Obama’s war on middle-class savings

The sign-maker misspelled “middling.” (Jamie Squire / Getty Images)

The sign-maker misspelled "middling." (Jamie Squire/Getty Images)

They misspelled “middling.” (Jamie Squire/Getty Images)

Among other things, the Obama era will be known as a bad time for savers. Now the president is proposing to go from a policy of malign neglect to actual punishment.

To understand the depth of the recklessness in President Obama’s proposals — including an end to preferential tax treatment for 529 college savings plans and Coverdell Education Savings Accounts and a tax increase on capital gains and inheritances — you have to understand how and why things are so bad for savers already. And that is directly tied to his presiding over the slowest-burning economic recovery in decades.

America’s economic growth, such as it is, has been financed in largest part by the Federal Reserve’s loose monetary policy. Besides that and higher fossil-fuel production (which is why Texas has provided such a disproportionate share of the nation’s growth), there hasn’t been much to write home about for the past several years.

The Fed’s loose monetary policy is the reason savings accounts and CDs, tools the middle class has historically used to build and hold wealth, have paid such paltry interest rates for years. It’s also a major reason money has flowed back into equity markets, as the rises in the Dow Jones Industrial Average, S&P 500 and other benchmarks show. Liberals love to tout these increases as evidence Obamanomics has been working (in between tirades against Wall Street) but in fact the major stock market indices remain at or below the levels of the late 1990s when adjusted for inflation. Putting money into the stock market has been more or less a way for savers to tread water. Those seeking higher yields have pushed many commodities, as well as housing in some markets, up (and in some cases, back down) in a way that isn’t necessarily supported by the health of the broader economy. These moves come with higher risks, which the truly wealthy can afford to take but middle-income folks can’t. That’s one prime reason the much-lamented wealth gap continues to grow.

And yet here comes Obama threatening to tax away the decent options we still have.

I want to focus for now on the educational programs. The 529 college savings account (my wife and I have one for each of our sons, just as the Obamas have accounts for their daughters) is essentially a bet that the medium-term strength of the U.S. economy and the magic of compound interest will overcome or at least keep pace with the staggering rise of college tuition. It uses the incentive of tax-free withdrawals (deposits are made with after-tax money) to encourage thrift, forward-looking behavior and taking responsibility for one’s own needs. Middle-income Americans have responded: The data show that about half the people investing in 529s, Coverdell ESAs and other education-savings tools didn’t finish college themselves. About half earn less than $100,000 per year; about a quarter make less than $50,000.

If the government is going to subsidize higher education — and I see no plausible future in which it doesn’t, to at least some degree — the cheapest, most efficient way to do so is to give people tax incentives to save and spend their own money for college. People are more careful with their own money. They keep their options open. They may devote more or less to one type of expense than another. In short, their thriftiness affects the behavior of colleges. That’s how markets are supposed to work.

But a market in which the government intervenes heavily isn’t a true market (see: k-12 education, health care, housing). Government actions tend to create distortions, perverse incentives, rent seekers. It is no coincidence that the soaring increase in college tuition has coincided with the rising number and generosity of state and federal financial-aid programs. Those aid programs have set an artificially high floor for the price of college, and colleges have responded quite rationally by keeping their prices above that floor.

Obama’s response? Double down. Take away one of the biggest incentives available for thrift and competition, and let the government intervene even further into the market. If you think community college tuition is high now, just wait until it’s “free.”

The other possibility, of course, is that community college goes the route of Medicaid, with government dictating price controls that result in lower-quality services and/or rationing. “Free” community college thus becomes an extension of high school to six years — when it would be smarter route to do the reverse, and try to help more students complete some college courses while in high school. That, or an increasingly devalued experience that wealthier families simply skip right past.

None of these possibilities is good news for middle- or lower-income families.

Take this analysis, apply it to retirement, and you have a pretty good idea of where the left would like to take us tools such as Roth IRAs. With similarly dreadful prospects.

And what is the reason for this exercise? The clearest effect, anyway, is to push the point of purchase of educational goods and services closer to the government. That serves no good purpose.

Reader Comments 0

85 comments
PudHead
PudHead

In 6 long years of watching Obozo give speeches I have learned that if he says he is doing something to help, you can guarantee that you are going to get screwed.

Wascatlady
Wascatlady

" It is no coincidence that the soaring increase in college tuition has coincided with the rising number and generosity of state and federal financial-aid programs. "


Actually, Kyle, THE "SOARING INCREASE IN COLLEGE TUITION" has coincided with the massive cutback in state aid to those colleges.


Fixed it for you.

DeborahinAthens
DeborahinAthens

Good for you, Wascatlady! I read an article a few years ago about why kids rack up so much debt nowadays , when we were able to work and go to school and pretty much come out without much debt. This article, which I can't find, said that in 50s,60s, and 70s the State of Georgia paid almost 80% of college costs in various subsidies. Today, that number is less than 30%. That is the biggest factor in preventing this generation fro having affordable higher education. Another factor is why kids in GA have to end up going to school for five years. It is impossible to get the courses you need because they have slashed the education budget so much there are not enough professors and instructors to offer the courses that are needed.

PudHead
PudHead

@Wascatlady 

Really? What world do you live in? The reason collage is so expensive is because our government got involved with “fixing” it. Why do we pay a college professor 4 to $500,000 a year and they spend less than 4 hours a month in the classroom teaching? Since you don’t appear to know I will tell you, the rest of the time they a rubbing g elbows with politicians trying to get grants for the collages…. Hmmmm sounds like a money grubbing politician rather than a teacher.

 

EdUktr
EdUktr

Now add in the interest payments future generations will have to pay on an additional $6.5 trillion the Obama Administration and Democrat Congresses have added to the national debt during his time in office.

DeborahinAthens
DeborahinAthens

Keeping interest rates low has been stimulative. Obama's administration chose to use proven stimulative cures such as keeping rates low. Using Quanitative Easing, saving the auto manufacturers, creating jobs by floating the Build America Bonds (which were super investments for investors with 4 to 7% taxable yields, and we're good for cities which issued them since it got projects done, good for the Feds since the income is taxable) The Republicans fought it tooth and nail, screeching in 2008 that inflation would get out of hand. Inflation is in control, interest rates for mortgages and capital development are at historic lows. Here we are, six years later, and the tactics Obama used (swimming upstream against the Repugs) have worked. It's a fact, and your pitiful article about how the Stock Market isn't really good, is a joke. My personal 401k had more than doubled (in today's dollars) since Bush presided over the two massive Market meltdowns. Our investments had finally recovered from the 2001 meltdown when the 2008 50% drop and the worst Recession since 1934 hit our pocketbooks. Please stop trying to make out that this President has been bad for our economy. By any metric, we are way better off financially than we were in 2008. Republicans are historically, FACTUALLY, bad for our economy. Every major recession and market crash in the last 30 years have happened under a Republican.

LilBarryBailout
LilBarryBailout

@DeborahinAthens

The Dow was over 14,000 before the recession, so its compounded annual growth rate is only 3.3% since then--barely above inflation.  Hardly anything to be excited about, but then that's what six year of slow economic growth will do.

And perhaps the reason Republicans appear to preside over worse economics is because they have to clean up Democrats messes--the bursting of the dotcom bubble, Clinton doing nothing against Islamofascist terrorism for eight years, and forcing banks to loan money to people who aren't creditworthy.

FIGMO2
FIGMO2

Among other things, the Obama era will be known as a bad time for savers.

Misery loves company.

If the government can't save money...why should anyone else be allowed "the privilege".

The younger generation better wake up to reality before they crumble under the weight of the federal government's debt. 

Infraredguy
Infraredguy

Obama may be a Socialist but he is not an idiot, he knows the real money is held by the Middle Class and if the Government needs money to blow, the Middle Class is where you get it, the so called " Rich " are so few in number that if you took everything they have, it would only pay the Government bills for 6 to 10 months, so the Obama plan is tell the low information voters you are going to tax the " Rich " when in reality you intend to increase the Middle Class taxes through the " back door " and the low information voters are too dumb to figure it out.

LilBarryBailout
LilBarryBailout

If we're lucky, we have spent more time discussing Obozo's free stuff (community college edition) than the Congress will.

They don't need to waste time on such garbage.

Get to work on issues that are actually important to Americans.

RafeHollister
RafeHollister

Good take Kyle.  I think this all just boils down to the progressive ideology of using government to dictate some level of equality for all.  It is just easier, more expedient, and to the proggies justified payback, to try and bring down the self reliant than it is, to attempt the long hard slog of trying to encourage/prod/reward/urge/educate the others to do better at providing for themselves.



straker
straker

Kyle - "that fact may have been left out"


But, is it true?

MHSmith
MHSmith

 Anyone born in this country has more good fortune and privilege than most of the rest of world's population, let alone the poor people in those countries who are lucky to get any food. Some can't even afford to look at the pictures of steak and lobster ANY NIGHT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!  


Thank God Almighty poor, poor pitiful me, little as I have, was born in the U.S.A.



</sarcasm with salt on it>

HarryCrews
HarryCrews

I know this will not be popular here, a quick glance at historical CD yields will show the greatest decreases in amounts of interest paid during the administrations of Reagan and the two Bush's. Rates have pretty much remained flat since 2009.

Kyle_Wingfield
Kyle_Wingfield moderator

@HarryCrews Those were also times (in particular the Reagan and HW Bush years) when the Fed lowered rates the most. At the time, it was lowering them from soaring heights, and that was a good thing for the economy. Big difference between that, and the Fed keeping rates low so long because the economy wouldn't get going otherwise.

HarryCrews
HarryCrews

@Kyle_Wingfield

As I understand it, the Federal Reserve derives its authority from Congress (and is thus subjected to its oversight.) Its decisions are not subject to approval by the Executive Branch or Congressional Branches of the U.S. Government.

JackClemens
JackClemens

Yes, I would love to have interest-bearing options again, but I'm not holding my breath. It has been a loooooong time.

DeborahinAthens
DeborahinAthens

There are many good investments that pay very good interest. ETFs that are tax free with yields of 6%. Bond mutual funds with yields of 4% to 6%. Broaden your horizons. And quit complaining.

cancunmark1959
cancunmark1959

The one fact that has been left out of this discussion is that this only applies to families making more that $150-180K / year.  That would apply to less that 10% of the people using these accounts. They also make up the majority of the people using these plans.  I'm not against setting aside money for college for your kids but the folks doing so are basically using it as a tax avoidance.  I'm a fiscal conservative but using your kids as a device to evade taxes is dispicable.

Kyle_Wingfield
Kyle_Wingfield moderator

@cancunmark1959 That "fact" may have been left out because you're the first person to claim the 529 change is tied to income.

LilBarryBailout
LilBarryBailout

I understand that most community colleges take charitable donations.  If everyone who supports Obozo's silly plan donated, these colleges could drop tuition or offer classes for free.

Don't wait for Congress to act.

And do let us know how much and to which college you've given.

Kyle_Wingfield
Kyle_Wingfield moderator

Unless I've overlooked something, no one is actually arguing in favor of Obama's policy change.

Visual_Cortex
Visual_Cortex

@Kyle_Wingfield

In a vacuum, as a stand-alone component, I'll go ahead and say I agree with you, Kyle, it's a stupid idea.

If it were part of a comprehensive program to make college more affordable for all, and it really were a bargaining chip, I'd support it. And I'd also be the first to acknowledge it's a tone-deaf way to find the money to fund something.

LilBarryBailout
LilBarryBailout

@Visual_Cortex @Kyle_Wingfield

The way to fund community college is to get a minimum-wage job and work 30-40 hours a week while living at home.  Teenagers have been doing it that way for decades.  It ain't complicated (until a big-government liberal comes along and complicates it).

MANGLER
MANGLER

Yes, the FED has kept the interbank rate historically low to give incentive for banks to lend to each other.  And yes, savings and CD rates are directly pegged to it.  Economists on this side of the pond have repeatedly said that austerity and letting the banks fail would have been worse on everyone than the steps the FED took.  So blaming the administration for having crappy CD interest rates seems a little silly when compared to the idea of what else would have happened. 

Kyle_Wingfield
Kyle_Wingfield moderator

@MANGLER It's been more than six years since Lehman failed. How many more years should we wait before the economy doesn't need an IV from the Fed?

Kyle_Wingfield
Kyle_Wingfield moderator

@HeadleyLamar Like the Senate allowing more floor votes this month on amendments, including minority-party amendments, than it had all of last year? Well, that's been done.

HarryCrews
HarryCrews

@Kyle_Wingfield

Here a freshman GOP representatives alludes to why there are more senate votes and why a lot of "bills" didn't reach the senate in years past.

"There's a growing sense in the conference that we need to get things done here, not just make political statements," said Rep. Carlos Curbelo of Florida, a freshmen lawmaker. "We should be focused on the agenda of the American people and not on taking an infinite amount of symbolic votes that aren't going to get anything done."

Visual_Cortex
Visual_Cortex

If you think community college tuition is high now, just wait until it’s “free.”

Is it terribly expensive in those countries where it actually is provided at little-to-no-cost to students?

Kyle_Wingfield
Kyle_Wingfield moderator

@Visual_Cortex I don't know that that is easily measurable (neither does Headley; he just answered reflexively). Nor do I know that that's easily comparable, given that we have systems that have evolved under quite different circumstances (i.e., charging tuition vs. not).

But I would remind you there's another possibility outlined in the paragraph after the one you cited. And I would point out that university rankings typically show the U.S. with a disproportionately large number of schools on the list ...

LilBarryBailout
LilBarryBailout

@Visual_Cortex

All the free stuff handed out in other countries that are so superior to the U.S., and yet we remain saddled with all these whiny liberals.

Finn-McCool
Finn-McCool

"America’s economic growth, such as it is, has been financed in largest part by the Federal Reserve’s loose monetary policy... there hasn’t been much to write home about for the past several years."


The last several years? When was the last time you saw a CD rate at a bank worth even taking a 2nd glance at? I bought my first house in 2001 and the interest rate on a 30 year fixed mortgage was just under 7%. In fact, the 30 yr fixed mortgage rate has been under 10% since 1992.

Kyle_Wingfield
Kyle_Wingfield moderator

@Finn-McCool I had a CD with eTrade in the mid-2000s that paid, IIRC, 5.25%. Or ~20x what you can get from a CD today.

MarkVV
MarkVV

Kyle’s and Republicans’ harping about slowest-burning economic recovery in decades,“ and that “all it took was 5+ years.” is getting more and more laughable with each good economic news. Why don’t they show us the depth of which of those recessions “in decades” could compare with the one Obama has inherited?

LogicalDude
LogicalDude

"Those aid programs have set an artificially high floor for the price of college, and colleges have responded quite rationally by keeping their prices above that floor.

Obama’s response? Double down. Take away one of the biggest incentives available for thrift and competition, and let the government intervene even further into the market. If you think community college tuition is high now, just wait until it’s “free.”"

Wait, so providing incentive programs raises the price of college. . .  

And eliminating incentive programs raises the price of college?

(Insert confused baby face meme here)

Kyle_Wingfield
Kyle_Wingfield moderator

@LogicalDude It's removing a broad incentive -- which could be spent on community college, technical school, undergrad at a 4-year university, grad school, living expenses while in school, etc. -- and replacing it with a subsidy for one of those things: tuition at community college. So rather than providers of all those things in the first list competing to get your money, it all goes to the providers of one thing on the list.

See?

IReportYouWhine
IReportYouWhine

And how exactly can it be called "growth" when you not only haven't paid the debt for it, you continue to accrue more debt? 


You can't.