The renowned
money manager goes back to school to explain how entitlements are helping the
Baby Boomers rip off future generations.
by James Freeman WSJ
Stan
Druckenmiller makes an unlikely class warrior. He's a member of the 1%—make
that the 0.001%—one of the most successful money managers of all time, and 60
years old to boot. But lately he has been touring college campuses promoting a
message of income redistribution you don't hear out of Washington. It's how
federal entitlements like Medicare and Social Security are letting Mr.
Druckenmiller's generation rip off all those doting Barack
Obama voters in Generation X, Y and Z.
"I have been shocked at the reception. I had planned to
only visit Bowdoin," his alma mater in Maine, he says. But he has since
been invited to multiple campuses, and even the kids at Stanford and Berkeley
have welcomed his theme of generational theft. Harlem Children's Zone President
Geoffrey Canada and former Federal Reserve Governor Kevin Warsh have joined him
at stops along the tour.
Mr. Druckenmiller describes the reaction of students:
"The biggest question I got was, 'How do we start a movement?' And my
answer was 'I'm a 60-year-old washed-up money manager. I don't know how to
start a movement. That's your job. But we did it in Vietnam
without Twitter and without Facebook and without any social media.
That's your job.' But the enthusiasm—they get it."
Even at Berkeley, he says, "they got it. There is tremendous
energy in the room and of course they understand it. I'd say it's a combination
of appalled but motivated. That's the response I've been getting, and it's been
overwhelming."
Movement or no, this is a good week to check in with Mr.
Druckenmiller, as President Obama won the budget battle without policy
concessions to break the federal debt limit and continue borrowing beyond $17
trillion. I last spoke to the Pittsburgh native and father of three daughters
during the 2011 debt-limit brawl, and he created a stir by supporting
entitlement changes as a condition of raising the debt cap.
This was not
the Wall Street consensus. He also said that a "technical default,"
in which the government is a week or two late in making payments on its debt,
would be "horrible" butnot "the end of the world" if it produced reforms
that put U.S. finances on a sounder footing.
"Some characters in the administration have
mischaracterized my view," he says now, in the conference room of his
office high above midtown Manhattan. Then as now, he argues that major reform
to protect future generations would be worth a short period of market
turbulence.
"If there's something really big on the other side in
terms of entitlement reform, it's worth using the debt limit. And God forbid
even if you go a day or two over it in terms of interest payments," he
says, the country would be better off "if and only if you got big, big
progress on a long-term problem." Contemplating the recent Beltway
debacle, he adds, "the problem with what we just went through is there was
no big thing on the other side."
Not that Mr. Druckenmiller endorsed the most recent
Republican strategy. "I thought tying ObamaCare to the debt
ceiling was nutty," he says, and I can confirm that he was saying so for
weeks before the denouement.
But he adds that "I did not think it would be nutty to
tie entitlements to the debt ceiling because there's a massive long-term
problem. And this president, despite what he says, has shown time and time
again that he needs a gun at his head to negotiate in good faith. All this talk
about, 'I won't negotiate with a gun at my head.' OK, you've been president for
five years." His voice rising now,
Mr. Druckenmiller pounds his fist on the conference table. "Show me,
President Obama, when the period was when you initiated budget discussions
without a gun at your head."
Which brings him back to his thieving generation. For three
decades until 2010, Mr. Druckenmiller ran the hedge fund he founded, Duquesne
Capital. Now retired from managing other people's money, he looks after his own
assets, which Forbes magazine recently estimated at $2.9 billion. And he
wonders why in five years the massively indebted U.S. government will begin
sending him a Social Security check for $3,500 each month. Because he earned
it?
"I didn't earn it," he responds, while pointing to
a bar chart that is part of his college presentation. Drawing on research by
Boston University economist Laurence Kotlikoff, it shows the generational
wealth transfer that benefits oldsters at the expense of the young.
While many seniors believe they are simply drawing out the
"savings" they were forced to deposit into Social Security and
Medicare, they are actually drawing out much more, especially relative to later
generations. That's because politicians have voted to award the seniors ever
more generous benefits. As a result, while today's 65-year-olds will receive on
average net lifetime benefits of $327,400, children born now will suffer net
lifetime losses of $420,600 as they struggle to pay the bills of aging
Americans.
One of the great ironies of the Obama presidency is that it
has been a disaster for the young people who form the core of his political
coalition. High unemployment is paired with exploding debt that they will have
to finance whenever they eventually find jobs.
Are the kids finally figuring out that the Obama economy is
a lousy deal for them? "No, I don't sense that," says Mr.
Druckenmiller, who is a registered independent. "But one of my points is
neither party should own your vote. And once they know they own your vote,
you're not going to get any action on this particular issue."
When the former money manager visited Stanford University,
the audience included older folks as well as students. Some of the oldsters
questioned why many of his dire forecasts assume that federal tax collections
will stay at their traditional 18.5% of GDP. They asked why taxes should not
rise to fulfill the promises already made.
Mr. Druckenmiller's response: "Oh, so you've paid 18.5%
for your 40 years and now you want the next generation of workers to pay 30% to
finance your largess?" He added that if 18.5% was "so immoral, why
don't you give back some of your ill-gotten gains of the last 40 years?"
He has a similar argument for those on the left who say
entitlements can be fixed with an eventual increase in payroll taxes. "Oh,
I see," he says. "So I get to pay a 12% payroll tax now until I'm 65
and then I don't pay. But the next generation—instead of me paying 15% or
having my benefits slightly reduced—they're going to pay 17% in 2033. That's
why we're waiting—so we can shift even more to the future than to now?"
He also rejects the "rat through the python
theory," which holds that the fiscal disaster will only be temporary while
the baby-boom generation moves through the benefit pipeline and then
entitlement costs will become bearable. By then, he says, "you have so
much debt on the books that it's too late."
Unfortunately for taxpayers, "the debt accumulates
while the rat's going through the python," so by the 2040s the debt itself
and its gargantuan interest payments become bigger problems than entitlements.
He points to a chart that shows how America's debt-to-GDP ratio, the amount of
debt compared with national income, explodes in about 20 years. That's where
Greece was when it hit the skids, he says, pointing to about 2030.
Breaking again with many Wall Streeters but consistent with
his theme, Mr. Druckenmiller wants to raise taxes now on capital gains and
dividends, bringing both up to ordinary income rates. He says the current tax
code represents "another intergenerational transfer, because 60-year-olds
are worth five times what 30-year-olds are."
And 65-year-olds are "much wealthier than the
working-age population. So the guy who's out there working—the plumber, the
stockbroker, whatever he is—he's paying the 40% rate and the coupon clippers
who are not working anymore are paying a 20% rate."
Ah, but what about the destructive double taxation on
corporate income? The Druckenmiller plan is to raise tax rates on investors
while at the same time cutting the corporate tax rate to zero.
"Who owns corporations? Shareholders. But who makes the
decisions at corporations? The guys running the companies. So if you tax the
shareholder at ordinary income [rates] but you tax the economic actors at
zero," he explains, "you get the actual economic actors incented to
hire people, to do capital spending. It's not the coupon clippers that are
making those decisions. It's the people at the operating level."
As an added bonus, wiping out the corporate tax eliminates
myriad opportunities for crony capitalism and corporate welfare. "How do
the lobbying groups and the special interests work in Washington? Through the
tax code. There's no more building plants in Puerto Rico or Ireland and
double-leasebacks and all this stuff. If you take corporate tax rates to zero,
that's gone. But in terms of the fairness argument, you are taxing the
shareholder. So you eliminate double taxation. To me it could be very, very
good for growth, which is a huge part of the solution to the debt problem
long-term. You can't do it without growth."
Amid the shutdown nonsense, this week's debt-ceiling accord
did create an opening for some reform before the next deadline early next year.
So what should Republican reformers like Paul Ryan do now?
"I would go for something simple that is very, very
tough for the other side to argue, for example, means-testing Social Security
and Medicare," which would adjust benefits by income. He notes again his
impending eligibility for a monthly government check.
"I don't need it. I don't want it. I could also make
the argument that every health expert will tell you that wealthy people live
4.5 years longer than the middle class or the poor. So I'm going to get paid
4.5 years more than the middle class or the poor," he says. "It's not
that many dollars, but I think it would be a great symbol in seeing exactly how
serious they are."
But Mr. Druckenmiller is not sure, so soon after the failed
attempt to defund ObamaCare, that Republicans should demand entitlement reform
in exchange for the next debt-limit vote this winter or spring. "Maybe
they need a break," he says. "I think a much more effective strategy
would be for them to publicly shine a light on something so obvious as
means-testing and take their case to the American people rather than go through
the actual debt limit."
If Mr. Obama rejects the idea, "then we will really
know where he is on entitlement reform." For this reason, Mr.
Druckenmiller views means-testing as "really the perfect start—and it
should only be a start—to find out who's telling the truth here and who's
not."
Source: WSJ
Weekend Interview of money manager Stanley Druckenmiller, by James Freeman, Updated
October 18, 2013, 7:36 p.m. ET Stanley Druckenmiller: How Washington Really
Redistributes Income Mr. Freeman is
assistant editor of the Journal's editorial page. A version of this article appeared October
19, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the
headline: How Washington Really Redistributes Income.http://online.wsj.com/article/SB10001424052702303680404579141790296396688.html?mod=WSJ_Opinion_LEADTop
Comments:
Corporate tax should be zero.
The government is responsible for paying down its own debt within its
own current revenue. If they monetize the debt, as they have in the past, it
will destroy the dollar. Government spending must be cut in any event. Mr. Druckenmiller’s
analysis of generational suicide is correct.
The “greatest generation” did win World War II, but they also created
these entitlement Ponzi schemes.
Government needs to reverse course, eliminate corporate tax,
restrict immigration and remove its restrictions and let the private economy
function. The private sector needs to be able to bring jobs back to the US and
drastically increase production of everything we have to sell. Global demand
suggests that we increase the production of coal, oil, natural gas, timber,
minerals and food. We have to work our
way out of this hole.
Means testing won’t really save much money and it puts us on a
slippery slope. We must find an
effective way to transfer the recorded social security payments of younger workers
to investment accounts they would own.
Government should get completely out of
health care, insurance, banking, lending, education, energy and other
inappropriate enterprises. Third-party payment for healthcare wastes too much money
on bureaucracy. Government subsidies in
health care and education have made them unaffordable. Ruined segments like health care and
education need to be weaned away from government funding and reinvented.
Norb Leahy, Dunwoody GA Tea Party Leader
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