where are we, how did we get here, and where are we going?

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Where Are We, How Did We get Here, and Where Are We Going?

Estate Planning Forum

Roger P BeyJanuary 8, 2013

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Where Are We

• Fiscal Cliff–Debt – $16.5 trillion–Deficit -- $1.3 trillion

• Tax Reform–Personal income–Corporate income– Estate–Property

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• 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

Where Are We con’t

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• Unemployment – 7.8%• Health Care– $2.8 trillion– 17% of GDP

• Energy– Fossil Fuel – 82%– Other sources – 18%

Where Are We con’t

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Where Are We con’t

• Education– Costs– Funding– Ability & number of graduates

• Corporate governance– Financial regulation– Collapse of the financial markets

• Dysfunctional government

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• 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

Where Are We con’t

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• 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

How Did We Get Here

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• 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

How Did We Get Here con’t

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• 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

How Did We Get Here con’t

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– 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

How Did We Get Here con’t

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– 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.”

How Did We Get Here con’t

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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

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• 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

How Did We Get Here con’t

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– 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

How Did We Get Here con’t

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• Depression data

How Did We Get Here con’t

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

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• 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

How Did We Get Here con’t

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• 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

How Did We Get Here con’t

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• 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

How Did We Get Here con’t

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– 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

How Did We Get Here con’t

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Historical Tax RatesMaximum Federal Tax Rates

2011 Dollars1913 7.0% $11,332,304 1946 91.0% $2,301,329 1916 15.0% $41,170,573 1952 92.0% $3,386,862 1917 67.0% $35,059,316 1964 77.0% $2,895,221 1918 77.0% $14,859,578 1965 70.0% $1,424,633 1919 73.0% $12,969,920 1982 50.0% $199,035 1922 58.0% $2,671,186 1987 38.5% $177,766 1924 46.0% $6,560,808 1988 28.0% $56,427 1925 25.0% $1,282,169 1991 31.0% $135,336 1932 63.0% $16,378,075 1993 39.6% $388,200 1936 79.0% $80,712,095 2001 39.1% $376,732 1941 88.0% $2,753,124 2002 38.6% $382,967 1941 81.0% $76,319,600 2003 35.0% $380,409 1944 94.0% $2,549,768 2011 35.0% $379,150

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Federal Spending, Deficit, Debt and GDP Billions of Dollars

Years Spending Deficit Debt GDP Debt/GDP1901 1 0 2 22 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 8 -2 36 92 40%1938 7 0 37 86 43%

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Federal Spending, Deficit, Debt and GDP Billions of Dollars

Years Spending Deficit Debt GDP Debt/GDP1939 9 -3 40 92 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%

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Federal Spending, Deficit, Debt and GDP Billions of Dollars

Years Spending Deficit Debt GDP Debt/GDP1982 746 -128 1,142 3,253 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%

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Federal Spending, Deficit, Debt and GDP Billions of Dollars

Years Spending Deficit Debt GDP Debt/GDP2001 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%

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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 $59.63 Persian Gulf $102

Civil: Confederacy $20.11 Iraq $784

Spanish American $9.03 Afghanistan $321

World War I $334 Total $6,819

Casualities

Deaths 1,326,612 Wounded 1,531,036

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Federal Budget Major Sectors Billions of Dollars

Year Total PensionHealth Care Education Defense Welfare

Interest on Debt

2000 1,789 449 352 60 359 177 3622001 1,863 475 390 64 366 189 3592002 2,011 497 427 78 422 229 3332003 2,160 510 469 91 493 249 3182004 2,293 531 509 96 542 244 3222005 2,472 558 549 106 600 232 3522006 2,655 586 583 128 621 254 4062007 2,730 628 642 101 653 262 4302008 2,931 660 671 101 730 322 4512009 3,517 730 764 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

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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

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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

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– 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

Where Are We Going con’t

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• World markets– Largest GDP 2011 Trillions/2013 Growth

Where Are We Going con’t

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%

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• Who to watch– Mexico – 1960 GDP $13B– 1990 GDP $262B– 2011 GDP $1.16T– Exports – 4th in autos; 1st in big screen TVs– NAFTA

Where Are We Going con’t

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– Age

• Middle East – good luck

Where Are We Going con’t

Country Median Average

India 26

Mexico 27 34

China 36 43

U.S. 37 39

Japan 45 52

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• 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

What Can/Should We Do?

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• Tax/Spending Reform– Government spends $31,000 per household– Government collects $19,000 per household– Tax breaks or expenditures $10,000 per household

What Can/Should We Do? Con’t

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• $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

What Can/Should We Do? Con’t

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What Can/Should We Do? Con’t

• What can we cut?

– 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

Year Total PensionHealth Care Education Defense Welfare

Interest on Debt

2012 3,795 820 846 153 902 452 450

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What Can/Should We Do? Con’t

– Defense budget $900B• 50% of the world• China $150B• Russia $75B• Greater than requested

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• 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

What Can/Should We Do? Con’t

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• Debt interest – must reduce debt• There must be more

What Can/Should We Do? Con’t

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• 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

What Can/Should We Do? Con’t

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• Quality• Majors• Haven’t found a way to be scalable• Athletics

What Can/Should We Do? Con’t

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– 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

What Can Should We Do? Con’t

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• 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

Why Should We Be Optimistic?

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• 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

Why Should We Be Optimistic? con’t

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– 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

Why Should We Be Optimistic? con’t

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Thank You