My Comments: This is about a soon to be imposed rule that applies to those of us who provide professional advice about the money you are accumulating for your retirement. It’s called the Department of Labor Fiduciary Standard rule and it’s long overdue.
As a financial planner, my role is to identify the existential threats you face in retirement and help you find solutions. For this I get paid from time to time. It might be instructive to understand the reason why I believe the rule is needed and ultimately expanded. With Trump now in the White House, there’s going to be shouting all up and down Wall Street to get rid of it.
Here’s some deep background. The greatest economic threats to the health and welfare of the world I leave to my grandchildren will come from income inequality or the disparity between the haves and the have-nots. I’ve written about this before and will again.
This income inequality is pervasive across the planet. I believe it’s the root cause of almost all conflicts between countries and their respective societies. If the disparity is great enough, economic incentive to succeed diminishes and society unravels. Why go on jihad and kill a bunch of infidels if you already have a good job, have plenty to eat and a home in which to raise your children?
Early last century, a political movement surfaced that we called communism. It arose in Russia and the Soviet Union and said ‘to each according to his needs’. It was a rejection of free enterprise and capitalism, which at the time said every individual has the ability to rise above others and have ‘more than what he needs’.
However, the intervening years proved that without an economic incentive, individuals rarely rise to any level, never mind enough to satisfy their needs. Without the ability to dream of success, people simply fail if there is no motivation to excel.
The other side of the argument says capitalism provides an unfettered ability to ‘succeed’, and at the extreme, allows total disregard for the aspirations and dreams of others playing the same economic game. Any barrier imposed by society to limit unfettered ability is deemed contemptible and must be removed.
But society, by definition, includes rules that we’ve come to accept as being in the best interest of society. We have no issue being required to drive on one side of the street, as opposed to whichever side we like on any given day. We have rules against stealing and causing bodily harm. These rules are accepted and no one argues against them. But suggest that bankers and stock-brokers be required to act in their clients best interest, with rules and regulations and penalties if you don’t and before you know it, the wailing starts.
A fiduciary standard says you are legally required to provide advice that is in your clients’ best interest. It’s not about denying some the opportunity to succeed any more than it’s about making sure none of us ‘has more than we need’. I should not be allowed to steal from you by giving you advice that is in my best interest and not your best interest. I may not ‘earn’ quite as much, but I will not suffer either.
This new rule is but one step on the playground of life that I hope will work to diminish the economic disparity I spoke about above. That effort has to start with a level playing field. It’s in the best interest of society and can happen within the context of a capitalist framework.
Theo Anderson | December 29, 2016
The income gap between the classes is growing at a startling rate in the United States. In 1980, the top 1 percent earned on average 27 times more than workers in the bottom 50 percent. Today, they earn 81 times more.
The widening gap is “due to a boom in capital income,” according to research by French economist Thomas Piketty. That means the rich are living off their wealth rather than investing it in businesses that create jobs, as Republican, supply-side economics predicts they would do.
Piketty played a pivotal role in pushing income inequality to the center of public discussions in 2013 with his book, “Capital in the Twenty-First Century.” In a new working paper, he and his co-authors report that the average national income per adult grew by 61 percent in the United States between 1980 and 2014. But only the highest earners benefited from that growth.
For those in the top 1 percent, income rose 205 percent. Meanwhile, the average pre-tax income of the bottom 50 percent of workers was basically unchanged, stagnating “at about $16,000 per adult after adjusting for inflation,” the paper reads.
It notes that this trend has important political consequences: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”
But the authors also note that the trend is not inevitable or irreversible. In France, for example, the bottom 50 percent of pre-tax income grew by about the same rate — 32 percent — as the overall national income per adult from 1980 to 2014.
The difference? In the United States, “the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions and an eroding minimum wage,” the paper reads.
President-elect Donald Trump’s administration promises at least four years of policies that will expand the gap in earnings. But a few glimmers of hope are emerging at the local level.
The city council of Portland, Oregon, for example, recently approved a tax on public companies that pay executives more than 100 times the median pay of workers. The surtax will increase corporate income tax by 10 percent if executive pay is less than 250 times the median pay for workers, and by 25 percent if it’s 250 and over. The tax could potentially affect more than 500 companies and raise between $2.5 million and $3.5 million per year.
The council cited Piketty’s “Capital in the Twenty-First Century” in the ordinance creating the tax. Steve Novick, the city commissioner behind it, recently wrote that “the dramatic growth of inequality has been fueled by very high compensation of a few managers at big corporations, as illustrated by the fact that 60 to 70 percent of people in the top 0.1 percent of income in the United States are highly paid executives at large firms.”
Novick said that he liked the idea when he first heard about it because it’s “the closest thing I’d seen to a tax on inequality itself.” He also said that “extreme economic inequality is — next to global warming — the biggest problem we have in our society.”
Investing in children
There is also hopeful news in the educational realm. James Heckman, a Nobel Laureate in economics at the University of Chicago who has spent much of his career studying inequality and early childhood education, recently published a paper that lays out the results of a long-term study.
In “The Life-cycle Benefits of an Influential Early Childhood Program,” Heckman and others report that high-quality programs for children from birth to age 5 have long-term positive effects across a range of metrics, including health, IQ, participation in crime, quality of life and labor income.
Predictably, perhaps, the effects of the programs weren’t limited to children. High-quality early childhood education also allowed mothers “to enter the workforce and increase earnings while their children gained the foundational skills to make them more productive in the future workforce,” a summary of the paper reads.
“While the costs of comprehensive early childhood education are high, the rate of return of [high-quality programs] imply that these costs are good investments. Every dollar spent on high quality, birth-to-five programs for disadvantaged children delivers a 13 percent per annum return on investment.”
The research is important because early childhood education has bipartisan support. Over the summer, the Learning Policy Institute released a report that highlighted best practices from four states that have successful early childhood education programs. Two of them — Michigan and North Carolina — are swing states in national politics. The others are Washington and a solidly red state, West Virginia.
Although it isn’t a substitute for other policy tools to address inequality, like progressive taxes, early childhood education has strong bipartisan support because it produces measurable payoffs for both children and the economy. One study found, for example, that the economic benefit of closing the educational achievement gaps between children of different classes would be $70 billion each year.
Early childhood education fosters an “increasingly productive workforce that will boost economic growth, provide budgetary savings at the state and federal levels, and lead to reductions in future generations’ involvement with the criminal justice system,” the Economic Policy Institute recently noted. “These benefits will, of course, materialize only in coming decades when today’s children have grown up. But the research is clear that they will materialize — and when they do, they are permanent.”