Marhsall Goldman is a Professor of Economics Emeritus at Wellesley College and Senior Scholar at the Davis Center for Russian Studies at Harvard University. In his book, Petrostate: Putin, Power, and the New Russia , Goldman chronicles Russia’s dramatic reemergence on the world stage, illuminating the key reason for its rebirth: the use of its ever-expanding energy wealth to reassert its traditional great power ambitions. In the article below Goldman reflects Russia’s role in increasing energy prices.

As energy prices rise to record heights, most consumers are unaware that it’s not only OPEC members who are the beneficiaries, but Russia which today actually produces more petroleum that Saudi Arabia. Russia has been the world’s largest producer of petroleum several times in the past including at the beginning of the twentieth century and again in the 1950s. But its role today when energy prices are at record levels has made Russia an especially important economic and political power, more so than ever before in the country’s history.

In more recent times, the bounty brought in by Russian petroleum exports has transformed Russia from near bankruptcy in August 1998 to levels of prosperity unmatched not only in Soviet but Czarist history. The Russian government today has built up nearly $500 billion in foreign currencies—not bad considering that less than a decade ago, in 1998, Russia’s treasury was effectively empty. Moreover the Russian company, Gazprom, the world’s largest producer of natural gas has just recently become the world’s second largest corporation as measured by the combined value of its corporate stock, a distinction that until just recently was held by General Electric. Today only Exxon-Mobil is larger than Gazprom, but Prime Minister Putin has promised that he will do all he can to help Gazprom reach first place. More than that Putin has begun to question why it is that the dollar is the world’s currency standard. As the US dollar loses value, the ruble has strengthened, gaining 20 per cent in recent weeks.

Not surprisingly both Putin and his protégé, Dmitri Medvedev his successor as President, have begun to demand that the ruble be included as a world currency (not bad considering that only a few years ago the ruble was not even convertible into other currencies) and that Russia have a say in selecting the leaders of international financial groups such as the International Monetary Fund and the World Bank.

Given the likelihood that energy prices will remain at high levels for some time to come, it is likely that Russia will seek to use its new wealth to reassert itself as both an energy and a political superpower.

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Today we bring you Teresa Ghilarducci (who just published When I’m Sixty-Four) in conversation with Jacob Hacker (author of The Great Risk Shift). These two experts have been debating how to ensure retirement for future generations. This is the final part the exchange. Read part one and part two.

Teresa Ghilarducci taught economics for twenty-five years at the University of Notre Dame and now holds the Irene and Bernard L. Schwartz Chair of Economic Policy Analysis at the New School for Social Research. She is also the 2006-2008 Wurf Fellow at Harvard Law School. Her most recent book is When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them.

Jacob Hacker is a Professor of Political Science at Yale University and a Fellow at the New American Foundation. His most recent book is The Great Risk Shift: The Assault on American Jobs, Families, Health Care, and Retirement And How You Can Fight Back.

Dear Teresa,

I would never throw you out of the reality-based policy community. But I would encourage you to be flexible in the debates over retirement security our nation is surely going to have. 401(k)s are more embedded, I think, than you acknowledge. And while they are indeed a practical failure and thus must be overhauled, “clever psychological jujitsu with automatic this and thats” might be the best we can do.

Moreover, this jujitsu approach wouldn’t be as bad as you suggest. I would universalize 401(k)s — everyone has them automatically, with a standard government contribution that is inversely scaled to income. If employers want to set up their own plans and match their workers contributions, bully for them. And yes, I would have all those “automatic this and thats” — default investment options with annual balances into the federally sponsored plan when you lose or change jobs, and so on.

In any case, you and I mostly agree on what needs to be done; we mainly differ on political strategy. The big controversy is not going to be between folks like us; it’s going to between folks like us and those who don’t actually live in the reality-based policy community and continue to insist that 401(k)s (perhaps with small tweaks at the margins) work splendidly — and, indeed, should be the model for reforming Social Security, and just about everything else. There are proposals for private accounts in Medicare, unemployment insurance, employment-based health insurance, and on and on. Heck, my guess is that somewhere at the Cato Institute they are formulating a plan for 401(k)-style reform of the post office. (”With individual mail accounts, all Americans can build their own personal postal service, not rely on a top-down, one-size fits-all, big-government system built for the 19th century!”)

You ask, “Who did this? Who brought old age income security under attack?” Well, employers and 401(k) providers are good places to start, and leading members of Congress, like the late William Roth of Delaware (of “Roth IRA” fame), have been making things worse for some time. But I think there’s something else going on. We are living in an increasingly unequal society in which those who make and comment on policy are, for the most part, insulated from the dominant economic trend faced by the middle and working classes: rising economic insecurity. You know the numbers, so I won’t inundate you with them. But I will quote one recent analysis by the Congressional Budget Office. Average income more than doubled among the top 1% between 1979 and 2005, after accounting for inflation, taxes, and public benefits. What about the middle fifth of Americans? Their average income rose by just over 20 percent during this quarter century, and most of that rise was because of increased family work hours. Meanwhile, private health insurance coverage, guaranteed pension protection, and personal savings have all headed sharply South.

So I have my own question: Who’s going to push back against these trends? I am reminded of the importuning question of a working mom I interviewed for The Great Risk Shift:
Where is the AARP for families? I feel like we need the equivalent of the Million Mom March to let candidates know that parent with young children are hurting. How can busy, overwhelmed parents be educated and motivated? How can we have our voice heard above those of huge PACs and corporations? I know this is nearly a rant, but I am angry and frustrated and don’t know where to turn to be effective in getting the leadership this country needs.

It’s a good question. What’s your answer? And where doesm the struggle for retirement security fit into this larger challenge?

I’ve enjoyed our exchanges; thanks for writing When I’m Sixty-Four and letting me talk with you about it.

Best,

Jacob

Jacob, I share your frustration and near shock that, since 1979, incomes for middle class families grew at a fraction the rate enjoyed by the top one percent and wages for middle class men actually fell. I am also appalled that tax breaks for pensions and health care have skyrocketed, while pension and health insurance coverage erodes. Tax breaks are going to people who need help the least. That we are both angry is a good sign; we are not alone, political change is possible.

In this conversation (and in our books) we have crafted, for the next President, a practical, affordable way to solve health and retirement insecurity. Such confidence - unusual for academics– comes from both of our work in the history of social policy and the knowledge about modern labor markets and policy failures.

About retirement security: my GRAs are your universal 401(k)s. Every worker would have a 401(k)-type account in which 5% of their income is contributed each year. The government would deposit $600 into everyone’s account (up to the Social Security cap) that would count towards that 5% contribution. The best thing about GRAs is that the government would guarantee the return and fees would be very low.

This means for people earning $12,000 per year the government would pay all of the workers’ contribution.

For people earning $40,000 per year the government would pay 40% of the required contribution and for people earning near the Social Security cap, at about $100,000 per year the government would pay 20% of the required contribution.

You aren’t alone urging me to be flexible, we costed out keeping some of the current 401(k) contributions up to $5000 (instead of the $46,000 maximum now) That would cost $25 billion.

The only difference is that you would make universal 401(k)s voluntary and I would make them mandatory. A reasonable reality-based path would be to phase in mandatory GRAs. Yet, Jacob, I am convinced, the $600 contribution might be so fetching and attractive that a mandatory plan may never be required.

About health insurance security: you have a plan that gives everyone more security. You would pay for it through a transparent, straightforward payroll tax. Maybe people will balk but you can make the argument we all pay anyway for the uninsured but the cost is hidden, passed through in the form of higher prices. And, we all pay more than we have to because of the inefficiency and high insurance and pharmaceutical profits.

Thank you for writing The Great Risk Shift and entering in this coversation about When I’m Sixty Four. We should not be shy insisting our books promote income security for American workers, which when implemented, will dampen anxiety and bitterness, enhance productivity and help the new president and Congress move away from a foreign policy based on fear and toward economic policy based on a healthy working class.

Teresa

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Today we are proud to bring you Teresa Ghilarducci (who just published When I’m Sixty-Four) in conversation with Jacob Hacker (author of The Great Risk Shift). These two experts will be debating how to ensure retirement for future generations. This is part two of the which will we be publishing all week, so be sure to come back and check our exchange.

Teresa Ghilarducci taught economics for twenty-five years at the University of Notre Dame and now holds the Irene and Bernard L. Schwartz Chair of Economic Policy Analysis at the New School for Social Research. She is also the 2006-2008 Wurf Fellow at Harvard Law School. Her most recent book is When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them.

Jacob Hacker is a Professor of Political Science at Yale University and a Fellow at the New American Foundation. His most recent book is The Great Risk Shift: The Assault on American Jobs, Families, Health Care, and Retirement And How You Can Fight Back.

Dear Teresa,

I see these multiple perspectives on retirement every day, in my research and my own life. I visit my dear colleague Bob Dahl, who in his mid-90s continues to publish path breaking books on democracy and political equality. How can I talk with someone so intellectually vibrant and not want to be contributing in that way in my own old age?

And then I remember Elinor Sheridan, whom I wrote about in my book. In her seventies, she was trying to find a job because her 401(k), crushed by the stock-market decline of 2000, had already been depleted. Even with Social Security, the pension she receives from 17 years at a hospital provided a meager standard of living. Elinor had worked her whole life — as a mom and wife (divorced) and then, ironically, as a “risk manager” at the hospital — and now she was not because she wanted to but because she had to. So much for the golden years.

It is good to have someone celebrating retirement as a benefit to our society, rather than a burden on us and future generations. The labor movement may be the “folks who brought you the weekend,” but it was FDR and countless fellow campaigners for a guaranteed retirement income who who brought us retirement as we now know it. And the campaign is not over.

Retirement security is under attack. Corporations are jettisoning traditional guaranteed pensions, Congress is pouring money into tax breaks for individual benefit plans that exclude millions and mostly benefit the affluent, virtue in proposals for partial privatization of Social Security that will put the promise of secure retirement= further at risk.

But this exchange would be pretty uninteresting if all I said was “Amen,” and so let me continue in the vein of disagreement for at least a little while. I have two concerns about the Guaranteed Retirement Account (GRA) vision — the first more philosophical, the second more practical. (And I should note, as a fellow policy wonk, that GRA is a nice acronym, especially when compared with John McCain’s chosen shorthand for his health plan of last resort, GAP, or “Guaranteed Access Plan.” Note to the McCain candidacy: A plan that’s billed as filling gaps should probably have another moniker, though perhaps the McCain folks believe in truth in advertising.)

First, the more or less philosophical concern: Are GRAs the best immediate use of federal resources and the scarcely unlimited running room for new federal taxes — excuse me, “mandatory contributions”? I am not one to go in for the clash-of-generations view so common in official Washington and the news media. (After all, we all get old, and young and old alike support Social Security and say they want a secure retirement.) But I am not sure I am ready to man the barricades for a major new commitment to provide enhanced retirement income when so many needs go unmet for working age Americans and kids. For one, and I say this only half in jest, I would rather have the 5 percent of payroll proposed to fund GARs for my universal health plan
= (http://www.sharedprosperity.org/topics-health care.html). For another, Social Security provides a tattered but still crucial safety net that is sorely lacking in other areas of American economic life—most notably, health care (again, I really want that 5 percent!). My point is not that we don’t need a new campaign for retirement security — we do. It’s just that I”m not sure it should be the first priority of those seeking economic security. The aged look out for themselves pretty well in American politics. Not so the young, the disadvantaged, the cash-strapped working family — though, yes, they will all be old some day and, yes, our pension system fails them above all.

Now, the practical worry. We have a huge 401(k) complex on which millions of Americans rely. In my 2002 book, The Divided Welfare State, I described the slapdash way in which this system came into being (trust me; almost no one knew what they were getting into, though once the floodgates were opened, corporations figured it out pretty quick). But I also made the point that existing systems of social protection, however haphazardly created or inadequate in practice, are fiendishly difficult to supplant with new, more rational arrangements. I called this “path dependence.” But we could just as well call it “political reality.” And it seems to me that the political reality today is that it will be very, very hard to completely redirect existing tax breaks for 401(k) plans and create an entirely new supplementary pension system managed by the federal government.

If that judgment is correct (dispute away), then where does it leave those of us living in the reality-based policy community who recognize that the 401(k) defined contribution model is incapable of providing retirement security for all but those at the top? I argued in The Great Risk Shift thSocial Security, and (2) transform 401(k)s into something that looks like a guaranteed retirement benefit. Without going into the details, I called for making 401(k)-type accounts available to everyone, even if their employer failed to provide them; requiring automatic enrollment through the workplace; and offering progressive “matches” to supplement lower-income workers’ contributions, even if employers do not offer a standard match. And I said that all account balances should be automatically converted into annuities (a guaranteed income for the remainder of one’s life) at retirement unless someone could show they had sufficient wealth to protect themselves against outliving their assets. (providing such annuities through the post office back in the 1930s).

By the way, this would surely cost serious money – which puts it somewhat in tension with my first point about priorities. But it has the virtue that it could be done in stages, with the lowest-cost aspects (automatic enrollment; annuitization, which should be self-financing) coming \ first. Its more important virtue is that it might be possible to do at all.

Fire Away,

Jacob

Thanks for reminding me of Robert Dahl and what was unspoken, our hope we are as incisive in our nineties and in control of our time.

Please know it was both — FDR’s Social Security and union pensions (e.g. those for the Ladies Garment Workers, bricklayers, coal miners, steel, auto workers etc.) that created the middle class and middle class retirement. But, as you point out, the campaign for “decent retirement for all” is not over. Except for the wealthiest men and women, people, now in their 40s and 50s, will likely be the first U.S. history to be more at risk than their parents of experiencing a sharp drop in living standards in old age.

I bristle a bit when accused of not being a reality-based policy wonk. There is not a pension economist on the planet that will defend our system of tax breaks for savings that only help the affluent move money from taxed accounts to tax-favored accounts, costing the Treasury over $80 billion per year. Thus, it is no surprise that the tax breaks - called tax expenditures - have soared while overall savings rates keep on going down. A full 50% of the tax expenditures for 401(k)-type accounts go to only 6% of workers; those at the top earning over $100,000 per year.
70% of the tax breaks go to the top 20%. The most head banging reality of it all is that these people would have saved without the help. The current system has no basis in logic.

Who did this? Who brought old age income security under attack? I used to think it was mostly corporations spending less on pensions because they could get away with it. The shift in market power to employers and away from workers is partly the reason, but a big part of the attack comes from Congress indulging the 401(k) industry. And a dedicated, ideologically-based campaign to transform Social Security into individual accounts (my Chapter 5 covers that intricate history and, as you rightly point out, continuing saga) is the other source of the plot against pensions.

My proposal for guaranteed supplements to Social Security is based in this reality. GRAs obtains pensions for all with no additional risk or federal spending. And, they restore savings rates to the higher rates before the “debt boom” that started in the 1980s.

Philosophically we are on the same page. You didn’t say it right out, but I guess you are just as terrified as I am that high payroll taxes would cause terrible things like widespread tax evasion and an underground economy. I’ve come to appreciate how lucky we are in America that we have almost 100% employer compliance (the stray restaurant and construction sites notwithstanding) in paying social security tax.

Keeping payroll taxes low is philosophical and practical. Nonetheless, I support your plan for an additional payroll tax to pay for health care and for a mandatory 5% contribution to a GRA. First, the government will offset the 5% GRA contribution with an indexed $600 annual contribution.

Second, the “mandatory contribution” is unlike a tax, it will go into an individual’s account under that individual’s name. Third, money for the old doesn’t take away money from the young. One of my best articles has the best title - Do the Old eat the Young? (I also teach a class on social policy with the same name). The ugly fear that supporters of Social Security and pensions compete with government support for working-age Americans and kids is not well founded. You know what? Nations that pay for the old also pay for kids. It is also a pattern in American history. When American families funded their pensions and paid ever increasing Social Security taxes, they voted for increases in property taxes to pay for schools.

Thus, we can plausibly argue for a bread and roses social policy. Your great book, The Great Risk Shift, put working class families’ insecurity front and center. The kids! The kids! Only African American kids have higher poverty rates than older single women. And, you are right, over the last 4 decades, we have drastically cut old age poverty rates while more kids face poverty risks. But did bread leave the mouths of babes to feed the grandmas? No. Tax expenditures - taxes not collected for special reasons, like for oil depletion and for profits of banks operating abroad — between 1974 - 2004 tripled. And the growth in tax breaks, mostly for businesses and the wealthy, far exceeds the growth in social spending. That is where much of the money for cash-strapped working families have gone.

I agree, thought the practical reality of checking the runaway 401(k) industrial complex might be difficult, it is not impossible don’t annihilate Wall Street firms, the government will contract with for-profit professional money managers just as we do for for investing pensions for Federal Reserve employees, Texas teachers, etc. Even Chuck (in the “Talk to Chuck” campaign for Charles Schwab brokerage accounts) and other broker dealers will have something to do. Employers can still keep their 401(k) plans, but their merits have to be r al, not based on the tax breaks going to the bosses. So, though it is difficult to implement policy as if we are “starting from scratch” because of “path dependence” this 401(k) path is fairly new - the tax breaks have soared only recently. And, if we can keep tax breaks for 401(k) contributions up to $5,000 per year - not up to, in some cases, $46,000 — we only spend $25 billion per year for GRAs for all, funded with $600 federal contributions for everyone.

So, don’t throw me out of the reality-based policy community. Guaranteed Retirement Accounts, with all due respect, is a more effective, straightforward plan than your plan that relies on clever psychological jujitsu with automatic this and thats. You aim to raise pension coverage rates by taking advantage of human laziness through auto enrolling, auto annuitizing and - you should add — auto investing. Fundamentally, relying on voluntary, commercial accounts does not address huge leakages from high retail fees, leakages from churning and scams, and leakages from early withdrawals and, the biggest leak of all, the fact most employers do not bother to sponsor a pension plan at all.

The best part about the GRAs is that it addresses the two Americas. The GRAs gives every American worker with a Social Security number what only some lucky workers have. Workers with government, corporate and union defined benefit plans, and college professors in TIAA -CREF have low cost, not-for-profit financial institutions handling our pensions. The other Americans have nothing, or pay retail fees for leaky 401(k) accounts. The GRAs close that access gap - everyone has access to a low fee, professional, quasi-governmental, financial institution that guarantees an inflation-protected competitive market return.

Jacob, we can get health and pension security. No?

Teresa

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Today we are proud to bring you Teresa Ghilarducci (who just published When I’m Sixty-Four) in conversation with Jacob Hacker (author of The Great Risk Shift). These two experts will be debating how to ensure retirement for future generations. This is the first part of the series which will we be publishing all week, so be sure to come back and check our exchange.

Teresa Ghilarducci taught economics for twenty-five years at the University of Notre Dame and now holds the Irene and Bernard L. Schwartz Chair of Economic Policy Analysis at the New School for Social Research. She is also the 2006-2008 Wurf Fellow at Harvard Law School. Her most recent book is When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them.

Jacob Hacker is a Professor of Political Science at Yale University and a Fellow at the New American Foundation. His most recent book is The Great Risk Shift: The Assault on American Jobs, Families, Health Care, and Retirement And How You Can Fight Back.

Dear Teresa,

You have written a powerful indictment of our rickety framework of retirement security, one that resonates very much with my own thinking on the topic. And you have done a masterful job puncturing the view that further encouragement of 401(k)s or partial privatization of Social Security is our salvation. As you show, these poison pills will actually increase the risk of inadequate income in retirement for most Americans while showering even more government largesse on well-off folks who do not have all that much to worry about.

And yet, I find myself coming up short -no pun intended- on those who would advocate a later retirement age. I am with you for most of the trip. Telling people that they need to tough it up and stay in the workforce for much longer than their parents did illustrates precisely the excessive emphasis on personal responsibility in economic policy debates that I criticized in The Great Risk Shift.

Many people don’t retire voluntarily; many have labored more than long enough, in jobs that are demanding and tiring; and many, sadly, won’t actually live that long after they leave work. You also make the important point that one reason we may be living longer -and, as you know, there are stark differences both in life expectancy and how much it has grown across income classes– is precisely because we have more time in retirement.

Still, we are living longer. And many of us are staying in school longer. And many of us are doing jobs, such as mine, where most of our time is spent sitting at desks, rather than lifting girders. I agree that working longer cannot be a national policy solution, but I wonder if we should be so resistant to the idea that a good share of Americans — and, perhaps even more so, Europeans — should be working later in life than they do now. I like the general idea, for example, of basing retirement age on the number of years in the workforce, so that those who get advanced degrees end up retiring later than those whose formal education ends much earlier. I see no reason either why we should encourage early retirement — by which I mean retirement before age 65 — except in cases where it is truly necessary or unavoidable. And I think we should be improving the opportunities for older workers to take fair part-time jobs, in part because I think that all Americans should have the opportunity to take part-time jobs that pay well and offer benefits when they need to do so to balance work and family.

It seems to me that the message you want to convey is that people need security as well as choice. They need guaranteed retirement benefits that are there when they need them, even if they need them at 62. But they should also have the choice to work longer, with benefits that do not penalize them if they stay in the workforce until 69, or 79. What do you think? And what should those benefits — and other supportive policies — look like?

Best,

Jacob

Thanks for your comments, we both challenge the growing insecurity of workers’ financial futures.

In writing the book I decided to first think what American retirement policy did right, to see where we went wrong. Through a patchwork of private/public programs – employer pensions, Social Security, disability provisions - we successfully extended to all workers what was once only available to the rich - a chance to retire at the end of our working lives. In one of my favorite chapters, I show that we have a very flexible retirement system so that everyone gets a crack at free time before they die. The coal miner dies sooner but he can retire earlier; the coal mine owner lives much longer, but she can work into her seventies. We, Americans have laws against age discrimination; we proudly stand apart from Europe and Japan, who make people leave their jobs JUST because of their age.

I want to preserve that equity and flexibility, Jacob, the ability of all older people - regardless of social economic class — to have free time at their end of their lives, to construct a meaningful narrative of themselves and their human relationships, whether it be by working or not.

I wrote this book to describe the attack on retirement, the creation of an ethic of work to supposedly stave off a fear of aging, and who wins and loses under the new pro-work, anti-pension ethic.

You are right, many come up short when they hear I am against policies to extend the retirement age and policies that push a pro-work agenda. Indeed, reporters, congressional members, educated professionals like us, really hate it when I say I am defending retirement or, worse, retirement leisure. I see them shuddering and shaking their heads no.

They think I am talking to them, telling them I want to declare them retired and thrown away. Though, when I talk to working people and people who fear from their pensions they hear something else. They hear me defend age discrimination laws. They hear me defend the unappreciated abilities and great desire of older people to be trained on the job.

They hear me defend the real choice to work in old age.

I propose that all workers save 5% of their income in guaranteed retirement accounts (GRAs) to supplement their Social Security benefits with a $600 contribution from the federal government. The worker takes responsibility to ensure they have basic income — 70% of pre-retirement earnings — after age 65. Under my plan, only a full 40 years of work or more gets you the basic pension. People should work as long as they want to. The thrust of my proposal is that only when we secure basic income in old age, will employers have to entice older people into the labor pool. Without basic pensions older people are pushed and never have time to rest and reflect. That is simply not an option in a civilized society.

Thanks for your comments Jacob!

Teresa

P.S. Your early work on the history of the welfare state in the United States was helpful in my approach to the looming retirement crises. I never had your article with Beland far from my desk.

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Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. In the article below he looks at the Clinton’s federal tax returns.

President and Senator Clinton’s federal tax returns provide much fodder for commentators who are debating a diverse set of questions in light of those returns: Has Mr. Clinton understandably maximized his post-presidential income in our celebrity-crazed culture – or has he exploited the presidency for unseemly financial gain? Does the Clintons’ private foundation reflect a worthy model of charitable giving – or the federal fisc’s subsidization of Senator Clinton’s presidential candidacy? Was Mr. Clinton financial relationship with Yucaipa appropriate for a former president – or for the spouse of a prospective president?

The Clintons’ tax returns raise one further issue which also requires public discussion: The federal subsidy the Clintons have received over the last seven years while earning in excess of $100 million. Mr. Clinton’s aggressive pursuit of post-presidential income is incompatible with the extensive public support he has received from federal taxpayers since leaving office. That public support was designed to preclude the nation’s chief executives from facing financial hardship after their terms of office. It was not intended to subsidize the aggressive pursuit of a post-presidential fortune.

The federal taxpayer’s subsidy of Mr. Clinton has several components. First, as a former president, Mr. Clinton is entitled to receive, for the remainder of his life, the salary of a cabinet secretary. That salary is today $191,000 per annum. In addition, as a former president, Mr. Clinton also receives, at taxpayer expense, “suitable office space appropriately furnished and equipped.” Mr. Clinton’s office in New York City costs federal taxpayers over $700,000 per year to lease and operate. Federal taxpayers also defray the salary and benefits for office staff and some of Mr. Clinton’s travel outlays. The General Services Administration currently budgets for all of these costs a yearly total of $1,162,000 for Mr. Clinton. The equivalent annual figures for former President Bush and former President Carter are $786,000 and $518,000 respectively.

In addition, Mr. Clinton is also entitled, at taxpayer expense, to Secret Service protection for the remainder of his lifetime – even though, as president, Mr. Clinton signed legislation limiting Secret Service protection for his successors to the first ten years after they leave office.

For most Americans, Mr. Clinton’s package would constitute a heady lifestyle. For President and Senator Clinton, however, this post-presidential package merely provided a tax-financed base for the aggressive pursuit of unprecedented financial gain for a former chief executive.

Mr. Clinton has apparently treated as tax-free much of the federal largesse he has received. While the Clintons’ federal tax returns report as taxable income his cabinet-level salary payments, he has apparently elected to exclude from his taxable income the other benefits he receives, namely, his federally-financed office, staff, travel costs and protection.

If the Clintons had treated these items as taxable, they most likely would have been reported on their Forms 1040 on line 21 for “other income”. On the Clintons’ 1040 for 2006, line 21 is blank, suggesting that they did not include in income the office, staff, travel costs or protection provided to them by federal taxpayers.

The tax-free treatment of this federal subsidy of Mr. Clinton makes it particularly valuable for him.

This post-presidential package and the federal subsidy it represents were not intended as a conventional deferred compensation arrangement. They instead reflect the judgment that former presidents should not be required to hustle in the marketplace after they leave office.

The story of an impoverished Ulysses Grant, financially-impelled to write his memoirs as he was dying of cancer, is an iconic image of American history. From this tragedy, the world received one of the great military autobiographies of all time. However, most Americans would prefer that the nation’s former leaders not confront the kind penury which plagued Grant at the end of his life.

The immediate stimulus for the modern post-presidential compensation package was the report that former president Truman lacked the resources to return his mail from the American public.

This post-presidential package was designed to preclude Grant’s and Truman’s successors from experiencing the financial problems they confronted. It was not intended to serve as a federal subsidy for the aggressive pursuit of a post-presidential fortune.

President Clinton is not required to accept all or any of the proffered subsidy from the federal Treasury. He can also make a payment to the federal fisc reimbursing it, in whole or in part, for the costs of this subsidy. Such reimbursement could, for example, be geared to the taxes Mr. Clinton would pay if his post-presidential benefits were treated as taxable income.

The federal taxpayers provide post-presidential benefits so that former chief executives will not replicate the unfortunate financial history of Grant or even the more moderate financial discomfort in which President Truman found himself. We do not subsidize former presidents so that they may pursue lucrative private sector careers. As a federal taxpayer subsidizing Mr. Clinton’s lifestyle, I hope he feels my pain.

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Suddenly cash isn’t quick enough for our fast-paced world. If you want to be happy and efficient and avoid the critical stares of cashiers and fellow customers, you need to swipe or tap a card and keep the line moving. According to the latest round of credit card commercials, checks and cash are just so 20th Century.

But innovation in spending can be the mother of insolvency. Every new banking convenience brings a new challenge to our self-control. People who pay with plastic are willing to pay more than those who pay with cash, and when asked just minutes after a purchase, swipers are much less likely to remember how much they spent than people who pay with cash or a check. No wonder we are having trouble living within our means.

Credit card companies get much well-deserved criticism for high interest rates, opaque rules, and predatory fees. The “Credit Cardholders’ Bill of Rights Act of 2008” (H.R. 5244) recently introduced by New York Representative Carolyn B. Maloney would provide much needed protection against arbitrary interest rate changes, inadequate disclosure of rules, and other abuses of the industry. But the worst things the credit card companies do they do with our consent— perhaps even our encouragement.

Credit cards have always given us the pleasure of purchasing while putting off the pain of payment, but when they were first introduced, credit cards could only be used when we were out in the world, eating at restaurants or shopping at bricks and mortar stores. The transaction required considerable effort on the part of a clerk who made a paper impression of the charge plate and called the bank to see if we were good for the money. With the advent of electronic banking networks and magnetic strip cards, going into debt has become a self- service enterprise that can be conducted at ATMs and vending machines wherever we find them.

But much of what plagues us about credit cards is not the fault of the banking industry. Most of our struggle with over-consumption and debt has been created by clever retailers who have found new ways to get us to cough up our account numbers. Credit cards combined catalogs and 800-numbers brought impulse shopping home, and the internet gave us one-click buying. Today, cell phones and wireless PDAs make it possible to spend almost anywhere. Not long ago the retail marketplace was only open at certain times of day, and we had to travel to get there. Now our every waking minute can involve decisions about whether or not to buy.

The credit card companies and retailers know we are less prudent when we act quickly, and they have refined the technology of the shopping transaction down to just a few seconds. No time for second thoughts; no time to consider where your money is going. Just keep the line moving.

It’s hard to argue with innovation. Technological development has fueled our economy and kept the United States competitive in a shrinking world. But if as consumers we hope to enjoy a life that is free of debt and anxiety, we should recognize that, after a point, all this convenience is a curse, not a blessing. Yes, it may slow up the line to go back to a cash-and-carry lifestyle, but if we use that extra time to think, we might just discover what we really want. In many cases, we won’t need a credit card to get it.

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Dmitri Medvedev’s election (or more accurately, selection) as president of Russia was not much of a cliffhanger. By eliminating any viable contender, his patron, Vladimir Putin did all he could to ensure his protégé’s election. For many Russians, there was little point in even bothering to show up at the polling station–everything had been decided in advance. Except for Medvedev, no other candidate (or even a potential candidate) was allowed meaningful access to TV, much less campaign funding. Large public rallies were restricted, if not banned outright.

It’s not that Medvedev had much to fear. Even if access to TV was open to all and the candidates had abundant funding, as Putin’s choice, Medvedev was automatically the favorite. After all, with public opinion polls showing over 70 % support for Putin, whomever he selected as his successor was endorsement enough. Putin is genuinely popular among the Russia public. Russians credit him with transforming their country from a state of near-bankruptcy after its August 1998 financial collapse—when most banks closed their doors and the state defaulted on its internal and external debt—to its present position as a financial powerhouse. Today, Russia has the world’s third largest holding of foreign exchange and gold, and its economy has been growing at about 7 % a year during most of Putin’s tenure. More than that, Russia has again begun to build up its military prowess and as several Russian leaders have boasted, “No longer will other countries (read the US and the EU) dare to push us around and tell us what to do and what not to do.”

None of this would have been possible if oil prices had not jumped from about $12 a barrel in 1998 to over $100 today. If Boris Yeltsin had stayed on for another eight years as president rather than turn over the job to Putin, with that increase in prices, even Yeltsin would have looked like an economic genius. That is because Russia today is the world’s largest producer of petroleum and the world’s second largest exporter. Moreover, Russia’s Gazprom, the country’s state dominated gas producer, is the world’s largest producer and exporter of natural gas. It is a major supplier of natural gas to most of Europe. Germany, for example, imports 40% of its natural gas from Russia. This is not only important economically for Russia, but politically. If the pipeline is cut off in the middle of the winter, there is no other readily available alternative.

It is not a coincidence that Medvedev has been not only a senior government official in the Kremlin (most recently the First Deputy Prime Minister) but also Chairman of the Board of Gazprom. Only Russia under Putin has allowed senior government officials to serve simultaneously in both the government and in for-profit as well as dividend-paying corporations.

What remains to be seen is whether or not Medvedev can sustain Russia’s economic success and whether or not he can work harmoniously with Putin when Medvedev becomes the senior ranking official and Putin becomes prime minister—that is, Medvedev’s subordinate (not the other way around as it has been since 1991). Medvedev as President has the right to hire and fire the prime minister but is unlikely to do so, at least in the early years of his presidency. After awhile however, there is a good chance that the younger Medvedev (42 now) will begin to question the need to clear everything with his mentor, Putin (age 55), who, given his KGB background, has a much tougher and rougher edge than Medvedev, whose parents are both educators (his father is a college professor). Moreover, if oil prices begin to fall and/or inflation begins to accelerate, we will see whether or not Medvedev will be able to make Russia less dependent on oil and gas, the goal of both Putin and Medvedev. Medvedev must also keep in mind that unlike Putin, who was appointed Prime Minister and then President at a historic low point in Russia’s economic and political history yet led it to a high point, Medvedev takes over at a high point. Given the recent deterioration in the world’s economy, it will be hard to sustain the momentum built up by Putin—but easy to lose it.

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In the N.Y. Times Magazine, Steven D. Levitt and Stephen J. Dubner discuss three seemingly unrelated stories about a deaf woman in Los Angeles, a first-century Jewish sandal maker, and the red-cockaded woodpecker. The commonality in these stores, the essay argues, is that they were all the unintended victims of well-meaning regulation – the Americans with Disabilities Act, an ancient Jewish law forgiving debts every seventh year, and the Endangered Species Act, respectively.

Levitt and Dubner are not the first to argue along these lines. The theory of “countervailing risks” was first popularized by President Bush’s former “regulatory czar” John Graham over a decade ago. Under this theory, regulators must be fearful that their actions will create new unintended risks that they did not foresee. The theory of countervailing risks has had widespread popularity and influence for some time; for example in 1992, a federal court used this logic to force a federal agency to consider the effects of stricter automobile fuel efficiency standards on auto safety when setting a new rule. The problem is that the idea of countervailing risks is based on the fallacy that all unintended consequences are bad.

The fact is that in some instances there are “ancillary benefits” that provide additional reason for environmental, health, and safety regulation. These ancillary benefits have occurred in the past, and are just as likely to occur in the future as Levitt and Dubner’s countervailing risks.

The relationship between climate change and respiratory disease is just one example of a positive “unintended consequence” of environmental regulation. Burning dirty coal releases the gases that cause climate change, but coal fired power plants also emit the pollutants that cause smog and acid rain, as well as fine particulate matter. It is well known that these “conventional pollutants,” as they are called, cause serious health problems, and contribute to early death for a substantial number of Americans. Any successful effort to combat climate change by capping (or taxing) greenhouse gas emissions will undoubtedly cause an increase in energy efficiency and a switch from polluting technologies (like coal) to cleaner means of producing electricity (like wind, solar, and perhaps nuclear power). The result will be less greenhouse gases—protecting future generations against the adverse consequences of climate change—but also less conventional pollution, giving us all cleaner, healthier air to breathe. Using common economic tools to measure the monetary value of these health benefits, climate change regulation could potentially deliver billions of dollars worth of cleaner air to the American public, before the benefits of stopping climate change are even counted.

The ancillary benefits of regulation have started to gain recognition now as well. In a recent decision in the Ninth Circuit federal court, the panel struck down the Bush Administration’s fuel economy standards for light trucks on the grounds that the agency failed to consider the positive benefits from reduced greenhouse gas emissions. This was a sensible decision because the agency considered the negative effects of a stronger rule on employment and sales, and the court found that the agency “could not put a thumb on the scale by undervaluing the benefits” of the regulation.

The specter of unintended consequences raised by Levitt and Dubner should not scare politicians from tackling the pressing problems facing our country. Just as regulation can have countervailing risks, it can have ancillary benefits. Focusing on the negative will paralyze regulators, and cause an unnecessary bias against efficient regulation. Now that is a consequence (unintended or not) that we surely want to avoid.

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Today we are thrilled to have an original piece from Paul Collier the author of The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It. Below, Collier a Professor of Economics and Director of the Center for the Study of African Economies at Oxford University, argues that the G8 did not go far enough in its efforts to assist Africa.

Since the 1960s around a billion citizens of the world have been diverging from the rest of us at an accelerating rate, a trend which will generate unmanageable social pressures. Most of these countries are in Africa, and so it is appropriate that the region should again have been on the G8 agenda during the recent summit in Germany. Unfortunately, the debate on what the G8 should do about Africa has been entirely dominated by aid. Enlarging aid packages and programs for parts of Africa would probably be helpful, but it would not be decisive in helping the bottom billion catch up. It is, in fact, a side-show relative to the other policy instruments that G8 governments control, instruments that could help prevent future tragedy. Because aid has dominated the airwaves people are simply unaware of our true potential for more direct interaction. Africa faces three distinctive economic problems, each amenable to a distinct policy.

The first economic problem is that the region has failed to diversify into labour-intensive manufacturers. For example, 60% of the world’s buttons are now made in one Chinese city. Asian cities now have massive concentrations of manufacturing activities geared for export, generating ‘economies of agglomeration’ which lower costs of production. Africa’s coastal cities need to be pushed over the entry threshold constituted by these agglomerations. How do we help Africa? By giving them a temporary advantage over Asia in the G8 markets. Both Europe and the US already provide this through Europe’s Everything-but-Arms (EBA) and America’s Africa Growth and Opportunity Act (AGOA). Both schemes let goods in duty-free if they are manufactured in Africa but impose tariffs on goods from Asia. However, with trade deals the devil is in the detail and both schemes are flawed. Currently, Kenya can export its shirts duty-free to the US, but not to Europe or Japan. EBA is so badly flawed that it is ineffective, whereas AGOA, despite weaknesses, has raised African exports of garments to the US market by around tenfold in five years. Africa needs programs that get the details right. The right trade policy has the potential to create millions of jobs in Africa.

The second problem is that the resource-rich countries have almost all lost or wasted the income from their resources, income they might have used for sustained growth. In a new analysis of how high commodity prices affect commodity exporters I found that after a few years of boom, in the long term the economic effects are catastrophic unless governance is good. The current high level of commodity prices such as oil, together with new discoveries, present Africa with a huge opportunity: it would be a tragedy if the opportunity were lost.

But history will be repeated unless the incentives are changed through institutional reform. Because these windfalls, such as profits from oil and diamonds, inevitably accrue to governments, the key to change is better accountability in public spending. Democracy is not enough: elections can be manipulated. Accountability depends upon a range of effective checks and balances which are currently missing because nobody has an incentive to supply them. The needed policy is new international standards and codes. The international community has just set up an organization called the Extractive Industries Transparency Initiative (EITI), headquartered in Norway, to try to raise standards. It aims to let citizens of the exporting countries know what revenues are coming into the country. This is a start, but quite a modest one. The international banks remain home to corrupt African money under a veil of secrecy: if the money is linked to terrorism the banks are legally required to report it, but if it is merely looted the banks don’t ask questions. There are no international standards that recommend appropriate savings strategies for managing windfalls. When Ngozi Nkonjo Iweala became finance minister of Nigeria for example, she had to invent a savings rule. There are no recommended procedures for awarding resource concessions. All companies in developed countries are now prohibited from offering bribes. The principle needs to be extended so that companies should be required to seek contracts for resource extraction only through verified auctions instead of through secret deals. There are no recommended guidelines for the transparency of public spending out of resource revenues. The absolute minimum should be clear rules for the competitive tendering of public investment projects: when Nigeria introduced such rules, only very recently, costs fell by 40%. The checks and balances that help natural resource revenues to be harnessed for development are an internal African struggle, but international standards help: they provide both a rallying point and a benchmark for internal reform efforts. The Nigerian reformers promptly adopted the present limited form of EITI as the foundation of their programme for change.

This issue was quite rightly on the G8 agenda. The result was merely a bland exhortation to good governance. Leaders failed to get serious and instruct the international institutions to put together a comprehensive set of standards and codes pertinent for resource-exporting countries.

The third problem is that much of Africa faces high risks of internal insecurity from rebellions and coups. This is partly due to decades of economic failure, and partly because most countries are too small to reap security economies of scale. Africa needs a stronger international security presence: prolonged peacekeeping in the fragile post-conflict situations, and ‘over-the-horizon’ security guarantees in the form of long-term forces. Both of these should be conditional upon clear standards of governance which could be set by the African Union. The model is the provision of external security for Sierra Leone. A few hundred British troops ended a civil war and have maintained the peace ever since. This was so cheap relative to the gains from a secure peace that it is about the most effective form of aid Europe has ever given to Africa.

Understandably, military intervention is the issue that the G8 was most reluctant to face. It postured over Darfur, but avoided the issue of shoring up the many fragile post-conflict situations around Africa through security guarantees. As we lurch between fear and belligerence we keep making mistakes: doing nothing in Rwanda in 1994, and full invasion as in Iraq in 2003.

Trade preferences, standards and codes, and security may not play as well on the streets of Europe as doubling aid, but they are likely to be more effective on the streets of Africa, where it really matters. However, they are not alternatives but would enhance aid programs. Before dismissing them as fantasies think how Europe was restored. The Marshall Plan was complemented by trade policy (GATT/WTO), by standards and codes (European Community), and by security (NATO). The leaders of the G8 could go beyond the politics of gestures and really make a difference. Judging by their performance last week, they haven’t got the guts.

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Like the society it reflects, Wall Street has grown extraordinarily complicated over the last two
centuries. New markets have sprung up, functions have been divided, and the sheer size of trading volume has expanded dramatically. But the core of the Street’s business would still be recognized by a nineteenth-century trader. Daniel Drew and Jacob Little would still recognize many trading techniques and basic financial instruments. Fortunately, their philosophies for taking advantage of others have been replaced with investor protections and a bevy of securities laws designed to keep the poachers out of the henhouse, where they had comfortably resided for almost 150 years.

Bull markets and bear markets are the stuff that Wall Street is made of. The boom and bust cycle began early, when the Street was just an outdoor market in lower Manhattan. The first major trauma that shook the market was a bubble brought on by rampant land speculation that shook the very heart of New York’s infant financial community. In the intervening two hundred years, much has changed, but the Street still has not shaken off
the boom and bust mentality. The bear market of the 1970s and the recession of 1982 were followed by a bull market that lasted longer than any other bull market except the one that began in the late 1950s.

Wall Street history has undergone several phases, which will be found here in four distinct periods. The first is the early years, from 1790 to the beginning of the Civil War. During this time, trading techniques were developed and fortunes made that fueled the fires of legend and lore. The second period, from the Civil War to 1929, encompassed the development of the railways and the trusts, the robber barons, and most notably the money trust. It was not until 1929 that the money trust actually lost its grip on the financial system and became highly regulated four years later. Only when the grip was broken did the country enter the modern period of regulation and public accountability. The third period was relatively brief but intense. Between 1929 and 1954 the markets felt the vise of regulation as well as the effects of depression and war. The fourth and final period began with the great bull market of the Eisenhower years that gave new vitality to the markets and the economy.

Stock and bond financing began early, almost as soon as the new Republic was born. During the early period, from the 1790s to the Civil War, investors were a hardy breed. With no protection from sharp practices, they were the victims of predators whose names have become legends in Wall Street folklore. But the days of Drew, Little, and Vanderbilt were limited. The second-generation robber barons who succeeded them found a government more interested in developing regulations to restrain their activities rather than looking the other way.

The latter part of the nineteenth and the early twentieth century saw a consolidation of American industry and, with it, Wall Street. The great industrialists and bankers emerged during this time to create the leviathan industrial trusts that dominated economic life for nearly half a century. Although the oldest Wall Street firms were only about fifty years old at the turn of the century, they were treated as aristocracy. The great banking houses of Morgan, Lazard, and Belmont were relatively young but came to occupy a central place in American life, eclipsing the influence of the robber barons such as Jay Gould and Jim Fisk. Although the robber barons were consolidators and builders in their own right, their market tactics outlived their industrial prowess in the annals of the Street.

The modern era in the financial world began in 1934 when New Deal legislation severely shackled trading practices. Investor protection became the new watchword as stern new faces replaced the old guard that had allowed the excesses of the past under the banner of free enterprise. The new regulators were trustbusters whose particular targets were the financial community and the large utility holding companies. No longer would nineteenth-century homespun philosophies espousing social Darwinism be permitted to rule the Street. Big fish would no longer be able to gobble up small ones. Small fish now had rights and were protected by the new federal securities laws.

The fourth phase of Wall Street’s history came in the late 1950s, when the small investor became acquainted with the market. Many securities firms began catering to retail customers in addition to their more traditional institutional clients such as insurance companies and pension funds. With this new emphasis, the Street began to change its shape. Large, originally retail-oriented firms emerged as the dominant houses. The result was all-purpose securities firms catering to all sorts of clients, replacing the white-shoe partnership firms of the past.

Since the Great Depression, the major theme that has dominated the Street has been the relationship between banking and the securities business. The two have been purposely separated since 1934 in order to protect the banking system from market catastrophes such as the 1929 stock market crash. But as the world becomes more complex and communications technology improves, the old protections are quickly falling by the wayside in favor of integrating all sorts of banking activities under one roof. While this is the most recent concern on the Street, it certainly has not been the only one.

Throughout its history, the personalities on Wall Street have always loved a good anecdote. Perhaps no other segment of American business has such a fondness for glib phrases and hero worship. Many of these anecdotes have become part and parcel of Wall Street lore and are included in this volume. They were particularly rampant in the nineteenth century, when “great man” theories of history were in vogue. Prominent figures steered the course of history while the less significant simply went along for the ride. As time passed, such notions receded as society became more complex and institutions grew and developed. But originally, the markets and industrial society were dominated by towering figures such as Andrew Carnegie, John D. Rockefeller, and J. P. Morgan. Even the more typical robber barons such as Commodore Vanderbilt and Jay Gould also were legends in their own time. Jay Gould became known as “Mephistopheles,” Jay Cooke the “Modern Midas,” and J. P. Morgan the “financial gorgon.” Much of early Wall Street history involves the interplay between these individuals and the markets. One of the great puzzles of American history is just how long Wall Street and its dominant personalities were allowed to remain totally independent from any meaningful source of outside interference despite growing concern over their power and influence.

Several startling facts emerge from the Street’s two-hundred-year existence. When the Street was dominated by individuals and the banking aristocracies, it was usually its own worst enemy. Fortunes were made and lavishly spent, capturing the headlines. Some of the profits were given back to the public, but often the major impression was that market raiding tactics were acts of collusion designed to outwit the smaller investors at every turn. The major market falls and many banking crises were correctly called “panics.” They were the results of investors and traders reacting poorly to economic trends that beset the country. The major fear was that money would be lost both to circumstance and to unscrupulous traders more than willing to take advantage of every market weakness.

The crash of 1929 was the last old-fashioned panic. It was a crucible in American history because, while more nineteenth- than twentieth-century in flavor, it had no easy remedy. The major figures of the past such as Pierpont Morgan were not there to help prop up the banking system with their self-aggrandizing sense of public duty. The economy and the markets had become too large for any individual or individuals to save. The concerted effort of the Wall Street banking community to rescue the market in the aftermath of the crash proved to be too little too late. Investors had been ruined and frightened away from a professional traders’ market. No one group possessed the resources to put the economy on the right track. America entered October 1929 very much still in the nineteenth century. By 1933, when banking and securities legislation was finally passed, it had finally entered the twentieth century. From that time on, the public demanded to be protected from investment bankers, who became public enemy number one during the 1930s.

Throughout its two-hundred-year history, Wall Street has come to embrace all of the financial markets, not just those in New York City. In its earliest days Wall Street was a thoroughfare built alongside a wall designed to protect lower Manhattan from unfriendly Indians. The predecessor of the New York Stock Exchange was founded shortly thereafter to bring stock and bond trading indoors and make it more orderly. But Wall Street today encompasses more than just the stock exchange. It is divided into stock markets, bond markets of various sizes and shapes, as well as commodity futures markets and other derivatives markets in Chicago, Philadelphia, and Kansas City increasingly known for their complexity. In the intervening years, other walls have been created to protect the public from a “hostile” securities business. The sometimes uneasy relationship between finance and government is the theme of Wall Street’s history.

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