5 Easy Theses by Jim Stone

Jim Stone's book about five problems that challenge America, and his solutions, resonated with the whole group. Only half of Bonnie Lea Book Club were able to make tonight's meeting, but that turned out to be OK. Jim joined us by teleconference for a half hour early in the meeting.

The book addresses problems facing our country from an economic perspective, acknowledging and challenging positions on both sides of the political spectrum.

The first chapter is Fiscal Balance, addressing our government's income, expense obligations and debt. To demonstrate the current imbalance, he apportions the federal debt burden to all Americans, and then to all taxpayers, with obligations of $55,000 and $100,000 respectively. We discussed after the call that when one includes the unfunded liabilities - SSI and Medicare - and apportions these liabilities to the top10% of taxpayers, the debt per person exceeds a million dollars per taxpayer. Jim focused on two topics in particular: how improving lifespans threaten the future of Social Security, and why interest deductions should be phased out for both businesses and individuals.

On Social Security, Rob added that his sons, in their late 30's and early 40's, would welcome later retirement ages to strengthen the system. But the political danger is well known: politicians who promote changes to this sacred program become stars of political ads pushing grandma down the stairs. It will take a crisis to address.

On interest deductions for businesses, Jim pointed out that the majority of interest expenses in big business goes to M&A financing; why should this be subsidized by the taxpayer? To protect small businesses who benefit from debt financing of capital to grow, Jim had no objection of a reasonable cap, say a million dollars, to restrict this particular subsidy.

On interest deductions for individuals, Jim showed how this deduction truly benefits such a small group of homeowners, roughly million dollar homes, that it unfairly subsidizes this small group. After the call we discussed the importance of housing starts on fueling the nation's economic engine, as well as the reach of the real estate and construction lobbies; but mostly came around to the idea conceptually.

Income Inequality is the second essay, and Mr. Stone's concern is the long term: on its current trajectory, we are headed to economic disparity such as those that existed in the middle ages (the Dark Ages?) in Europe. Trusts now enable generational transfer of wealth, which undermines the founders' vision of wealth not by heredity, but by effort and thrift. But we diverge on the current state of inequality, if measured by consumption as opposed to income, as addressed in my review of Capital in the 21st Century,

We all agreed that a nation with no middle class is not a society we aspire to live in, and that intergenerational wealth transfer should be limited. We are more skeptical about the taxing of unrealized gains. The devil is in the details on these.

On health care, Jim reiterated his clarification in the book that his proposal for so-called single payer is not government control of the delivery of health care, but rather consistent systems - removing multiple insurance companies - and better governmental negotiations for pharmaceuticals. Disproportionately costly end-of-life expenses could be addressed by asking all patients, when healthy, what kind of care they wanted. Today this care involves emotional decisions by families, and economic incentives for providers, an expensive combination. Reminder to all: get a health care proxy executed so individuals can make these decisions for themselves, not leaving to others.

We did not discuss HSAs with Jim, but Geoff continues to believe that removing the insulation of insurance carriers from the economic decisions works well at both the micro and macro level, given a chance.

Chapter 4 on finance outlines the financial history of the past century, highlighting the laws passed under FDR in the wake of the stock market crash of 1929. These laws provided the regulatory backbone of our nation's extraordinary financial system, regulating banks and the mutual fund industry. Unregulated hedge funds operated quietly for private wealth until the '70's, but their assets grew from $120 billion in 1997 to 1.2 trillion just seven years later. As the hedge fund industry is populated by 'the same spectrum of integrity' as other professions, there are many who employ outright criminal activity, plus non-fundamental investment activity as that described in Michael Lewis's Flash Boys.

After the conference call, we also discussed Graham Leach Bliley, ending Glass Steagal's separation of commercial banking from investment banking. Banks have grown to a stage where oversight, management, and protecting the rest of the market from the effects of a failure become impossible. To critics who argue that additional regulation will chase capital away, Stone argues persuasively that strong regulation is a net magnet for capital. Rob L remarked that the time spent on compliance in the financial sector is excessive, and Joel added that the paperwork for a recent construction loan was comical. Simple, clear regulations for all players could be an improvement both systemically and operationally.

The derivatives market was originally conceived to reduce risk in commodity and agricultural markets but derivatives markets opened to unregulated financial forces. Open derivatives of the country's ten largest banks approximate $200 trillion, about three times the GNP of the planet. It is an opaque market, with unrestricted leverage, and by nature, a zero sum game; thus great risk for no apparent net economic gain. Jim's solution: Reduce scale and risk of largest banks, regulate hedge funds as mutual finds, and limit derivative leverage with capital requirements that other businesses are subject to.

We did not spend as much time on education as the other topics, but had talked about the universal national service before and during the teleconference. Jim pointed out that of the many radio shows he has done, this topic elicited the greatest interest ...and support. While the idea is new to today's political discussions, it has been employed successfully here in the US in the past, and is successful in many other countries. A well conceived program could address many ills: social stratification, education expense, and vocational training to name just a few.

Overall, while several of us are skeptical of the government's ability to handle our money effectively, the solutions offered in 5 Easy Theses deserve active discussion and promotion so that our political leaders can attend thoughtfully the risks we face as a nation.