Where Are We, How Did We get
Here, and Where Are We Going?
Estate Planning Forum
Roger P Bey
January 8, 2013
1
Where Are We
• Fiscal Cliff
– Debt – $16.5 trillion
– Deficit -- $1.3 trillion
• Tax Reform
– Personal income
– Corporate income
– Estate
– Property
2
Where Are We con’t
• Market Conditions
– 2012 equity markets -- 16% return
– 10 yr. bond yields -- 1.91%
– 30 yr. mortgages –- 3.25%
– Junk bonds – 6%
• Home Foreclosures
– 30% (16M) mortgages underwater
– 2M in foreclosure
3
Where Are We con’t
• Unemployment – 7.8%
• Health Care
– $2.8 trillion
– 17% of GDP
• Energy
– Fossil Fuel – 82%
– Other sources – 18%
4
Where Are We con’t
• Education
– Costs
– Funding
– Ability & number of graduates
• Corporate governance
– Financial regulation
– Collapse of the financial markets
• Dysfunctional government
5
Where Are We con’t
• Income distribution
– Top 1% 8% of total income
– Top 10% 41% of total income
– Forbes 400 $200+ million average income
• Wealth distribution
– Top 1% 35% of total wealth
– Top 10% 88% of total wealth
– Forbes 400 1.7T; $4.2B each
• Will Rogers
6
How Did We Get Here
• New England 1700’s
– Saw mills, grist mills, iron mills, pulling mills, salt
works, and glassworks
• Infrastructure – roads, bridges, inns, and
ferries; provinces and towns subsidized
foregoing
• New occupations for women – weaving,
teaching, and tailoring
7
How Did We Get Here con’t
• American Revolution 1775-1783
– No available funding
– Refused to tax
– Volunteer army with promise of land grants
– Issued $400 million in paper money
– $242 million repaid 1791 at 1 cent on the dollar
– Debt -- $37 million national; $114 million state
8
How Did We Get Here con’t
• New Nation
– 1787 Constitution – no internal tariffs or taxes on
interstate commerce
– 1791-1811 Hamilton – 1st national bank
– Hamilton – Jefferson conflict
– Hamilton – Burr
– 1816-1836 2nd national bank
– Jackson – let bank charter expire, opposed paper
money, & demanded government be paid in gold
and silver
9
How Did We Get Here con’t
– Panic of 1837 stopped growth for 3 years
– Railroad projects & homesteading grants opposed
• Civil War 1861-1865
– Railroad expansion
•
•
•
•
30 yr. government bonds
Land grants
1850 – 9,000 miles of track
1890 – 130,000
– 1862 Morrill Land Grant Act
10
How Did We Get Here con’t
– Costs - $3.1 billion
– New taxes (excise-value added) & bonds
– First income tax, only on the wealthy
• 3% - $600; 5% - $5,000; 10% -$10,000
– Repealed at end of the war
– Lincoln – “Radical Republicans demeaned harsher
treatment of the South. War Democrats desired
more compromise. Copperheads despised him,
and irreconcilable secessionists plotted his death.”
11
How Did We Get Here con’t
• 1865-1900 Gilded Age
– Greatest period of economic growth
– 1873-1879 Long Depression
•
•
•
•
NYSE closed for 10 days
89 of 364 railroads bankrupt
14% unemployment
18,000 business failures
– 1880’s 500% increase capital investment; capital
formation doubled
– 1890 passed Britain in manufacturing output
12
How Did We Get Here con’t
• 1900-1945
– Mass production
– Wilson, Roosevelt, Taft
– 1916 16th Amendment
– 1917-18 World War I
• First real U.S. world leadership
– 1919 19th Amendment
– 1920’s ended wartime taxes, raised tariffs,
reduced debt by one third
13
How Did We Get Here con’t
– 1929 stock market crash
• PE – 15
• Gov. bonds 3.4%
• Corp. bonds 5.1%
– 9% drop in October
– 90% by 1932
– Bank holiday
– Gold standard
– Social Security 1935
14
How Did We Get Here con’t
• Depression data
Year
GDP (1929
dollars)
CPI
Unemployment
%
1929
101
122
3.1
1931
84
109
16.1
1933
68.3
92
25.2
1937
104
103
13.8
1938
104
99
16.5
1940
113
100
13.9
15
How Did We Get Here con’t
• World War II 1941-1945
– Price controls
– Rationing
– 12 million men drafted
– 6 million women enter the work force
– Costs $4.1 trillion
– Marshall plan
16
How Did We Get Here con’t
• 1945-1973 Postwar Prosperity
– Pent-up demand
– $200 billion in war bonds matured
– GI Bill
• 2.2 million college
• 6.6 million other training
– Baby boom 1946-1964 66 million babies
– Income tax reduction from 94% 1944 to 70% 1965
17
How Did We Get Here con’t
• 1975 – 2012
– Globalization
– 1990’s 18%/yr. equity return
– IPO bubble crash – 50-75% drop
– Long Term Capital
•
•
•
•
Equity $4.72 billion
Debt $125 billion
Off balance sheet $1.25 trillion
1998 collapse
18
How Did We Get Here con’t
– 2008
• Perfect storm – housing bubble & financial markets
• Market dropped 40%
• AIG
– $170 billion bailout
– $165 million in bonuses
•
•
•
•
TARP $700 billion
General Motors & Chrysler
Stimulus $787 billion
Unemployment 10.2% Oct. 2009
19
Historical Tax Rates
Maximum Federal Tax Rates
2011 Dollars
1913
1916
1917
1918
1919
1922
1924
1925
1932
1936
1941
1941
1944
7.0%
15.0%
67.0%
77.0%
73.0%
58.0%
46.0%
25.0%
63.0%
79.0%
88.0%
81.0%
94.0%
$11,332,304
$41,170,573
$35,059,316
$14,859,578
$12,969,920
$2,671,186
$6,560,808
$1,282,169
$16,378,075
$80,712,095
$2,753,124
$76,319,600
$2,549,768
1946
1952
1964
1965
1982
1987
1988
1991
1993
2001
2002
2003
2011
91.0%
92.0%
77.0%
70.0%
50.0%
38.5%
28.0%
31.0%
39.6%
39.1%
38.6%
35.0%
35.0%
$2,301,329
$3,386,862
$2,895,221
$1,424,633
$199,035
$177,766
$56,427
$135,336
$388,200
$376,732
$382,967
$380,409
$379,150
20
Federal Spending, Deficit, Debt and GDP
Billions of Dollars
Years
1901
Spending
1
Deficit
0
Debt
2
GDP
22
Debt/GDP
10%
1916
1
0
4
50
7%
1917
2
0
6
60
10%
1918
13
0
15
76
19%
1919
19
-13
27
78
35%
1920
6
0
26
88
29%
1928
3
1
18
97
18%
1929
3
1
17
104
16%
1930
3
1
16
91
18%
1931
4
0
17
77
22%
1932
5
-3
19
59
33%
1933
5
-3
23
56
40%
1934
7
-4
27
66
41%
1935
6
-3
29
73
39%
1936
8
-4
34
84
40%
1937
1938
8
7
-2
0
36
37
92
86
40%
43%
21
Federal Spending, Deficit, Debt and GDP
Billions of Dollars
Years
1939
Spending
9
Deficit
-3
Debt
40
GDP
92
Debt/GDP
44%
1940
9
-3
43
101
42%
1941
14
-5
49
127
39%
1942
35
-21
72
162
45%
1943
79
-55
137
199
69%
1944
91
-48
201
220
91%
1945
93
-48
259
223
116%
1946
55
-16
269
222
121%
1947
35
0
258
244
106%
1948
30
0
252
269
94%
1949
39
1
253
267
95%
1950
43
-3
257
294
88%
1951
46
6
255
339
75%
1952
68
-2
259
358
72%
22
Federal Spending, Deficit, Debt and GDP
Billions of Dollars
Years
1982
Spending
746
Deficit
-128
Debt
1,142
GDP
3,253
Debt/GDP
35%
1983
808
-208
1,377
3,535
39%
1984
852
-185
1,572
3,931
40%
1985
946
-212
1,823
4,218
43%
1986
990
-212
2,125
4,460
48%
1987
1,004
-150
2,350
4,736
50%
1988
1,065
-156
2,602
5,100
51%
1989
1,144
-153
2,857
5,482
52%
1990
1,253
-221
3,233
5,801
56%
1991
1,324
-269
3,665
5,992
61%
1997
1,601
-22
5,413
8,332
65%
1998
1,653
69
5,526
8,794
63%
1999
1,702
126
5,656
9,354
60%
2000
1,789
236
5,674
9,952
57%
23
Federal Spending, Deficit, Debt and GDP
Billions of Dollars
Years
Spending
Deficit
Debt
GDP
Debt/GDP
2001
1,863
128
5,807
10,286
56%
2002
2,011
-158
6,228
10,642
59%
2003
2,160
-378
6,783
11,142
61%
2004
2,293
-413
7,379
11,853
62%
2005
2,472
-318
7,933
12,623
63%
2006
2,655
-248
8,507
13,377
64%
2007
2,730
-161
9,008
14,029
64%
2008
2,931
-459
10,025
14,369
70%
2009
3,517
-1,413
11,876
13,939
85%
2010
3,456
-1,293
13,529
14,508
93%
2011
3,603
-1,300
14,764
14,959
99%
2012
3,795
-1,327
16,351
15,602
105%
24
Cost of War
2011 Dollars
Wars
Billions
Wars
Billions
Revolution
$2.41
World War II
$4,104
1812
$1.55
Korea
$341
Mexican
$2.38
Vietnam
$738
Civil: Union
Civil:
Confederacy
Spanish
American
$59.63
Persian Gulf
$102
$20.11
Iraq
$784
$9.03
Afghanistan
$321
World War I
$334
Total
$6,819
Casualities
Deaths
1,326,612
Wounded
1,531,036
25
Federal Budget Major Sectors
Health
Interest
Billions of Dollars
Year Total Pension Care Education Defense Welfare on Debt
2000 1,789 449
352
60
359
177
362
2001 1,863 475
390
64
366
189
359
2002 2,011
2003 2,160
497
427
78
422
229
333
510
469
91
493
249
318
2004 2,293
2005 2,472
531
509
96
542
244
322
558
549
106
600
232
352
2006 2,655
2007 2,730
586
583
128
621
254
406
628
642
101
653
262
430
2008 2,931
2009 3,517
660
671
101
730
322
451
730
764
88
794
415
383
2010 3,456
750
821
139
847
502
414
2011 3,603
776
858
114
878
473
454
2012 3,795
820
846
153
902
452
450
26
Where Are We Going
• 2013 Financial Market Outlook
– Equities Up
– Individuals $600B in withdrawals
– Corporate cash $2T
– High bond prices to go down
– Housing market recovery continues
– Mortgage will increase a little
– Bank lending will ease
– Frozen by fear of uncertainty
27
Where Are We Going con’t
• 2013 Labor markets
– Small declines in unemployment
– Structural realignment required
– Demand for skilled labor – machinists, welders,
etc.
– Reshoring but a new generation of manufacturing
• Maybe Mexico and Brazil
28
Where Are We Going con’t
– 2013 Energy
• Natural gas – high production
– U.S. $3.25MCF
– World $12.00MCF
• Crude oil
– U.S. $90.00/barrel expect to decline
» High production
» Increase in pipelines
• Coal
– Cost advantage declining
– Clean air/global warming
• Other
29
Where Are We Going con’t
• World markets
– Largest GDP 2011 Trillions/2013 Growth
Country
GDP/Growth
Country
GDP/Growth
U.S.
$15.7/2.1%
U.K.
$2.4/1.1%
China
$8.3/8.2%
Brazil
$2.4/4.0%
Japan
$6.0/1.2%
Italy
$2.0/-0.7%
Germany
$3.4/0.9%
Russia
$2.0/3.8%
France
$2.6/0.4%
India
$1.9/6.0%
Global
$70/3.3%
30
Where Are We Going con’t
• Who to watch
– Mexico
– 1960 GDP $13B
– 1990 GDP $262B
– 2011 GDP $1.16T
– Exports – 4th in autos; 1st in big screen TVs
– NAFTA
31
Where Are We Going con’t
– Age
Country
Median
Average
India
26
Mexico
27
34
China
36
43
U.S.
37
39
Japan
45
52
• Middle East – good luck
32
What Can/Should We Do?
• What can/should we do?
– Dysfunctional government
•
•
•
•
•
•
•
•
Avoid electing the extremes – cancerous
Term limits
Electoral college
Voting privilege or requirements
Ranked voting
Balance budget amendment
Public financing of elections
Citizens United
33
What Can/Should We Do? Con’t
• Tax/Spending Reform
– Government spends $31,000 per household
– Government collects $19,000 per household
– Tax breaks or expenditures $10,000 per household
34
What Can/Should We Do? Con’t
• $1 expenditure for $1 of revenue
– Revenue 2012-2016
•
•
•
•
•
•
•
•
•
•
•
Health insurance $200B/yr.
Mortgage interest $120B/yr.
Step-up capital gains $70B/yr.
401K $70B/yr.
State & local taxes $60B
Employee pensions $50B
Charity $50B
Capital gains on houses $44B
Increase Social Security cap to $150K = $75 - $100B
Wealth tax -- $70T @1% = $700B
Value added tax – national sales tax 1% of GDP = $150B
35
What Can/Should We Do? Con’t
• What can we cut?
Year
2012
Health
Interest on
Total Pension Care Education Defense Welfare
Debt
3,795
820
846
153
902
452
450
– Suggestions
• Homeland Security 2013 budget $59B; $3.4B for 40 buildings
14,000 employees; 200,000 employees in total
• War on drugs $40B/yr. for 30 years
– Cocaine 74% cheaper
– 1.6 million inmates
– $63B costs
36
What Can/Should We Do? Con’t
– Defense budget $900B
•
•
•
•
50% of the world
China $150B
Russia $75B
Greater than requested
37
What Can/Should We Do? Con’t
• Health care
– Administrative costs 15% ($450B) ; France 5%
– Obesity 7% $190B; more than smoking
– Frist – 30% of Medicare on last few months of life
– Another report – 25% of Medicare for 5% of
recipient's in last year of life
– Expected life 51st -78.9yrs.; Japan 3rd 83.9;Canada,
Italy, Spain, Greece all ahead of us
– Infant morality 34th right behind Cuba
– Maternal deaths 47th just ahead of Chile and
Lebanon
38
What Can/Should We Do? Con’t
• Debt interest – must reduce debt
• There must be more
39
What Can/Should We Do? Con’t
• Education
– Problems
•
•
•
•
•
Noncompetitive work force
14th in terms of per capita graduates; had been 1st
Costs increasing faster than health care
Administrative and facility costs
Public education is a misnomer
– OU 15-20% state funded
– Penn State, Michigan less than 10%
• Student loans $1T
40
What Can/Should We Do? Con’t
•
•
•
•
Quality
Majors
Haven’t found a way to be scalable
Athletics
41
What Can Should We Do? Con’t
– Suggestions
• Educational disruption
– Kahn Institute; MOOC’s
•
•
•
•
•
No direct entry from high school
Major support for 2 year vocational schools
Science, computer science, engineering,
Higher expectations
Growth thru public/private partnership
• Corporate taxes
42
Why Should We Be Optimistic?
• World is most peaceful in hundreds of years
– Richest countries are not in geopolitical
competition
– Fewest people dying from war, civil war, &
terrorism in at least 100 years
43
Why Should We Be Optimistic? con’t
• Global economy growth
– 10-20 percent faster than previous decade
– 60 percent faster than decade before
– 5 times as fast as three decades ago
• Poverty
– UN estimates reduced more in last 50 years than previous 500
– Chinese – 10 times richer than 50 years ago, live 25 years
longer
44
Why Should We Be Optimistic? con’t
– College graduates globally last 40 years
• Men 4 fold
• Women 7 fold
– Implications for U.S.
• A rising tide lifts all boats, i.e., opportunities
• We have
–
–
–
–
–
Dynamic economy
Dominate age of technology
Deepest capital markets
Home for world’s greatest companies
Most of the worlds greatest universities
45
Thank You
46