GETTING TO GREXIT…Turning left at Athens

Happy trails to you, until we meet again. ~ Dale Evans

The Greek economy is in serious trouble. Of the 19 Euro-zone (EZ) nations, Greece now claims the most precarious fiscal position. This is not a new situation. Ever since we found out almost 5 years ago that previous Greek governments had been cooking their national books with far worse than grape leaves and lamb, the nation's finances have been at best "fragile."

From the fiscal fallout of these mega-errors Greece received a huge bailout from its 3 primary creditors – nicknamed "the troika" – the European Central Bank (ECB), the 19 Euro-zone finance ministers (the Eurogroup), and the International Monetary Fund (IMF). This bailout allowed the Greek government to stay functioning, but required Greece to seriously reform its wayward approach to doing the public's business and its fiscal accounting. Since 2012 Greece has received total bailout loans of more than €270 billion (B). At the current euro/dollar exchange rate, that's $310B which Greece owes to 7 different groups of international creditors.

Despite being the larger-than-life birthplace of public democracy, Greece is a fairly small nation. Its 2013 GDP was $267.1B, which represents only 2% of the EZ GDP and makes the country's economic output worth about the same as that of the state of Tennessee. Greece has almost twice as many people as Tennessee, offering a perspective on Greek citizens' overall productivity. Greece's GDP has fallen 25% since it initiated the austerity requirements imposed by the troika as a condition of receiving its fiscal bailout. Greek unemployment hovers around 25%, youth unemployment exceeds 50%.

In large part, these austerity reforms spurred Greek voters to elect a new government last month lead by the left-wing Syriza party. Syriza pledged to unilaterally dismiss the loathed "reforms" that increased taxes, forced government agencies and businesses to dismiss workers and generally made economic life worse for many citizens, all in the name of improving Greece's economic productivity and becoming more worthy of the loans. The Eurogroup ministers and Greece have been negotiating before Mar 5, the first of Greece's many days of fiscal reckoning, when Greece will need to repay €1.7B. Because Greece's economy has taken a nosedive – in part due to the imposed reforms – everyone realizes, but is unwilling to publicly state now, the country will not be able to repay all of the loans on time without additional loans.

The first round of these negotiations has been as much public posturing as private negotiations. If all goes badly, it's possible that Greece will exit the Euro Zone, which is termed the "Grexit." Nevertheless, on Feb 20 the Eurogroup announced that despite big, bad Germany's vocal trepidations, the Eurogroup offered a conditional 4-month extension of the Greek fiscal bailout. On Feb 24 the Eurogroup accepted the Greek government's latest bailout (extension) plan. The clamor surrounding these negotiations has heightened because of the size of the debts owed, the political divergence between the new, anti-austerity Greek government and the powerful EZ austerians (primarily the Germans, with strong support from Finland and the Netherlands) and the symbolism surrounding the euro currency's viability.

Unlike America's 2007-08 credit crisis that was initially founded on real-estate speculation, the troika cannot just foreclose on Greece's delinquent bankers (including the government's central bank) and, in effect, put the nation up for sale. Given the intricate rules and procedures involved with all euro-zone policies, the Greek negotiations weigh euro-zone credit regulations against Greek accountability. On principle, every European politician, including even Germany's Chancellor Angela Merkel the queen of austerity, has stated Greece should not abandon the euro. And, after admitting to excess fiscal expenditures, Spain, Portugal and Ireland have each swallowed the bitter austerity policy pills administered to them by the Eurogroup. Really, why should Greece get special treatment just because the Olympics began there?

Ironically, Germany may particularly benefit from Greece's travails because the euro has depreciated more than 13% in the last 5 months relative to the dollar, in part because of this latest "euro crisis." So travelling to Europe for Americans will be much less expensive this summer than it has been in years; and the cheaper euro will mean more German-made and exported Porsches, BMWs and Mercedes (as well as exports from other euro nations) will continue to grow. When they think about it, having Germany's net exports rise on the shoulders of still-unemployed Greeks will not likely sit too well with Athenians. Interestingly, there is no other major economy that can top Germany's exports as a share of GDP, at 46.6%. China's is 26.4%; the US's is 13.5%.

Although this latest 4-month extension agreement seems to offer some timely political expediency, it really just kicks the fiscal can down the viaduct. At some point the Eurogroup ministers and Greece will have to acknowledge and face three fearsome, related realities. First, significant structural reforms will need to be quickly and irrevocably implemented in Athens and the rest of Greece – and not merely discussed. Given their electoral platform, how the leftists of Syriza can get their political compatriots – and citizen-voters – to swallow these changes is very uncertain. If Syriza sticks to its perceived mandate, a Grexit won't be so far away. Second, even with such reforms, it's very hard to imagine Greece's creditors not eventually getting a haircut (not receiving all of their loans due to be paid back). No one wants to be first in the fiscal haircut line. And third, austerity policies even if they could improve public efficiency (which is not at all a given), have created such wide-spread wreckage that it's not clear the pain is worth the possible gain.  

The trails ahead for Greece and the rest of the Eurogroup are unlikely to be happy ones in the next year, no matter how many times they meet again.

THE MIDDLE CLASS. WHY VIRTUALLY EVERYONE'S IN IT.

Upper classes are a nation's past, the middle class its future. ~ Ayn Rand

President Obama's January 20th State of the Union speech (since every action in Washington seems to require an acronym, his speech is the SOTUS) was characterized by the White House and then the media as addressing "middle-class economics." It's a politically smart focus, especially because there have been lots said about the denouement of the middle class, its "hollowing-out" and its on-going struggles. Even Republicans are extolling "middle class economics," since they (mistakenly) believe they've been vaccinated against shameless duplicity – endemic to GOPers.

Because it's once again a focus of our political nobility, being middle class is in the news. So how does one qualify as a "middle-class" American? Alas, there is no single definition of "middle class," a social, cultural, economic, and of late, political concept that has been central to American's self-image for a long time. A recent survey by the Pew Research Center indicates that nearly 90% of respondents judge themselves to be some version of "middle class," which defies math and statistics, but is a truly-held belief for lots and lots of folks. This survey result echoes Garrison Keillor's Lake Wobegon residents who are all "above-average." It also reflects the ever-broadening characterization of who is middle class, especially at the top end. At this point, almost everyone's middle class, which suits politicians just fine.

One traditional foundation of our middle class is to define it by one's annual income. By calculating what the median income^[1] is for the US we can determine a central point of the middle-class. So what is the median income in the US? Excellent question; unfortunately there are multiple answers, depending on how you measure income, as shown in the following table that shows 3 different median income calculations.

Table 1:  US Median Income

Measure of Median Income	Amount	Year	Source
Household income	$52,250	2013	US Census
Annualized real weekly earnings	$40,768*	2014Q1	Dept. of Labor
Adjusted gross income	$36,055	2012	Tax Foundation

* In 2013 dollars.

Median household income is the most often used way to gauge middle-class income, and provides the highest measure of median income, $52,250. But weekly earnings for full-time workers (there now are 104.3 million full-time workers according to the Department of Labor) and adjusted gross income (AGI) from your Federal income tax form 1040 are well-known and -regarded alternative measures of income. As Table 1 illustrates, even determining a mid-point of middle class income is perplexing as there's a 40% difference between $36,055 (AGI) and $52,250 (Household Income).

One gloomy finding is that real median weekly earnings have not increased in 10 years; they're now virtually the same as they were in 2004. Adjusted gross income includes not just wages and salary but income from interest, dividends, capital gains (that collectively comprise "investment income"), business and pension/retirement and other sources. Unsurprisingly, personal income from investment is 46% of total 2012 AGI for those with income exceeding $1 million. For people whose total AGI is less than $100k, investment income is 3%. With AGI between 100k to 200k, investment income is almost 4% of their AGI. Why median AGI is so much lower than Household Income is puzzling.

But there is a range of income that encompasses the middle class, not just the mid-point (the median). An often-cited income range for the middle class is $25,000 to $100,000/yr. The lower bound of being "middle class" frequently employs the federal "poverty-level" income (FPL) or a multiple of FPL, which varies by family size. In 2015, the FPL for a 4-person family is $24,250. This poverty-level income is used as a basis to determine eligibility for certain public programs and benefits. For example, the federal Affordable Care Act defines a lower and upper AGI range for people to receive premium savings (e.g., subsidies, discounts or tax credits). If a family of 4 people has an AGI of $23,850 to $95,400, they can qualify for lower premiums at the Health and Human Services' federal marketplace healthcare website.

Defining what the upper-end of middle-class income is far more fraught. Politicians, among others, offer an expansive view. In speeches during his run for his second term, President Obama has said “the rich” are those who make $200,000 or more as individuals and $250,000 or more as households; adeptly implying that those households making less than $250k are not "rich," and thus middle class. Remarkably, this upper-range was also cited by Mitt Romney when he was a presidential candidate. Stretching the middle class to include households whose income is $250k means the middle class includes families within the top 3% of all income earners. It may be good politics, but it's wholly unsound economics and math.

After his election, when President Obama and the Republicans were negotiating how the government would not push itself off the infamous "fiscal cliff," they agreed that "the rich" really made a lot more money and raised the definition of “rich” to $400,000 for single people and $450,000 for couples. Making $450k places a household in the top 1% of all earners, nationally. Whether it's $200k or even $450k, that's a very spacious upper-end definition of middle class.

Culturally, being part of the American middle class is tied to several keystone fixtures beyond income. These fixtures include owning a home and sending one's children to college. Home ownership peaked in 2004, when 65% of Americans were paying mortgages for their domicile. Now, after the housing bust, just 64% own their homes, and a rising 34% of middle-class people say they'd rather rent than own if it were time to move.

However, a college education remains highly-sought after. It is closely intertwined with the American Dream, prominently wished for by all of us perhaps especially by middle middle-class folks. Sending our kids to college to improve their future prospects has become more of a perceived necessity rather than an option, given the lethargic growth in even middle-skilled jobs and wages. Thus, the president's middle-class economics plan included proposals to broaden the affordability of college education.

Any change federal tax policy to strengthen the middle-class' economic situation and make college education more affordable should be a bipartisan slam dunk. Nope. Exhibit A is the response to the president's proposed change to benefit middle-class citizens in their efforts to save for their kids' college expenses. He briefly mentioned this proposal in his SOTUS, which was to reform tax-free higher-education savings (aka, 529) plans so more benefits would be focused on "true" middle-class folks.

The president's proposal was to eliminate the tax-free status of 529 plans and instead broaden an existing educational tax credit – the American Opportunity Tax Credit (AOTC) – that would provide more money than 529 plans for lower- and middle- middle-class families to cover their kids' college costs. The AOTC would be phased out for families with incomes greater than $180,000. The AOTC is used far, far less than 529 accounts. And that's saying something because less than 3% of US households even have a 529 account. Not mentioned at all was that about 70% of all undergraduate college students use loans to finance their educations. Thus, reforming student loan policies – like making the loans' payments depend on the income of the newly-graduated person (so-called Pay-As-You-Earn (PAYE) loans) – would likely have a more pronounced benefit for true middle-class families for lowering the costs of higher education than changing 529 plans. Oh well.

The White House stated that 70% of balances in the college accounts were held by families making at least $200,000 a year. Others stated that more than 70% of the total number of accounts are owned by households with incomes below $150,000. The average 529 account balance in 2013 was $19,584, which as all you tuition-payers know might cover, at best, one year at an in-state public college/university.

This White House proposal was the target of vehement criticism across a broad political spectrum, with lightning-quick disapproval from both John Boehner and Nancy Pelosi. Less direct condemnation was spread by the financial industry, which manages 529 accounts and often receives hefty fees for that service. Why? Because 529 plans are popular, despite their low numbers. There is over $240 billion in 529 accounts, and to listen to the criticism, each and every one of these accounts are held by certified middle-class citizens. Certainly many "middle-class" folks have money in 529 accounts, but as the White House pointed out, the benefits of such accounts disproportionately accrue to people in the upper reaches of the middle-class.

Unfortunately, there is enough of a middle-class patina on 529 plans to ensure the president's proposed 529-plan educational benefit reform entered face down into the political waters without even getting its toes wet.

This episode illustrates several inter-related issues in dealing with the "middle class economics." First, there's the difficulty that I've discussed above: defining who resides (or more to the point, who doesn't reside) in the middle-class. From a political perspective, we're virtually all middle class, even families who make $450,000. Silly me; I thought the middle class was a state of economics, not of mind. Second, paying for tax reform that can assist "middle class" people, a goal virtually all politicians pay at least lip service to achieving, is fiendishly difficult. Because tax reform usually means some folks will be winners (who get the benefits) and some will be losers (who pay more taxes).

If the middle class embraces virtually everyone – each of whom want to be tax reform winners – then it's next to impossible to offer benefits to households whose income is far closer to the $52,250 median income. There are simply not enough families who earn over $250k to provide tax revenue to assist middle-middle-class families, whether it be for college education or any other fiscal benefit to make their lives less fraught.

P.S., If you're interested in seeing where in the middle class your income places you, go here.

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[1] Median income is the numerical value separating the higher half of a distribution of income from the lower half.