The 2016 U.S. Presidential election is possibly the most polarizing election in our lifetime. The 2008 election between McCain and Obama was very similar, but for this year, neither side really seems electrified about their candidate. The winner might ultimately be determined by voters who are truly voting for the “lesser of two evils.” While there are dedicated followings to Trump & Clinton, most people are reluctantly voting for either one because their candidate was eliminated during the primaries.
Regardless of who wins on November 8th, the 45th President is going to be addressing some major financial issues during their time in the Oval Office. This article isn’t going to endorse any particular candidate, but, I will include a recommendation at the end that applies to every political candidate. Plus, the issues listed below do not solely apply to the President. They will need to be solved by the U.S. Congress and the various state legislatures as well.
Unprecedented Low-Interest Rates
The historic interest rate for the United States has been around 5% since the country was founded. Since 2008, the rates have been near zero percent and do not appear to be moving much in the near future. If you expand the history of interest rates beyond the very short history of the U.S., rates have never been near zero percent for such an extended period of time.
Technically the President has nothing to do with interest rates. That job belongs to the Federal Reserve, but the President does appoint the chairperson. Current Chairwoman has given out mixed signals lately about what to expect, rising or lowering interest rates, more quantitative easing, etc. The issue isn’t exclusive to the U.S. Several European nations already charge negative interest rates and Yellen has said they could come to our shores as well.
When it comes to borrowing money, I would much prefer todays rates compared to those seen in the 70s and 80s. But, the longer interest rates remain low, the fear of many is that the equal and opposite reaction can be devastating. Non-existent interest rates have made the stock markets the only place for many to earn appreciation on their money. While the stock market has always been one of the best places to earn passive income, one begs to ask if stock prices are artificially higher because of the lack of investment choices.
Skyscraper Health Care Costs
For many, the Affordable Care Act has made monthly healthcare premiums very unaffordable. Since we are self-employed. we currently belong to a health sharing plan that is significantly cheaper than what we can purchase from the healthcare exchanges. Those with employer-sponsored insurance should say an extra prayer of thanks, as most I corporate familes I know “only” paying between $300 & $400 per month.
In the past three years, our rates (without tax subsidies) on the Marketplace for a bronze plan family of three was $330/month in 2015, $550/month in 2016, and will be $600/month in 2017. And, in 2017 the only bronze plan has a family deductible of $9,400.
Many think that single payer, where the U.S. government operates the entire plan, is the next step. This is one area where I will chime in my personal opinion. Obama gets the rap for all the negative changes to the healthcare industry since 2008, but, a very similar version of this plan was proposed by REPUBLICAN president Dwight Eisenhower. It was enacted by REPUBLICAN governor Mitt Romney in the state of Massachusetts. During the 2012 Presidential election, “Romneycare” and “Obamneycare” were thrown around loosely.
The current U.S. healthcare system is a quagmire. The system needed reform and the Affordable Care Act only worsened the problem. I don’t know what the solution is as there are many problems, but I don’t know if single-payer is the option. I grew up going to military hospitals and the running joke is that all problems are solved by prescribing Motrin. It’s like the comedian Chris Rock skit saying all ailments are fixed with Robitussin (there is foul language so I decided not embed this video in case any children or co-workers are nearby). If the single payer model resembles anything close to this, the VA administration, or Vermont’s failed 2011 single-payer system, I think there will be lots of false hope.
Social Security and Medicare Reform
Another topic that really hasn’t been broached this cycle is the financial solvency of entitlement programs like Social Security and Medicare. Both systems are currently not paying for themselves and have been drawing money from their cash reserves since 2010 to pay the entitlements because the current payroll tax witholdings are insufficient.
It’s estimated that the entire Social Security and Medicare system will become insolvent by 2034 (18 years from now). The two options government has is to increase the retirement age and increase how much is withheld from each paycheck. For Social Security, currently 6.2% of each employee paycheck is withheld up to the first $118,500 earned each year. Employers match the contribution with another 6.2%. Basically, each worker gives the Social Security fund about 15% of their paycheck for Social Security and Medicare.
Once the programs become insolvent, it is estimated that Social Security will only be able to pay about 3/4 of the obligations and the number will steadily decline as more retirees enter the system & fewer people work. Some possibilities might be that people will suddenly only be paid $75 per month instead of the promised $100 per month (proportionally speaking) or funds will only be distributed to those with the most need.
As a Millennial, I have never counted on receiving Social Security. I’ve been told by teachers, adults, financial advisors, etc. to not bank on receiving a check. For my retirement calculators, I check the box to not factor Social Security earnings into the equation. But, for people that have paid into the system their entire working career should receive something for the lost income.
I don’t know what the perfect answer to this problem is. The last meaningful Social Security reform was in 1983. Otherwise most reform issues have been expanding the scope of beneficiaries and “borrowing” money from the trust funds to pay for other projects.
Student Loan Reform
It’s no secret that college gets harder to afford each passing year. In the eight years since I graduated college, my same 4-year degree would cost 66% more if I attended today.
Part of the reason for the steep increase in tuition prices is declining state funding since 1980. Some project certain states are trending to have their relative funding per student drop to near zero in the mid-2030s. Coincidentally about the same time as when Social Security and Medicare are also projected to become insolvent.
The federal Department of Education has expanded their role in the higher education field with increased financial aid and more lenient loan forgiveness options. One budget boondoggle to watch in the coming years is the federal student loan forgiveness program that forgives any remaining student loans after 10 years (instead of the normal 20 years for forgiveness programs) for federal employees. This program was enacted in 2007 with very little participation, but popularity has greatly increased as students with graduate or professional training with lower salary government positions. And, it’s the taxpayers that pick up the tab.
While nobody should be repaying their student loans for a lifetime, this is just a taste of the high student loan amounts. There has been talk of “free college” during this election cycle. While parents of college students might not think this is a bad idea as they are footing the bill for college anyways, many other families are not paying $60,000+ per college degree and do not want their taxes raised for this cause. Especially since many recent graduates do not find work in their major & are sometimes considered “overeducated.”
The TPP (Trans-Pacific Partnership) proposal, plus NAFTA, have gotten a lot of debate time this year. I think free trade is here for the foreseeable future. The classic example is the production of an iPhone in North America. It would be so expensive, only the 1% would probably buy it.
Here are some factors about trade. Look at the label of just about anything you buy. Electronic goods are most likely made in China or Vietnam. Clothing & textiles in India or Pakistan. Everything else manufactured is either from China or Mexico.
Why? Their wages are so much lower than ours. A good wage in Mexico is $20 per day. In the U.S., we are talking about hiking the minimum wage to $15 an hour. Yes, it costs more to live in the U.S. than other places in the world, but, until the Western world is willing to take some serious pay cuts. Realistic reshoring of jobs will not happen. If they do, most of them will be automated.
There are some foreign policy issues to deal with. Yes, there is a case to be made for free & fair trade. As other nations manipulate their currency to be able to produce goods for so cheap. But, for the time being, China needs the U.S. to fund their government.
Global trade helps make the world more dependent on each other. If we were to provoke a war with China or Mexico, most retail shelves would be empty for the near future. Plus, I think as a country we are addicted to low prices.
If we halt global trade, I think the likelihood of military provocation could increase. Research why Japan attacked Pearl Harbor. Their supply routes for raw materials were cutoff and going to war was a “Hail Mary” effort to regain sovereignty and restore their economy.
I do not want to be an armchair quarterback. But, my one suggestion is for each government official and every family to read three books to get a better understanding of financial literacy.
They are best for students of 12 years old and up and are written by Richard J. Maybury in the following order:
- Whatever Happened to Penny Candy? *Read my review of this book if you are curious.
- The Money Mystery
- The Clipper Ship Strategy
These books are all very engaging and quick page turners that will give you a good yet basic understanding of money, inflation, deflation, and government economies.
Mr. Maybury’s economic viewpoint is from the Austrian school. Essentially a financial “laissez-faire” viewpoint. Perhaps you have heard of the book The Road to Serfdom by F.A. Hayek, one of Austrian economics most famous proponents. It’s no secret that America has a looming national deficit that is only going to increase in size with the issues listed above. My fear, is that if/when the bill collectors come, it’s going to be a very bad day for the nation.
This blog, plus many others in the financial community, preach the importance and necessity of getting our personal financial houses in order. It’s about time the government starts doing so to, or we will all feel the pain. These books can help you get a better understanding of how money works, how the government has and is using it, and some basic steps you can take to potentially profit from the current fiscal trends (in the Clipper Ship strategy). These books will not take the place of Dave Ramsey or Benjamin Graham, but, I think they are a great introduction to what many economics 101 classes do not teach as in-depth. And they are a great resource to teach your high schooler.
The 2016 election goes beyond the White House. While the President has a lot of authority and influence, they are only one person. It’s also important to vote for the best candidate for the other offices as well like federal and state legislatures and even the various city or county commission offices.
You might not think your vote counts, but, it’s a privelge many civilizations have not experienced. It’s a way to hold policymakers accountable. Remaining silent, only magnifies the voice of others. If you disagree with that other voice, things will only change for the worse.
Thanks For Reading,
What do you think is the most important financial issue of the 2016 election cycle?