catchy “Werewolves of London” (#21 May). I was learn more than a year later that this was one of Anne’s (my future wife) favorite songs. (“I saw a werewolf with a Chinese menu in his hands….Little old lady got mutilated late last night. werewolves of London again… Ah-hoo werewolves of London!” )

Scotsman Gerry Rafferty (former member of Stealers Wheel) released his second solo album City to City (Jan. 1978) which was his first popular album and rose to #1 on the US album charts. It also spawned a nice trio of mellow rock hits “Baker Street” (#2 Jul.)  , “Right on Down the Line” (#15 Oct.) and Home and Dry (#28 Feb. ’79).

Other Rock Hits

The Street Survivors (Oct. 1977) album was released Lynyrd Skynyrd in late 1977 just days before the plane crash on Oct. 20th that took the lives of 3 band members included leader and lead vocalist Ronnie Van Zant. In addition to the group’s standards “Free Bird” and “Sweet Home Alabama”, three excellent songs from this album–“What’s Your Name” (#13 Mar.),  “That Smell”, and “You Got that Right” (#69 Apr.) – were receiving tons of air play on FM progressive stations during 1978.

Joe Walsh had his best solo effort (and most popular) with the utterly fun and at least partly autobiographical rocker “Life’s Been Good” (#15 Aug.) (“My maserati goes 185, I lost my license now I don’t drive” ).

Heart had another hit single with the rousing “Straight On” (#15 Nov.). Unfortunately the album Dog and Butterfly (October ’78) had little else to offer.

The comeback hit “A Rock n Roll Fantasy” (#30 Sep.) by the Kinks was the group’s first top 40 hit since 1970’s “Lola”. The lyrically interesting song (“He just spends life living on the edge of reality. He just spends his life living in a rock n’ roll fantasy“) contains nice vocals and a good rock tune.

New wave’s Talking Heads released their second album More Songs About Buildings and Food (July ’78) which contained a superb cover of Al Green’s song “Take Me to the River” (#26 Feb. ’79).

Styx  had two more catchy rock singles in 1978 –“Fooling Yourself (The Angry Young Man)” (#29 Apr.) and “Blue Collar Man (Long Nights)” (#21 Nov.).

Unlike many, I did not enjoy Bob Seger’s slow ballads  “Still the Same” (#4 Jul.) and  “We’ve Got Tonite” (#13 Jan. ’79) but I did like his hard rockin’ “Hollywood Nights” (#12 Oct.).

Soft Rock and Pop

While harder rock and new wave definitely were my favorite genres in 1978, several softer rock and pop songs were good as well:

  • “Time Passages” (#7 Dec.) by Al Stewart was not as good as Stewart’s previous extraordinary hit “Year of the Cat” but a nice ballad nonetheless.
  • “Feels So Good” (#4 Jun.) by trumpet player and band leader Chuck Mangione was definitely the instrumental of the year and spawned a popular career for Mangione which included some memorable “Is it live or is it Memorex (tape) ?” ads.
  • “Whenever I Call You Friend” (#5 Oct.) by Kenny Loggins  was Loggins first solo top 40 hit and a very good tune at that, with a nice assist from Stevie Nicks singing harmony.
  • “Ebony Eyes” (#14 Apr.) by Bob Welch – Though not as good as his earlier 1977 hit “Sentimental Lady”, Welch’s second hit song was still a nice pop tune.
  • “Thunder Island” (#9 Mar.) – Jay Ferguson. Ferguson was the former leader of the band Spirit and his first solo hit was his best
  • “Back in the USA” (#16 Oct.) was the highlight of Linda Ronstadt‘s new album Living in the USA. A nice up tempo version of Chuck Berry’s song which featured Ronstadt’s great voice.
  • Kansas Point of Know Return (Oct. ‘77) album spawned the slow rock ballad  “Dust in the Wind” (#6 Apr.). A good song, but hopelessly overplayed on the radio and very difficult to hear when getting up in the morning (“All we are is dust in the wind”)
  • John Travolta and Olivia Newton-John had a huge hit from the movie Grease “You’re the One that I Want” (#1 Jun.) which was definitely the movie’s musical highlight, though Frankie Valli‘s “Grease” (#1 Aug.) wasn’t bad either.

Rock and Pop “Misses”

Though most of rock and new wave music was excellent  in ’78, there were also several major disappointments. One of my favorite groups, the Moody Blues FINALLY put out their next album Octave (June ’78) after a more than 5 year hiatus. I couldn’t bring myself to buy it since it had nothing of consequence other than the modestly interesting “Steppin’ in a Slide Zone” (#39 Aug.) and paled in comparison to the Moodies previous 7 studio albums. Another favorite group of mine, Yes released Tormato (Sep. 1978). Though it contained two pretty good songs “Don’t Kill the Whale” and “Release, Release”, the album was a last gasp for the group and not as good as their previous effort Going for the One the year earlier. This was to be the last studio album for founder and lead singer Jon Anderson and organist Rick Wakeman until their comeback album 90125 five years later.

Meanwhile, Rod Stewart continued to veer far away from rock with the disco song “Do Ya Think I’m Sexy” (#1 Feb ’79) which was on the charts for 21 excruciating weeks. Elton John had fallen even further off the tracks releasing A Single Man (October 1978) (minus Bernie Taupin as lyricist)  which though commercially successful was a critical bomb. I honestly don’t remember listening to a single song from the album at the time.

Paul McCartney and Wings London Town received decent critical reviews but unlike ALL of McCartney or Wings previous albums, I didn’t buy it (or for that matter ever listen to it). The headline song from the album “With a Little Luck” (#1 May) was a decent song, but nothing like past stellar McCartney songs such as “Band on the Run”, “Uncle Albert”, “Maybe I’m Amazed” etc.

Meanwhile, Neil Diamond and Barbra Streisand “You Don’t Bring Me Flowers” (#1 Dec.) was so cloying it made me yearn for the early 70s Diamond and Streisand.

Disco, R&B and Funk

Quite a bit of R&B music seemed to be subsumed in disco music, of note was the newly crowned Queen of Disco Donna Summer “Last Dance” (#3 Aug.) and her first #1, the remake of Richard Harris’ “MacArthur Park” (#1 Nov.), though I can’t say I liked either song very much.

In contrast, Earth, Wind and Fire continued to put out excellent songs with 1978 being a particularly stellar year. It began with the lively and brilliant “Fantasy” (#32 Apr.) (“Our voices will ring together, until the 12th of never“)  which somehow only managed to barely make the top 40. Next there was the great jazzy remake of the Beatles “Got to Get You Into My Life” (#9 Sep.). Last the superb “September” (#8 Feb. ’79) (“Ba de ya, say do you remember, ba de ya, dancing in September“) closed out the year. EWF combination of a great funk rhythm section, a superb horn section, wonderful high harmonies and many excellent tunes made them the best R&B group of the late 1970s (and early 1980s) bar none.

Meanwhile, the Pointer Sisters had their biggest hit and first top ten with the slow, soulful “Fire” (#2 Feb. ’79), a Bruce Springsteen composition. But my favorite popular R&B song of the year was the lively disco/funk song “Le Freak” (#1 Dec.) by Chic which could even get me dancing.

Completely under the radar, a new promising 20-year-old artist from Minneapolis released his first album and charted his first single “Soft and Wet”(#92 Nov.) to little critical acclaim. But for Prince it was to be the beginning of a recording career which spanned almost four decades.

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1978 remains one of my favorite years for rock music, perhaps it was the mostly good memories the music evoked, or that the music was in many cases new and different. In either case, it was a nice revival for rock music which had been in the doldrums since the advent of disco in the mid-1970s.

“I’ve Got the Music in Me” on Sirius XM radio

 

Full Picture of Book

“The First Cut is the Deepest?” Redux

I have been waiting for the CBO to update their long-term budget projections before I blog next about our debt, deficit and what we need to do in order to avoid an impending collapse of the US and world economies when the debt and money bubbles burst. (Hint: it’s called putting Social Security, Medicare and Medicaid on a viable financial footing!). In the meantime, I thought I would do a “replay” of a post from almost exactly five years ago, which is eerily prescient (and who doesn’t love patting themselves on the back!). In the post, I predicted that US federal debt would “swell to near $25 trillion by the end of the decade”. Given that we will be at almost $22 trillion by the end of 2018, it seems likely that we will be nearly there in 2020. I also correctly noted that the CBO was on drugs when they predicted that GDP growth would be about 4% per year during 2013-2017 (it turned out to be only 2%) and that tax revenues would almost double during this period. (They fell short of CBO’s estimate by $0.6 trillion or 20%!). My main prediction of higher inflation and more normal interest rates (which will exacerbate our deficit and debt) hasn’t come true yet, but it is moving in that direction. And lets not forget that while the tax reform law won’t change net government revenues probably much either way, the Faustian bargain of the Trump Administration seems to be to remove the sequester, allow Defense to grow a lot in exchange for allowing domestic spending and infrastructure spending to grow as well. This is not a pretty picture in the longer term.

Anyway, because I am inherently lazy, here’s what I said some five years ago:

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“The First Cut is the Deepest?”

The day of reckoning for sequestration has come and gone and the small cuts have started to go into effect. To hear some of the rhetoric coming from the President and some of our other political leaders, you would have thought  that we are now facing an economic Armageddon. I believe these fears amount to “inside the beltway” exaggerated concern over the importance of government spending to the economy. After all, the cuts of $85 billion (and only $43 billion this fiscal year) are still very small relative to the amount of federal spending (only about 2 percent of total federal spending in 2013) and only about 0.5% of total US GDP. More importantly, they pale in comparison to what will be needed to ultimately to balance the budget which will require budget cuts below current levels ( not the “fake” future cuts below inflated future levels that are often cited by many politicians as if they were “real” cuts) of on the order of $500 billion per year.  (See “Let’s Get Fis-i-cal” post and early last year posts for more info on what we need to do.)

But somehow the thought of the ghastly sequester has had many leaders in Congress pretty confused. Consider the following dim-witted remarks in the past couple of weeks:

“It’s almost a false argument to say we have a spending problem” …Nancy Pelosi(D-CA)

” Is it a spending problem? No” …Senator Harkin (D-IA)

So since we seem to have two senior members of Congress having a “senior” moment, let me make this crystal clear . Our federal spending hasn’t just grown rapidly, it has literally exploded. In 2007, we spent $2.7 trillion and by 2011 we have spent $3.6 trillion or an eye-popping 30 percent growth in federal spending in only 4 years in a period when personal income growth was flat and inflation was very low.  And in the spirit of bipartisanship, we have been growing the federal budget almost as fast during the Bush years from $1.7 trillion in 2000 to $2.7 trillion in 2007. The only good news seems to be that we actually cut outlays slightly (by $60 billion) between 2011 and 2012 ( the limited “real” cuts that occurred as a result of the 2011 budget deal plus lower interest costs due to the Fed’s huge monetary stimulus). However, by and large, this has been an aberration in a very long-term pattern. Spending also has grown across the board. Discretionary non-defense spending has grown 31 percent between 2007-11 , with defense growing 28 percent during the same period. Between 2000-07, defense spending grew the most rapidly due to the Iraq war and new homeland security expenditures, but discretionary non-defense spending also rose rapidly by about 54% during this period.

The consequences of these large spending increases is well documented. Tax revenues grew enough prior to the 2008 recession to keep the deficit from growing much (i.e. in fact, we managed to get the deficit down to about $200 billion in 2007). However, after the recession and the major increase in government stimulus, the annual deficit exploded and reached $1.3 trillion in 2010 and 2011. As a result, we are now saddled with more than $16.5 trillion in federal government debt which is more than 100% of the US GDP, an already dangerous level. And this doesn’t even count on the order of $100 trillion of unfunded liabilities for social security and medicare and other government pensions.

The complete denial of the magnitude, scope and real danger associated with the US debt on the part of some of our politicians means we are in more serious trouble than even I realized. Further, the complaining and moaning on the part of many politicians over a tiny cut in the federal budget does not bode well for the future where we will need to do much more to get our fiscal house in order. Unfortunately, we also have enablers of this fallacy such as Paul Krugman, Ben Bernanke and other Neo-Keynesian economists who insist that we should postpone any further cuts far into the future, allowing politicians to “kick the can down the road” in good conscience. We also have the supposedly unbiased, Congressional Budget Office issuing projections for the future which even though they show continued large deficits, use ridiculously optimistic assumptions such as more than 4 percent real GDP growth between 2014-17, interest rates that don’t really rise significantly until 2016 (and remain moderate throughout the period) and inflation remaining at 2 percent virtually forever.  (and “forever” is a very long time!). These assumptions drive a very rosy picture of tax revenues almost doubling in just the next 5 years, while expenditures grow by only a bit more than 20% in the same period.

PUH-Leese! ….I went thru the CBO estimates and adjusted the costs for higher likely inflation and interest rates as well as lower likely growth in the economy. These more realistic assumptions suggest that we will continue to have deficits of about $0.8- $1 trillion per year or more and that our debt will swell to close to $25 trillion by the end of this decade. And probably several years before that, the US will learn what REAL ECONOMIC ARMAGEDDON means. Just remember, if we don’t cut our spending substantially (along with really reforming tax code to make it more revenue efficient) and really close our annual deficits to near zero, the markets will eventually come to the conclusion that the “full faith and credit” of the US no longer means much. Foreigners will sell their holdings of US treasuries, and the dollar will tank. To make matters worse, this will occur at the same time inflation and interest rates and interest costs are rising significantly (Thanks to the Fed’s policy of the last 4 years). As a result, we will probably go into default (though we won’t call it that) and there will very large layoffs in the government, along with massive cutbacks in social security and medicare payments when the government can no longer effectively borrow. You think it can’t happen? If we continue down our current path, I am quite confident it WILL happen.

So Rod Stewart didn’t really have it right after all, the first cut may seem like the deepest to some but it probably will be the “last” cut that is the deepest.

Next blog post, I will be more upbeat. I promise! But our not so fearless leaders, gave me no choice this time.

Not Another Auld Lang Syne…Because “In -Flew -Enza”

“I had a bird. Her name was Enza. I opened the window and in-flew-enza”

This was a popular children’s rhyme during the 1918 flu epidemic according to a PBS documentary. Anne and I watched this fittingly during my lengthy bout with the flu during the first two weeks of January. (The logic of doing so was questionable. Was I trying to make myself feel better by knowing that millions had died in 1918, and though I felt like it, I wasn’t going to die from my case of the flu?)

But I digress, I had planned to write my annual review of resolutions, and then got sick at the end of December and felt pretty awful until about a week ago. So New Years resolutions will have to wait until next year. Lets face it January can be a pretty lousy month, often a letdown from Christmas vacation (and visitors) and this year had the added bonus of record cold weather for the first couple of weeks in much of the East and Midwest along with the explosion of numerous cases of a nasty flu. (And I even got my flu shot!).

However, I like to think of my blog as an uplifting read for those looking for solace from a bitterly cold, sniffling, hacking and feverish January. So even as it is snowing here today (again!) and Anne is hacking away with her nasty cold, herewith my top 10 good things about January:

#10 – There are only 9 things I can think of, so there is no #10.

#9 – The days actually start getting longer again in January. In fact, the days in Columbus are about 48 minutes longer at the end of January than on January 1. To be sure, it is usually difficult to tell given that most of our days look like night, with a shroud of thick clouds usually overhead.

#8 – If you get thru January, you are really only one short month away from meteorological Spring (which is generally considered to begin March 1). Since I like meteorologists (and sometimes wished I had become one, given my fearless weather prediction abilities), I will go with their definition rather than the calendar date of March 21 or some groundhog’s prediction.

#7 – When the high temperature refused to get much above 20 degrees for 2 weeks straight with lows of about zero every night, I thought  “it really can’t get much worse?” (Or can it?)

#6 – The cold and snowy weather gives you an ideal opportunity to binge watch various new series on Netflix and Amazon such as “The Incredible Mrs. Maisel” and “The Crown” (both excellent by the way).

#5 – January is the month when the best movies are out in the theaters. This is because films must be “released” before January 1 to qualify for the Oscars. Because filmmakers are notorious procrastinators, it seems that every Oscar-worthy filmmaker got their 2017 release out at 1159 pm on Dec. 31st. (Even if it was only “showing” in Steven Spielberg’s basement)

#4 – When the sun does come out, our snow-covered yard and our neighborhood actually looks pretty beautiful. Further, you get to see some very fat robins and cardinals happily looking for seeds in the snow and all sorts of animal tracks from our panoply of animals here in Upper Arlington. So at least the animals and birds seem to be enjoying themselves.

#3 – Thankfully there are NO famous songs about January. This spares us from such crazy/masochistic December/Christmas songs like “Let it Snow, Let it Snow”.

#2 – January is named after the Roman god Janus.  February  is named after a purification ritual “Februa”. December is from the latin word for ten (‘Dec’), when it was the 10th month, a couple of thousand years ago. I’ll take a God over a purification ritual or an incorrectly numbered month any day.

#1 – Because January is miserable (despite #9-#2), just think how happy you are going to be when Spring finally arrives!

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The New Yorker did a very funny cover of the month  of January for this week’s edition. (Perhaps they were aware that I was going to be blogging about this!). For those that haven’t seen it, it is a drawing of a January calendar over a snowy backdrop of NYC including a miserable woman waiting at the Bus Stop. The dates on the calendar say as follows:

  1. Hang-Over
  2. Lose Keys in Snow
  3. Still January
  4. Bombo-Genesis?!?!?
  5. Slip on Ice
  6. Knit Self Scarf
  7. Sunset at 11 A.M.
  8. Cold
  9. Gray
  10. Wet
  11. Cold, Gray, and Wet
  12. Frost-Bite
  13. Leave Scarf on Train
  14. Heat Wave
  15. Quarterly Taxes Due
  16. Arctic Blast
  17. Ice Storm
  18. Ugh
  19. Flu
  20. Flu
  21. Flu
  22. Still January
  23. Slip on Ice
  24. Why Me Lord?
  25. Cabin Fever
  26. Cross-Town Bus Never Comes
  27. Sleet
  28. Weird Frozen Pellets
  29. Slip on Ice
  30. Dentist
  31. Last Day of January! (IN LARGE LETTERS covering the 31 on the calendar)

 

Happy Belated New Year and enjoy February!

 

“Don’t Stop Thinking About Tomorrow”

Forty years ago in 1977, rock music was beginning to change. Likewise my life was changing. I began the year at Fidelity Union Trust Co. in a do-nothing job, but by the middle of the year I was a securities analyst providing buy and sell recommendations for the investment advisers to the bank’s trust and pension funds. My personal life was improving too. My distance relationship had become more settled at least for a time, and I started to interact more with friends in New York.

Changes in 1977 in rock music were mostly for the better, but rock still was playing second fiddle to conventional pop songs and disco in popularity. In fact, not one of the top twenty most popular songs of the year could be classified as a harder rock song.

Major British Artists “Missing in Action”

In 1977, most of the major British “classic” rock artists did not record any new material. The Rolling Stones had no top 40 singles for the first time since 1963 and no new studio albums either. The Who, Led Zeppelin and the Moody Blues recorded no new material either. Pink Floyd did have a reasonably good, new album Animals (loosely based on George Orwell’s “Animal Farm”) but it paled in comparison to the group’s previous two albums – the outstanding Wish You Were Here and Dark Side of the Moon.

Individual British artists fared no better with Elton John, John Lennon, George Harrison and Paul McCartney with no new studio albums. The lone positive note was McCartney and Wings release of its excellent live album “Wings over America” which included the release of one of my favorite songs  “Maybe I’m Amazed (live)” as a single. The album was also unique in that it was the first “live-concert” album from any of the four Beatles and included several Beatles tunes performed by McCartney.

While American rock artists were generally more active than the Brits, there was another year of no new Bruce Springsteen records (owing to his contract dispute) and the king of rock n’ roll,  Elvis Presley died 8/16/1977 at only 42 years of age.

Best Rock Albums

While British and hard rock music were mostly absent in 1977, rock albums were still quite good, albeit mostly on the softer side. In fact, there were ten very good new studio albums by existing rock/pop artists:

My favorite album was also the most popular album of the year: Rumours (Feb. 1977)  by Fleetwood Mac. Good songs often come out of breakups. In the case of Rumours, great songs came out of the breakup of John and Christine McVie’s marriage as well as the end of the long-running affair between Stevie Nicks and Lindsay Buckingham. This was a great album with emotional and catchy songs by each of the three main artists/songwriters (Nicks, Buckingham and Christine McVie), including the optimistic and happy “Don’t Stop” (“thinking about tomorrow”)  (#3 Sep.) and “You Make Loving Fun” (#9 Dec.); angry songs such as “The Chain” (“And if you don’t love me now, you’ll never love me again, I can still hear you saying you’d never break the chain!”), “Blue Letter”, and “Go Your Own Way” (“you can call it another lonely day”)  (#10 Mar.); and melan­choly songs such as “Dreams” (#1 June), “Songbird”, and “Never Going Back Again”. The album features excellent song melodies, compositions, guitar playing by Lindsay Buckingham, and a number of beautiful vocals by Christine McVie.

While there are many songs that Steely Dan has recorded that I like a great deal, Aja (Sept. 1977) was their only album where I enjoyed ALL the tracks. Aja is Steely Dan at their jazziest, though still fundamentally a rock-jazz fusion group. And I can remember listening to this album frequently in the months before heading west to California and Stanford Business School in the summer of 1978. The album starts with “Black Cow”, a wonderful song about rocky relationships (“I can’t cry anymore while you run around. Break away. Just when it seems so clear that it’s over now, drink your big black cow and get out of here”). The song features great saxophone, keyboards and guitar that fit the mood of the song brilliantly. Next, the title track “Aja” has a distinctly different Asian char­acter, albeit with equally jazzy instrumentation, a lengthy musical interlude in the middle and an extremely relaxed feel to it. In fact, it remains one of my favorite Steely Dan songs to this day. Side One ends with the single “Deacon Blues” (#19 June ’78), another excellent song and the third lengthy track on the side. Side 2 features the two excellent singles “Peg” (#11 Mar. ’78) and “Josie” (#26 Oct. ’78).

Going for the One (July 1977) represented a comeback album for Yes, after their previous two efforts, Relayer and Tales of Topographic Oceans, lacked the cohesiveness and musical completeness of their earlier albums. To be sure, Going for the One was still not as good as the superb Fragile, The Yes Album or Close to the Edge. Nonetheless it was a solid effort with the title track “Going for the One” and “Parallels” both excellent hard rock songs, while “Wondrous Stories” and “Turn of the Century” were two of Jon Anderson’s better soft ballads. The album benefitted significantly from the return of Rick Wakeman (keyboards) after a three-year absence from the group. Despite its length “Awaken” doesn’t meander and features Wakeman’s stellar keyboards and wonderful use of the church organ at St. Martin’s church in Switzerland. Call me sentimental, but this album evokes wonderful memories so will always be a favorite.

Running on Empty by Jackson Browne (Dec. 1977)  was Browne’s best album.  Its strengths were the singles “Running on Empty” (#11 Apr. ’78) and “Stay/The Load Out” (#20 Aug. ’78) as well as three other tracks “You Love the Thunder” (“and you love the rain”), “The Road” and “Cocaine”. This was Browne’s album about touring but it was much more upbeat and much less depressing than his former effort The Pretender which is probably why I enjoyed it much more. This album and particularly the superb “Running on Empty” became a bit of a theme song on my first drive across country during the summer of 1978 with friend Dave Dorsey, on my way to Stanford Business School.

Likewise, Billy Joel released his best album The Stranger (Sept. 1977) featuring the beautiful love song “Just the Way You Are” (#3 Feb. ’78) which was to become a soft rock/adult contemporary staple for years to come. However, the album had much more, most notably the lively hits  “Movin’ Out (Anthony’s Song)” (“Working too hard can give you a heart attack yak yak yak”) (#17 May ’78) and “Only the Good Die Young” (#24 Jul. ’78) as well as the slower and melodic “She’s Only a Woman”(#17 Oct. ’78). However, the hidden gem on the album was the brilliant “Scenes From an Italian Restaurant” (“Bottle of red, bottle of white…I’ll meet you anytime you want at our Italian Restaurant”). The seven and a half-minute tour-de-force was about high school reminiscing and catching up. Lyrically and musically, it was exquisite.

In addition, Eric Clapton released Slowhand (Nov. 1977) which was his best album  since 461 Ocean Boulevard three years earlier. The album included the hit singles “Wonderful Tonight” (#16 Jul. ’78) and “Lay Down Sally” (#3 Apr. ’78) and two other classics: a brilliant remake of J.J.Cale’s “Cocaine” (“She don’t lie”) and “The Core”. While lesser known, “The Core” was one of my favorites: nine minutes in guitar heaven.

Songs in the Key of Life by Stevie Wonder was released at the end of 1976 and became very popular during 1977. I never bought the album, because my brother owned it and I taped many of the songs from his vinyl to cassette. The best songs from the album included the singles “I Wish” (#1 Jan), “Sir Duke” (#1 May), “Another Star” (#32 Sep.) and “As” (#36 Dec.) as well as the album cut “Isn’t She Lovely”. The latter song wasn’t released as a single but received a huge amount of airplay during 1977. The album is considered by many as Stevie’s best over his illustrious career and one of the best rock/R&B albums of all time.

Little Queen (May 1977) by Heart was a solid follow-up to the group’s debut album “Dreamboat Annie”. The album featured three excellent lively rockers, Barracuda (#11 Aug.), Kick it Out (#79 Dec.) and the superb “Love Alive” as well as the slower ballad “Little Queen” (#62 Oct.). Though lacking the dynamite of “Crazy on You” and “Magic Man” from the previous album (my two favorite songs by Heart), Little Queen still delivered.

Book of Dreams (May 1977) by Steve Miller was almost the equal of the previous year’s Fly Like an Eagle. It was highlighted by such excellent, catchy tunes as “Jungle Love” (#23 Sep.) and “Swingtown” (#17 Dec.) and my favorite by the group “Jet Airliner” (#8 July). This last song became my a theme song that I hummed/sang to myself on plane trips when returning home thru much of my working career. The album also had several excellent tunes that weren’t hits such as “Winter Time” and “True Fine Love”.

JT (June 1977) by James Taylor was his best effort since his 1970 Sweet Baby James album. This album represents the pinnacle of Taylor’s optimism with his then-marriage to Carly Simon no doubt at its happiest. The album exudes Taylor being head-over-heels in love featuring an excellent cover of a Jimmy Jones 1960 classic “Handy Man” (#4 Sep.) (‘That’s me, I’m your handy man“) and one of Taylor’s best love song compositions  “Your Smiling Face” (#20 Dec.) (‘Whenever I see your smiling face, I have to smile myself“), as well as a nice co-performance with Carly on”Secret O’ Life”. The up-tempo “Honey Don’t You Leave LA” (#61 Mar. ’78) adds nice variety to the album.

Rock Newcomers

Tom Petty and the Heartbreakers self-titled debut album was released at the end of 1976 and began to get airplay in 1977. “Breakdown” (#40 Feb. ’78) was released as single at end of 1977 and also appeared on the album FM which put Petty on the map. Surprisingly, “An American Girl” the other standout song from the album (and a personal favorite) was never released as a single, but later became a staple on FM radio. Music critics such as Rolling Stone made much of Petty’s throwback sound to Roger McGuinn and the Byrds (both guitar and vocals) which is probably the reason his “new” sound appealed to me. This was the beginning of a lengthy and successful career for Petty until his too-early death this year.

Meat Loaf’s Bat Out of Hell was the first album for this veteran of the cult movie of “The Rocky Horror Picture Show” and member of one of Ted Nugget’s road bands. To be sure, this was a very derivative album but I still enjoyed it nonetheless. My favorites of the album included “Bat Out of the Hell”, “All Revved Up With No Place to Go” and the classic duet “Paradise by the Dashboard Light”. This last song was notably performed live by Meatloaf and co-artist Ellen Foley including a live “make-out” scene on SNL  in late 1977.

Punk and New Wave

1977 was also the year that punk rock and new wave began to make its mark on a changing rock landscape. Punk was led by the Sex Pistols and their first and only studio album Never Mind the Bollocks Here’s the Sex Pistols. ‘It featured such rebellious songs as “Anarchy for the UK” and “God Save the Queen”. The Sex Pistols and its future imitators in punk rock was in-your-face hard rock music with little if any melody. Also from Britain, punk/new wave rockers The Clash released their first album The Clash in 1977. In the U.S. the new wave was led by the Talking Heads with the release of their first album  Talking Heads ’77 .  Much like punk rock, I didn’t get it at the time. I found a bit too “weird” for my liking, but that was to change, particularly as I grew to love the one single from the album “Psycho Killer” (#92 Feb. ’78) (“Qu’est que ce? You better run run away“). As the late ’70s move forward, I was soon to realize that some “weird” music could be excellent and the Talking Heads definitely fit that mold. Interestingly, the Talking Heads were formed at the Rhode Island School of Design in 1974 only a couple of miles from my dorm room at Brown at the time. Little did I know.

“We Will Rock You”

Many other rock songs were good as well.

A new group from New York, Foreigner first two singles were top 10 hits. Their first,  fittingly entitled, “Feels Like the First Time” (#4 June) was perhaps their best, a great rocker driven by stellar vocals and strong guitar from Ian McDonald. “Cold as Ice” their second hit (#6 Oct.) was a sign of what was to come with Lou Gramm’s soaring vocals a hallmark of the group during their heyday from the late 1970s through the 1980s.

Queen  News of the World album was nothing special except for the double-sided hit  “We Will Rock You/We Are The Champions” (#4 Dec.). The album version was excellent as it segued between “We Will Rock You” and “We Are the Champions” (“no time for losers”) and is still played this way on classic rock stations to great effect. Of course, these two songs have been subsequently been overplayed in sports arenas and stadiums, but when they first came out they were quite interesting to listen to and very different.

While I was never much of a Boz Scaggs fan , “Lido Shuffle” (#17 May) was my favorite by him. An upbeat and lively tune, it stood in sharp contrast to his late 1976, depressing tunes “Lowdown” and “It’s Over” (see my 1976 music blog or my book “I’ve Got the Music in Me” )

Electric Light Orchestra had a somewhat disappointing, double-album Out of the Blue  in 1977 after the excellent A New World Record in 1976. However, it did boast the interesting and catchy “Turn to Stone” (“when you are gone”) (#13 Jan. ’78) and my daughter Maryanne’s favorite ELO song “Mr. Blue Sky” (#35 Aug. ’78).

Canadian group Rush had their first charting singles, the excellent “Fly by Night” (#88 Jan.) and “Closer to the Heart” (#76 Dec.). The songs featured what would become the groups trademark rock sound and Geddy Lee’s high voice. I’ll confess that I only really started to listen to Rush a few years later after songs such as “The Spirit of Radio”, “Limelight” and my favorite “Tom Sawyer” were released and the group started receiving a lot more airplay on FM rock-oriented radio.

Hall and Oates had their first rollicking single “Rich Girl” (#1 Mar.) (“You can rely on the old man’s money”) and their first number one. This song was presaged the duo’s success in the 1980s with songs with more upbeat rhythms and melodies (e.g. “Out of Touch” and “Maneater”)

Dearborn, Michigan native Bob Seger had been on the charts since late 1968’s “Ramblin’ Gamblin’ Man” , but it was the best song of his career “Night Moves” (#4 Mar.) that first got my attention. Later in the year, “Main Street” (# 24 May) and “Rock And Roll Never Forgets” (#41 Aug.) were good efforts. Though  I was never a big Seger fan, I did like some of his hits.

The Southern rock group, Marshall Tucker Band  had their biggest hit record “Heard it in a Love Song” (#14 June) followed by the even better  “Can’t You See” (#75 Sep.).

Best of Soft Rock/Pop

One of my favorite soft rock songs of the year was Carly Simon’s singing “Nobody Does it Better” (#2 Oct.) from the James Bond film “The Spy Who Loved Me” , continuing the series of great opening theme songs from Bond films. (E.g. “Goldfinger” “You Only Live Twice”, “Live and Let Die” etc.). This song showcases Carly’s unique vocal talents and has a melody that is irresistible. My apartment mate David Carroll came home one Saturday evening in late 1977 obviously drunk and singing the song, a personal memory that fortunately doesn’t blot out Carly’s version in my mind.

“Baby, What a Big Surprise” (“right before my very eyes”)(#4 Nov.) was another very catchy soft-rock hit by Chicago featuring stellar vocals by Peter Cetera. It was hard not to notice the unintentional and tragic irony, in that as the song was still being played on the radio in January 1978, Terry Kath (guitarist for the group) accidentally shot and killed himself.

Paul Simon had no new album, but he did have a nice single “Slip Slidin’ Away” (“the nearer your destination the more you’re slip slidin’ away”) (#5 Jan. ’78) which rose up the charts late in 1977.

Another good soft pop song, “Lonely Boy” (#7 June) by Andrew Gold had simplistic lyrics and theme, but the tune was excellent and it was very catchy.  

But my favorite soft rock ballad was “Year of the Cat” (#8 Feb.) by Al Stewart, a very enjoyable song with an irresistible piano intro and hook, though it still makes me sad at times listening to it. And the song lyrics were pure poetry “She comes out of the sun in a silk dress. Running like a water-color in the rain. Don’t bother asking for explanations she’ll tell you that she came in the year of the cat”.

English art rockers, Supertramp had their first American top twenty with the tuneful and catchy “Give a Little Bit” (#15 Aug.).  However, their breakout year was to come two years later when “Breakfast in America” topped the album charts.  In a similar sounding vein, but from Chicago, Styx had their second top ten single “Come Sail Away” (#8 Jan. ’78) also a very catchy tune with Dennis DeYoung’s high-tenor vocals.

Strangely enough, 10cc  had a nice soft rock, love song “Things We Do For Love” (#5 Apr.) (“Like walking in the rain and the snow when there’s nowhere to go”) which was their first big hit since 1975’s “I’m Not in Love”. “Things…” was a much more conventional love song and far more upbeat both musically and lyrically than the brooding and psychedelic sounding”I’m Not in Love”.

 Meanwhile, Rita Coolidge had the rock cover of the year with her beautiful rendition of “(Your Love Has Lifted Me) Higher and Higher” (#2 Sep.). While the song wasn’t better than Jackie Wilson’s original , it was sufficiently different (slower tempo and with Coolidge’s beautiful voice) that it was still an excellent version. She also had a lesser hit but still a nice song with “We’re All Alone” (#7 Nov.).
Lionel Ritchie and the Commodores had the smooth sounding “Easy” (#4 Aug.), a nice crossover hit from their normally harder R&B/funk sound.
Last but not least, Linda Ronstadt had two of her biggest hits at the end of 1977 with “Blue Bayou” (#3 Dec.), as well as “It’s So Easy”(#4 Dec.). Both of these came from her massively popular “Simple Dreams” album. Both her hits were good and her voice was excellent, but I found that her style of covering old hits by Buddy Holly, Roy Orbison, the Everly Brothers, the Rolling Stones etc. was hit or miss for me. I liked the up-tempo “It’s so Easy” but the slow “Blue Bayou” made me pine for Roy Orbison’s version.
 The Funk and The Disco 
While I was not enamored with funk music, there were a couple of excellent funk/R&B songs in 1977. This included my favorite “Brick House” (#5 Oct.) by the Commodores which featured a great sax section as well as “Boogie Nights” (#2 Nov.) by Heatwave.
While most disco music was simply too much for me to handle, there were a few songs (albeit precious few) that warrant praise. The best of the lot was “Best of My Love” (#1 Aug.) by the Emotions an upbeat disco/R&B tune which had a nice rhythm and tune.  Co-written by Maurice White (founder of the group Earth, Wind and Fire) the song sounds much like a good EWF tune, not surprisingly. Also, I was a bit of a sucker for “Star Wars’ Theme/Cantina Band” (#1 Oct.) by Meco which made listening to disco interesting again as it cleverly wove John William’s various sounds and musical themes (including memorable music from the Cantina band in the bar on Tatooine) into a three-minute instrumental record.
The Bad, the Blah and the Ugly
Unfortunately, 1977 had its share of bad songs which more often than not made it to the top of the pop charts. In the category of unbearable schmaltz, we have the two most popular songs of the year: Debby Boone’s “You Light Up My Life” (#1 Nov.) and The BeeGees “How Deep is Your Love” (#1 Dec.) respectively. Though slightly more up-tempo than “How Deep is Your Love”, younger brother Andy Gibb also had the bland and saccharine “I Just Want to Be Your Everything” (#1 Aug.). As if that weren’t sufficient, Leo Sayer ventured into the world of slow pop with “When I Need You” (#1 May) which I tired of quickly. Then there was yet another unbearable mega-hit from Barry Manilow “Looks Like We Made It” (#1 Jul.), the only good news was that it was Barry’s last #1 song. And in the category of awful remakes, there was Shaun Cassidy (yes this was Partridge Family’s David Cassidy’s younger brother) covering  “Da Doo Run Run” (#1 Jul.)  which no doubt had the Crystals figuring they should release the original again.

In the blah category, there was “I’m in You” (#2 Aug.) by Pete Frampton, not a bad song (and interestingly, his top charting US  hit), but I found myself turning the radio dial. Then there was “Short People” (#2 Jan. ’78) by Randy Newman. A clever and catchy parody on discrimination but one that grew VERY tiresome after repeated listenings. Likewise, Bill Conti’s “Gonna Fly Now” (#1 Jun.) reminded us interminably of Sylvester Stallone training in the movie Rocky. Not a bad tune, but enough is enough.

In the ugly category, there were two more entries into the depressing, ‘I don’t want to hear this song’ category, particularly after the breakup of a two-year relationship with my girlfriend in November 1977. This included “Whatcha Gonna Do?” (#6 Aug) (“when she says goodbye“) by Pablo Cruse and “Baby Come Back” by Player (#1 Jan. ’78) (“And I just can’t live without you“). Eerily and depressingly, the latter song was hitting the charts just as my relationship ended.

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Fortunately, there were many fewer depressing songs than in 1976 AND good news was around the corner. In December 1977, I received a phone call from the head of Admissions at Stanford Business School letting me know that I had been accepted for the fall of 1978. This meant big changes ahead in 1978 which per usual seemed to parallel rock music moving in a more exciting direction. But that is the subject for my next music blog.

 

“Yeah, I’m The Taxman” Redux.

With the current tax reform/tax cut bills in conference it is looking increasingly likely we will be seeing new tax legislation this year. While I had originally intended to do a lengthy blog to discuss the positives and negatives of all the various changes House/Senate bill, the busy-ness of the Christmas holidays and completion of grading my OSU students this week has made that impossible. So instead I provide a short synopsis of the bills’ positives and negatives and a little bit of economic commentary. Per usual in this blog, I will be dealing only with facts and numbers and analysis not political hyperbole that seems to have been the main reaction of the press, social media and our political leaders to the tax reform/cut effort, ranging from it will be “terrible” to it will be “incredible”.

Earlier this year I blogged about the change needed to make the tax system more efficient, truly fair, to reward savers, to discourage excess consumption, to make the tax code simple and reduce the hundreds of billions in losses in productivity to our economy from a tax code that is hopelessly complex with myriads of subsidies. My conclusion is that the Fair Tax (see FairTax.org ) is by far and away the best system of taxation we could have in this country. However, sadly it is politically unrealistic so I won’t repeat my plea here again. Nonetheless, I have attached my April 2017 blog which goes thru the arguments and points out what principles in taxation make sense and why. (An economist can dream!)

So what is one to make of the current efforts and likely final passage of something resembling the Senate or House Tax Reform Bill? Herewith is my thumbnail review/analysis and my own takeaways:

Summary – The tax reform bills are focused on three main areas of taxation (1) Personal Income Taxes and (2) Corporate Income Taxes and (3) Estate Taxes 

Key Changes

  • Corporate Taxes Reduced (1) Corporate Rate for Domestic “C” Corporations reduced from 35% to 20% (Senate Bill changes this beginning in 2019/House Bill 2018)- as of today it could be 21% in the final bill (2) Foreign Earning Tax Treatment Changed providing an incentive to repatriate past earnings (currently about $2 trillion ) making them subject to a low US rate (3)Domestic Corporations CAPEX for new and used investments – Can now be expensed immediately rather than depreciated (in House Bill), (4) Interest Expense No longer deductible
  • Individual Income Taxes Cut/Reformed – (1) Marginal Tax Rates Generally Reduced to 12% (from 15%), 25% (from 28 and 33%) and 35% (from 39.6%) (2) Top Marginal Rate of 39.6% Retained — but now only for individuals earning more than $500,000 and couples earning more than $1 million (Senate Bill reduces this rate to 38.5%). Final Bill has apparently reduced this to 37% (3) Standard Deduction roughly doubled (to $24,200 for couples) though Personal Exemption eliminated –Net effect is a greater “net” standard deduction except for families with 4 or more children  (4) Major Itemized Deductions Eliminated (e.g. state and local income taxes) or Capped (e.g. property taxes limited to $10,000 deduction). Looks like the final bill will cap state and local income tax deductions at $10,000
  • Estate Tax Cuts—Approximately doubles the estate tax exemption from $5.49 Million to $11.2 Million. House bill repeals estate tax altogether by 2025.

Macroeconomic Impacts

Most of the changes in the tax reform bills will have a positive economic impact. My assessment below is based on my own economic analysis, supported by a number of the economic models that have been used to assess the national impacts:

  • POSITIVE — Reduction in the Top Corporate Rate from 35 to flat 20%/Expensing of New Investments – This will make US corporations much more competitive with foreign companies. (Currently the US has one of the highest corporate tax rates –which includes state corporate taxes– among OECD countries). It will reduce the use of foreign subsidiaries and increase the use of domestic offices. It will also make it more likely that foreign companies may headquarter or have operations in the US. It will lower the effective marginal cost of capital, increase profits, increase wages and employment, and also result in lower prices and higher volume of goods sold.
  • Slightly NEGATIVE Interest Expense No Longer Deductible  – This will likely raise the after-tax cost of debt financing, raising in turn the costs of goods sold. However, in today’s low-interest rate environment, many companies have become too leveraged and this tax change should help discourage excess debt financing and increase use of equity instead which will offset some of the negatives.
  • POSITIVE Individual Marginal Tax Rate Cuts/Increase in Standard Deduction/Major Itemized Deductions Eliminated or Capped– The cuts in the tax rates will lead to more disposable income and savings for most taxpayers. This will be offset somewhat  for higher income taxpayers with the reduction in itemized deductions. (In high tax states, the advantage for high income taxpayers may be more than offset by the elimination of itemized deductions).  The removal/limitation of itemized deductions will have a positive impact on the economy overall as it removes or limits the amount of effective subsidies for homes and properties and frees up more capital to be spent on more productive uses. On balance, these changes should be positive for the economy.
  •  NEUTRAL Estate Tax Cuts –  Because there are relatively few taxpayers affected by the changes in the estate tax and most of the very wealthy have created foundations which shelter much of their income, the economic impacts of the estate tax cuts or its elimination (in the House Bill) are relatively small.

 

Federal Deficit Impacts

The impact on the deficit varies depending on the model and economic assumptions used. I generally subscribe to those models that actually indicate what their underlying macroeconomic assumptions and are “dynamic” reflecting the impact of the tax changes on investment/savings and consumption . For the Senate Bill I have seen estimates from the Joint Committee on Taxation (JCT) staff (which is bipartisan) which suggests a $1 trillion cumulative deficit impact over the next ten years ($1.4 trillion loss in “static” terms somewhat offset by $0.4 trillion gain due to the “dynamic” effects on GDP and hence tax revenues). The House Bill generally shows a somewhat lower deficit estimate. Notably, the Tax Foundation has pointed out that the dynamic scoring of the bill used by JCT substantially understates the positive impact on the economy for a variety of reasons (See “JCT’s Dynamic Scoring is Positive but Underestimates Economic Benefits” from their website). To be sure, the Tax Foundation has some biases in favor of tax cuts ( just like the Brookings Institution has a bias against tax cuts). Nonetheless, their economic arguments seem compelling to me, though I am not convinced that we won’t have some added debt as a result of the plan.

Some estimates that have been published are “static” (e.g. CBO), meaning they don’t consider the effect of behavior changes by firms and individuals to the tax changes. I would caution anyone from giving these estimates any credence as they are just plain wrong.

In short, we are probably looking at approximately a $1 trillion deficit from the ultimate tax law with the possibility that more optimistic assumptions about growth might result in a nearly neutral deficit impact. As a deficit hawk, I am not happy  with $1 trillion more debt but its important to put this in perspective. For all those who are now screaming about this, where we’re you when we more than doubled our debt from about $8 to $18 trillion during the Obama years? While some of this occurred due to the recession, most of this happened due to a one-time (but really permanent) $800 billion increase in spending due to the 2009 Stimulus Act. So the deficit impacts of $1 trillion really pales in comparison to the roughly $5 trillion increase in debt due to the stimulus ( a policy which by the way did not work all that well). And all else being equal, I would much rather put more money in the hands of individuals and corporations thru a tax cut and cut government spending (which we need to do in a very BIG way in the long run), than the other way around.

Distributional Impacts

The most important effect (or rather the one most people care about!) is who wins or loses with the changes in the individual tax code. After running a few numbers on the House Tax Bill version , I got the following results for married couples (no kids) :

  • $50,000 Income (Std. Deduction)— Current Law Income Tax: $3428  House Bill: $3072 Net Savings: $356 or 10%
  • $75,000 Income (Std. Deduction) — Current Law Income Tax: $7178   House Bill: $6072  Net Savings: $1106 or 15%
  • $100,000 Income (Std. Deduction)–Current Law Income Tax: $11483  House Bill: $9072  Net Savings:   $2411 or 21%
  • $100,000 Income (Item. Ded. $25,000)—-Current Law Tax: $9308      House Bill: $9072  Net Savings:  $236 or 2%
  • $150,000 Income (Item. Ded. $20,000)—-Current Law Tax: $22158    House Bill: $19700 Net Savings: $2458 or 11%
  • $150, 000 Income  (Item. Ded. $30,000) –Current Law Tax: $19658   House Bill: $19700 Net Loss: $-43 or -0.1%
  • $500,000 Income (Item. Ded. $40,000) —Current Law Tax:$127602   House Bill: $128,760 Net Loss: $-1159 or -1%
  • $500, 000  Income   (Item. Ded. $80,000) —-Current Law Tax: $113,701 House Bill: $128,760 Net Loss: $-15,059 or -13%

In other words, the individual tax reform bill is more of an “across the board” tax cut than a “middle class” tax cut. It is generally on the order of a 10 -20% tax cut for most middle to upper-middle income tax payers (e.g. $50,000 to $150000 income). However, if you live in a high tax state (e.g. New York, New Jersey, California) and make more than $100,000 and have a home mortgage, your tax cut will be largely offset by the loss of your itemized deductions and in some cases you may end up paying more in taxes. At higher income levels, there is even a greater difference between the high tax states/homeowners vs. individuals in low tax states. For example, my quick calculations suggested a relatively wide difference between taxpayers earning $500000 with a lot of net itemized deduction (e.g. $80,000) vs those in lower tax states that don’t have large mortgages (e.g. $40000). In the latter case, these taxpayers would pay about $1159 or 1% more in taxes. In the former case, these taxpayers would be paying 13% more in taxes or an additional $15059.

Overall, of course, most of the “dollar” tax cuts go to individuals in higher tax brackets. This is not surprising because these people pay the vast majority of federal income taxes today. Consider the following statistics from the most recent year (2014) available:

  • In 2014, 139.6 million taxpayers reported earning $9.71 trillion in adjusted gross income and paid $1.37 trillion in individual income taxes.
  • The share of income earned by the top 1 percent of taxpayers rose to 20.6 percent in 2014. Their share of federal individual income taxes also rose, to 39.5 percent.
  • The top 50 percent of all taxpayers paid 97.3 percent of all individual income taxes while the bottom 50 percent paid the remaining 2.7 percent.
  • The top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).
  • The top 1 percent of taxpayers paid a 27.1 percent individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).

 

Missed Opportunities

  • Keep The Estate Tax as is – The estate tax cuts and  ultimate repeal in the House Bill make no sense to me. Most economists believe they will only mildly improve the economy. And they benefit ONLY the heirs of the very wealthy. I realize that estate taxes reflect triple taxation (once when earned, once when gains are made and once after death) and arguably that is very unfair. However, it is not worth reducing overall tax revenue to benefit a very few.
  • Lower SSN Payroll Tax rates – One way to help out the working poor would be to lower payroll tax rates for Social Security while raising the income subject to the tax.  This could be done to keep neutral the amount of $ collected by the payroll tax, while significantly cutting into the amount of taxes that the working poor pay. (Note the FairTax goes even further and eliminates the Social Security and Medicare taxes completely!). I understand why no one wants to touch the third rail of Social Security Reform quite yet, but making a “neutral-revenue” rate cut would be welcome for those most needing the help.
  • Eliminate Home Mortgage Interest Deduction/Property Tax Deduction – By retaining the mortgage interest deduction (and in the case of the Senate expanding it) as well as keeping, albeit a capped, property tax deduction, an opportunity was lost to get rid of deductions which will only help upper-middle and upper income taxpayers (those that will itemize because they will have more than $24,200 in itemized deductions for couples) making more than $100,000 a year. I know the real estate lobby is fierce BUT this would have been an opportunity to increase tax revenues while simultaneously making the tax code more efficient.
  • Keep a Line-Item Deduction for Charitable Donations – Even though both bills left in deductions for charity, with a much larger number of taxpayers taking the standard deduction with the tax law changes, many taxpayers may reduce their charitable deductions. The new tax law should create a special line item which much like Health Savings Accounts directly reduces AGI (adjusted gross income) so that this deduction can be taken in addition to the standard deduction.
  • Limit Business Income Deductions Further – The further limitation or even outright removal of the deductibility of business entertainment (e.g. luxury suites, meals, parties etc.) would be a good step. Why should a business be able to deduct such activities for tax purposes? Maybe it would help reduce the ridiculous salaries and profits made by sports teams and players. It certainly would help raise some needed tax revenue to offset some of the tax rate cuts. See the recent WSJ op-ed on this.

My Bottom Line Takeaways

Reform of corporate taxes in the US was long overdue and cutting the marginal tax rate to 20% (or 21%) is a positive move for the US economy and US citizens. While reform of individual taxes was only partially accomplished, the removal and capping of most itemized deductions (in exchange for generally lower tax rates across all income levels ) is a step in the right direction. On the other  hand, the bill should have reigned in more deductions and tax shelters in the corporate and individual so that it was unequivocably revenue neutral. It should have provided more tax cuts (in the payroll tax) to help lower-income workers. The tax bill certainly isn’t perfect and it certainly isn’t my idea of true tax reform, but at least it was an improvement over the current system.

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“Yeah, I’m the Taxman” (Post from April 19th)

With this years official tax due date of  April 18th just behind us, it is time for my annual tax blog. But as I purveyed my past blogs around tax time, I realized that I haven’t written an “annual” post in three years. So for now what is my “triennial” post on taxes, I will focus on with the multitude of problems with the current system and why we must change it pretty radically. I am not naive on tax policy however, and the chances that anything close to the type of changes I am suggesting are minimal at best. Nonetheless, sometimes I like to dream.

The federal government collects money largely thru a system of personal income taxes and to a lesser extent corporate income taxes. In 2016, the government collected $3.3 Trillion in Taxes –almost $1.6 trillion thru personal income taxes,  $1.1 trillion thru payroll taxes (i.e. medicare and social security paid by employees and companies) and about $0.3 Trillion thru corporate income taxes with the balance of $0.3 trillion collected thru federal excise taxes and other taxes.

I won’t be focusing on corporate taxes as that is the most likely area to be reformed by Congress this year and frankly is not a major part (only about 10%) of our current tax picture. However, my main focus will be on personal income and payroll taxes which account for more than 80% of the total taxes collected by the government. However, the changes I am suggesting would replace all corporate taxes and personal taxes currently collected by the US government.

Why is our personal income tax system a problem?

  1. Federal income/payroll taxes provides a disincentive to “work” and for employers to hire U.S. workers – By taxing income, we are taxing the hundreds of millions of Americans who are working. This is particularly problematic for the lower-income worker who is often making only a bit more than welfare plus food stamps benefits because it discourages employment. (A single person making only $20,000 per year will pay about $2500 in taxes largely because of the mandatory FICA taxes of 7.65%). Studies abound about the importance of having a job to an individuals self-worth and the positive effects it can have on the family. But our current system actually financially discourages work which is obviously a big problem. More pernicious is that the payroll tax is also paid by the employer which discourages hiring and encourages more automation or outsourcing.
  2. Our Federal income tax system tax “savings” but not consumption – As a society one of the most important things we want to encourage is individuals saving for their retirements or for unexpected rainy days. More importantly, savings are the bedrock of capital that businesses need to expand and invest creating economic growth and jobs. However, our current system taxes savings by taxing interest, dividends and capital gains earned as well as eventually taxing all earnings in deferred tax accounts (e.g. IRA, 401K etc.). More importantly, we encourage consumption now because we don’t tax it at all. Partially as a result of this, we now are a nation of consumers and NOT savers with average savings of only about $40000 for those approaching retirement and only $9000 for all families. In contrast to our savings, our national debt has soared with total personal debt of $18.3 trillion almost as large as our US government debt. This personal debt burden is now more than double our personal debt burden in 2000 and TEN times our personal debt burden in 1980.
  3. Federal income and payroll taxes fail to tax the underground economy –  It is pretty obvious that income and payroll taxes miss the underground economy of illegal drugs, gambling and prostitution as well as legal professions such as maid, cleaning and other services which are often paid in cash and go undeclared. This underground economy is estimated to be not paying some $300-500 billion in taxes per year. In addition, the massive complexity of the tax code means that there are many knowing and more commonly unknowing tax cheats which cost the federal government significant tax revenues.
  4. Federal  tax deductions encourage home purchases and borrowing – The notion of home ownership is strong in the US and has a long history and individual home ownership is generally a good thing. However, by allowing deductions for property taxes and mortgage interest we significantly subsidize the cost of home ownership for many taxpayers. This has two negative effects: (1) it often encourages greater borrowing and the overconsumption of housing ( e.g. a bigger house than is truly affordable) and (2) it results in over-investment in the housing sector to the detriment of areas of our economy where investment would be more efficient (i.e. result in more economic growth and more jobs).
  5. Federal tax deductions for state and local taxes and tax-free interest for state and local governments encourage overspending by state and local governments –The largest itemized tax deductions for many tax payers are deductions for state and local taxes (both income and property). Also, state and municipal governments benefit from interest paid on their bonds being federal tax-free. The effect of these subsidies is to significantly subsidize state and local government spending and more state borrowing. Total state and local debt outstanding now totals $3.1 trillion some 10 times the amount of debt in 1980.
  6. High Marginal Tax Rates Discourage Small Business and Entrepreneurship  – Not surprisingly most small businesses and proprietorships pay individual taxes and with about a 50% marginal tax rate (when local and state taxes are factored in), it is not surprising that businesses are discouraged from expanding or for that matter even starting businesses since the venture or other capital needed is hampered by a low after-tax return on investment. Another effect of high marginal tax rates is to encourage tax deferred investment (401Ks and IRAs) and deferred income for the wealthiest tax payers. This actually reduces tax collections in the short run.
  7. The Current Tax Code is So Complicated that it Results in Much Wasted Spending –  According to the Tax Foundation the current federal tax code now totals MORE THAN 70,000 pages!!! The IRS estimates that the average individual tax payer spends about $120 per year to file taxes or a total of more than $18 billion per year across 175 million individual tax returns. Each individual taxpayer also spends about 8 hours on average preparing taxes. This is also a tremendous economic waste almost 1.3 billion hours (155 million tax filers x 8 hours) could have been spent on productive work, volunteering or leisure activities , were it not for our absurdly complex tax code. Valuing these foregone activities at a conservatively low $50 per hour (and arguably the number is higher as most of the tax preparation hours are spent by those in upper income brackets) means that there is an additional loss of almost $80 billion per year to the economy. In other words, just the costs of filing  for individual tax payers costs the US economy almost  $100 billion per year in wasted activity. And this doesn’t even include our corporate tax filing costs which are nearly as  significant.

The Trump Administration and Republicans in Congress promise to reform taxes. I believe that this will happen with respect to corporate income taxes, but it is lot less likely to happen with personal income taxes. Even if they do succeed, my fear is that it will only affect matters marginally. Certainly, reducing all the tax rates some will help (particularly IF deductions are phased out for the wealthy or capped to pay for the tax rate reductions). However, something much more fundamental is needed. We simply can’t afford as a nation to continue to operate with a tax code that is costing our economy hundreds of billions $ and maybe even trillions$ per year.

My favorite tax reform proposal to rectify these serious problems is something called the Fair Tax. See FairTax.org. I blogged about this proposal five years ago, but it seems more important than ever today. So with apologies to those who actually read my first blog post on taxes :), the remaining section is largely from that post in 2012.

The Fair Tax proposal represents a simple and effective way of raising tax revenues and having a system which is fair and positive for the economy.  To quote the website: “The FairTax is a national sales tax that treats every person equally and allows American businesses to thrive, while generating the same tax revenue as the current four-million-word-plus tax code. Under the FairTax, every person living in the United States pays a sales tax on purchases of new goods and services, excluding necessities due to the prebate”. Of particular note:

  •  Simplicity– The FairTax is a 23% national retail sales tax on all goods and services plus a prebate to offset the 23% tax rate on consumption up to the poverty level. This  eliminates ALL federal personal income, corporate income, gift, estate, capital gains, dividends, alternative minimum, Social Security, Medicare and self employment taxes. It is very simple and straightforward to collect and eliminates the incredibly complicated federal tax system we have in place today.
  • Revenue Neutral – The Fair Tax is estimated to be revenue neutral relative to the current set of federal taxes. However, with the economic benefits that it would unleash, it probably will result in even more tax revenue for the federal government being raised.
  • Efficiency—Compliance with the FairTax would be far better than under the current tax system due to its simplicity and its collection at the point of sale. (Something most states already do). In fact, even the $1-$2 trillion underground economy and others that don’t pay enough taxes (either knowingly or unknowingly) would be taxed fully as they would still consume goods and services. The costs of personal and corporate tax accountants, tax lawyers, HR Block, Turbo Tax and the IRS would disappear entirely and filling out your tax forms would no longer be necessary.
  • Great for the Economy and Jobs–By eliminating the large amount of unproductive activity associated the current tax code, resources are freed up to produce more goods and services more efficiently across the economy. In addition, the elimination of subsidies and penalties in the current tax code, will eliminate overconsumption which is also inefficient, and encourage savings and investment which are badly needed in our debt laden economy.  Net retail price increases in the first year of the tax should be relatively small because the 23% tax on prices will be mostly offset by the elimination in corporate and other business taxes (which are estimated by economists to account for about 20%+ of  retail prices today). The US will become the mecca for foreign investment and US companies will no longer produce as much offshore given the elimination of these embedded taxes on exports. This will mean many more jobs in the US and better paying jobs as well.
  • Fair and Progressive—The system provides a prebate in the form of monthly check equal to the national sales taxes paid on consumption at the poverty level for each family. This means that  the first approximately $30000 of spending for a family of four is completely tax-free and the effective tax rate for those that spend at or below the poverty level is zero. In addition, all used goods (e.g. used cars, used appliances, used furniture, used clothing, etc..) are completely tax exempt under the proposal. This means that many necessities to live are NOT taxed while discretionary items are taxed. Also, those who are frugal and save more, get taxed even less. This is very different from the system today where the working poor pay significantly more federal taxes (when payroll taxes are included) than under the FairTax.  Studies also demonstrate that spending on goods and services are generally proportional to income (e.g. someone earning twice as much usually spends twice as much) . Thus, the tax is progressive ( a higher effective rate is paid for those who earn and spend more).

In short, the FairTax would broaden the tax base, aid the economy, create more US jobs and help us out of our budget and debt crisis. In addition, it can be easily modified to make it even more progressive by increasing the prebate and overall tax rate to account for the lost revenues, if that it is ultimately what US taxpayers want.

The biggest problem with the FairTax is POLITICAL. The benefits of the proposal is to the US population and economy collectively. However,  the benefits of the current tax system are to a multitude of special interests ranging from higher education, wind and solar power manufacturers, oil and gas drillers, public employee unions, state and local governments, the medical industry, real estate brokers as well as lawyers and accountants that thrive on the current hopelessly complex system. Any attempt to change the current system, let alone completely eviscerate it will be met with strong resistance. Also, there will be many who won’t feel that the Fair Tax is progressive enough particularly when it comes to the very wealthy.

Accordingly, I would add either one of two provisions (or both) to the Fair Tax IF NEEDED to get consensus around the proposal. The first would be additional federal excise taxes on “bads” including all tobacco, alcohol content and sugar content. See my Post from 2012  “No Sugar Tonight” for the value of doing this on sugar. This could be used to supplement tax revenues and allow for a higher income for which there would be no effective taxes (by raising the probate) AND/OR to lower the fair tax rate of 23%.  Second, if it would help  would be a 10% earned income tax on joint filers with earned income of say over $400,000 per year (or whatever income level is deemed necessary for high income earners). This would be simple addition which would tax salary over this threshold and only require a relatively small number of filers.

I know the obstacles are considerable and I am clearly dreaming. But it doesn’t hurt to try. It’s a good idea whose time has come. It’s about time we changed a federal tax system that was born in the early 20th century and clearly has outlived its usefulness.