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Dr. Cornel West is a Princeton University professor and author. Tavis Smiley is a television and radio talk show host and author as well. The two have known each other for a long time, and last year they toured the country to hear from citizens and talk about the issue of poverty in America. After their travels and discoveries, they published a new book together, The Rich and the Rest of Us.

The central concept of the pair’s appearances, including visits to news programs and public speaking, is that poverty is largely ignored as an issue. When Mitt Romney explained that he wasn’t concerned about the very poor thanks to the systemic advantages this class is afforded, Romney was speaking from the system’s perspective.

Cornel West and Tavis SmileyMoney rules politics, and only groups with significant amounts to pledge to campaigns or lobbyists can influence public policy. It’s the way our democracy is designed, and it’s not much different than when the country was founded. The primary difference is that wealthy corporations, not just wealthy individuals, have a bigger influence today. Democrats or Republicans, the power of money is the same.

Smiley and West offer an interesting statistic. They claim that one in two Americans — half of this country’s population — deals with poverty. 150 million people are in or near poverty, perhaps just one lost paycheck away from spiraling into a financial situation that could be difficult to fix. The authors are also including “new poor” in this figure, and the “new poor” are the former middle class.

I’d like to get a chance to chat with either of the authors about this concept. Is the middle class truly poor? As a group, they are certainly better off than those in abject poverty. My understanding of middle class — and I realize that there are always ways to interpret classes differently depending on one’s perspective — is that today’s middle class is generally working, earning a paycheck, and somewhat able to spend beyond the basic physiological needs like food and shelter.

On the contrary, the middle class has faced unemployment over the last few years, and for many, this has been a struggle for families. Unemployment has enabled class mobility in a negative direction, removing families from the particular designation of middle class. Families remaining in the middle class live paycheck-to-paycheck, so the loss of that consistent source of income combined with the difficulty of replacing a middle class job could lead a family into poverty. For many middle class families, debt is a way of life, and allows people to “afford” a living that appears to be like their neighbors’.

To work towards the solution of eradicating poverty in the United States, the two authors want to see President Obama or whoever receives the office after the next election set up a conference on the issue. They would like to see the government move forward with a massive job program, investment in education, and abandonment of austerity policies. This is not a solution to poverty, and I believe the authors realize this. It’s intended as a beginning, a way to keep poverty in the forefront of political discourse, and encourage smart people to get together and work on solutions to poverty.

It’s hard not to compare Smiley and West with their hero and the hero of many others in this country, Dr. Martin Luther King, Jr. The issue of poverty of worthy of as much attention as the civil rights movement received in the 1960s. Where the comparison fails is that Dr. King had the ability to foment a revolution. The public, for the most part, saw civil rights as an important issue. The time was right, with a public ready to be involved, empowered to force a change. Dr. King took his message to the streets; Smiley and West are taking their message to the streets, selling a book, and charging admission to their talks.

For poverty to become the lead story in a system that pays attention only to the issues prescribed by those with money, there needs to be an uprising, a revolution. An apathetic public without the feeling that the issue of poverty is personally relevant will not rise up. There might be a thought that the Occupy-branded protests show that the public is ready to support a major issue like civil rights was in the 1960s, but I don’t think it’s ready yet. The Occupy-branded protests are too small and too unfocused to make the necessary impact. If Smiley and West want to influence the way Americans think about poverty, they’ll need to take a page from Dr. King’s book, and do a better job of getting people to care about the issue and see the value of change.

Here’s a clip of Tavis Smily and Dr. Cornel West on Face the Nation (sorry about the advertisement first):

The pair also appeared on Stephen Colbert’s Colbert Report recently for an entertaining interview.

Photo: DC Central Kitchen

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As many Presidents of the United States have done, President Obama avoided confrontation with Congress by appointing an individual to direct a government organization while lawmakers were on recess. Yesterday, the President appointed former Ohio attorney general Richard Cordray to the long-delayed position of director of the Consumer Financial Protection Bureau (CFPB). Now that this department has a director, it can move forward in enacting regulations — not just suggestions — for non-bank financial entities.

Lately, the CFPB has been working on simplifying customer agreements for financial accounts. A great example is this redesigned credit card agreements. The new design highlights the important terms of the agreement, describes financial terms in plain language, and helps consumers increase awareness of their obligations and rights. The bureau is currently working on a similar resigned agreement for mortgage contracts.

Richard CordrayWithout a director, none of these recommendations would be required to be enacted by financial firms. Some banks have already taken steps to improve communication, but banks are also regulated by the Federal Reserve. The Fed issued some regulations as part of the Credit CARD Act of 2009, but the regulations do not extend to non-bank financial firms.

The CFPB may face legal challenges from industry groups who insist that the bureau can have no power to issue regulations.

Who is Richard Cordray?

When Richard Cordray was the attorney general in Ohio, and when he was Ohio’s treasurer before assuming the role of attorney general, I would receive marketing emails from him every couple of months. He championed pro-consumer causes and worked to ensure the public had a better understanding of predatory financial arrangements. His emails were directed at the press to help raise issues in the media. For example, he campaigned for closing loopholes that allows payday lenders to practice predatory tactics and he warned consumers of scams related to the Cash for Clunkers program. Cordray lost in his campaign to be re-elected attorney general in Ohio.

Cordray wasn’t without enemies in the banking industry. He filed a lawsuit against Bank of America and its executives in 2009 on behalf of Ohio’s state pension funds related to the acquisition of Merrill Lynch.

Cordray is also a five-time champion on Jeopardy.

In general, judging by his past actions, Cordray appears to be comfortable with a position strongly in opposition with Wall Street interests, which is a change in direction for Washington politicians for as long as I’ve been an adult. Clinton, Bush II, and Obama have all, despite occasional moments of pro-consumer rhetoric, appointed Wall Street insiders to major financial roles in government and pseudo-government agencies.

There is some validity to that philosophy, after all, Wall Street executives have the connections and relationships with other Wall Street executives, and these connections are necessary for the government to operate efficiently with one of the largest driving forces of the American and global economy. The government, however, can’t be expected to issue effective regulations if it needs to stay on Wall Street’s “good side,” however.

It’s a tough balance to manage, and it’s one of the many reasons why I avoid politics.

Photo: Richard Cordray

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Update: The Buffett Rule, if implemented, could help pay for the American Jobs Act.

As long as the public holds the general impression that economy isn’t favorable, and that’s certainly the case, for example, when unemployment is high or after a stock market crash, political leaders will propose stimulus plans to help move the country in a more favorable direction. The focus of the 2011 stimulus package is jobs, with unemployment a lagging factor in today’s economy. President Obama has pitched his 2011 stimulus plan with a total cost of $447 billion and is looking for Congress to quickly sign off on the plan to boost the economy.

There are politics at work here, of course, with an election looming next year and one political party eager to blame the other for the inevitable fact that the economy won’t look great by the time citizens in the United States head to the polls.

Dollar - 2011 Stimulus PackageThere is no stimulus check for American citizens this time, but here is what is included in the $447 billion 2011 stimulus package called the “American Jobs Act.”

  • Cut the payroll tax in half. Today, employees pay 4.2% on the first $106,800 of wages, an already-reduced rate from the normal 6.2%. The 2011 stimulus proposal would reduce the payroll tax to 3.1%. The proposal would also reduce the payroll tax rate paid by businesses to 3.1% on the first $5 million paid in wages.
  • Payroll tax exemptions for new hires and raises. Any new hire will be exempt from payroll taxes, both from the employee and the business side. The same is true for any employee who receives a raise; they will be continue to be taxed on their old salary.
  • Tax credit for business that hire the unemployed. If a business hires an individual who has been unemployed for over six months, the business will be able to claim a tax credit of $4,000.
  • Deductions for companies that invest in infrastructure. Companies that spend capital on equipment and plants will be able to deduct certain expenses from their taxes.
  • Creation of an infrastructure bank. After a round of federal funding, a new facility will be able to offer loans to help fund local infrastructure improvement projects. Once the infrastructure bank is operational, it should pay for itself through interest collection on the loans.
  • Transportation improvement projects. In addition to the infrastructure bank, the 2011 stimulus plan includes immediate funding for highways, mass ground transportation, and aviation.
  • Modernize schools. Part of the stimulus package will include spending to repair, rebuild, or outfit 35,000 public schools.
  • Fix vacant property. The federal government will dedicate funds for fixing up properties, residential or businesses, that have been foreclosed or abandoned.
  • Extend unemployment benefits. Although employee benefits have already been extended to 99 weeks, the stimulus proposal would extend benefits even further. For unemployed individuals who choose to build their skills through job training, the plan would extend benefits as well as provide a stipend.
  • Fund teachers and first responders. Obama would send $35 billion in federal money to local communities to help hire and keep public school teachers and emergency personnel.
  • Offer more home refinances. The President has already proposed extending mortgage refinancing at today’s low rates to more homeowners.

How to pay for the 2011 stimulus

The total cost of the tax cuts in the 2011 stimulus package is $254 billion and the total cost of the spending measures is $194 billion. To pay for the tax cuts and spending, Obama’s plan for the most part is to raise taxes on individuals with incomes over $200,000 (or $250,000 for couples filing jointly). These are the adjusted gross income values, which are often much lower than gross revenue from a job or a business. For business owners, adjusted gross income is the resulting number after business expenses are deducted; for all individuals, adjusted gross income is the resulting income after most retirement contributions are removed from the number.

Much of the following is part of the Buffett Rule proposed by President Obama on September 19, 2011.

  • Cap itemized deductions at a rate of 28%, not affecting anyone other than those in the top two income tax brackets. For every $100 in deductions, the most any America would be able to receive back is $28. Those who use major charitable donations to reduce taxable income, for example, could see a significantly higher tax bill.
  • Tax carried interest at ordinary income rates. Hedge fund managers and others in the financial industry have benefited from the long-term capital gains rate of 15%. When a compensation is paid out of investment returns, it can qualify as carried interest. The stimulus plan would combined carried interest with ordinary income and the total would be subject to the tax bracket calculation, with a rate as high as 39.6%.
  • Repeal oil subsidies. The oil industry has benefited from help from the government at a time when the industry seemed to be successful regardless of the subsidies. Paying for the stimulus plan could be assisted by removing these subsidies and allowing the industry to flourish on its own.

Obama’s proposal for the 2011 stimulus package has little chance of being approved by the Congress in its current form. There will likely be competing priorities between Republicans and Democrats to be settled first, and competing bills between the House of Representatives and the Senate in need of a compromise. As the situation changes, this article will contain the latest details.

What do you think about the 2011 stimulus package in its current form? Will it help to push the economy in the right direction? Is it completely unnecessary?

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When asked about what it means to be financially independent, most people think about retirement and the amount of money needed in the bank and investments in order to be worry-free for the remainder of their lives. For many, this is why we work, why we suffer through a job we may not enjoy. The reward down the road is worth putting up with micromanaging supervisors, unfair office politics, and uneducated clients. The pattern and habit of earning and saving will help us reach the point at which we can lean back, relax, and live off our nest egg until we die.

The key to the above is that nest egg. If it’s large enough, it can sustain any life through its expenses. How large? Traditionally, experts have suggested taking what you believe your expenses would be in a year of active retirement and multiply that by 25. If the result were, say, $1 million, then that is the amount you should have invested in a broad equity index now in order to be able to withdraw 4% this year and adjust that amount for inflation each your for the rest of your life. Theoretically, you’ll never run out of money. If your first year of living off your nest egg won’t occur for another 30 years, you’d want to adjust your first number, what you believe your expenses would be that first year, by estimated inflation. A necessary nest egg of $1 million today could be more like $5 million down the road.

This type of financial independence doesn’t inspire completely security; stock market crashes could wreak havoc on the supposed 4% safe withdrawal rate. That’s why people like Suze Orman, who have millions of dollars to put away, put their own money in bonds — a much less volatile investment option — but need only 2% or less of their nest egg each year to meet their expenses. And Suze hasn’t stopped working; she’s financially independent now but still writes books and speaks publicly.

You don’t have to stop working completely in order to be financially independent. Another approach to financial independence focuses on passive income sources. That’s not much different from the above example of living off your investments; the gains and dividends that the stock market as a whole returns over time can be seen as passive, if not for the fact that you still need to pay attention to your investments and react to the market in some cases. In fact, most of the income sources generally labeled passive and somewhat active. You could create a business like real estate empire, where you could live off the rent income, sourcing all the “hard work” to contractors and management companies. Even reducing your work, you can never be completely hands-free when you run any business.

The key to financial independence may be finding a calling — some type of career you can do — and do well — while earning a living. You may still work for someone else’s company or perhaps build your own company, but the important thing is that thanks to the fulfillment you get from your activities, you may never want to retire.

As flexible and personal as the definition of financial independence is, I can’t imagine a scenario in which someone can be in debt and consider himself financially independent. Being in debt is like having part of your income owned by someone else. You are not free to do what you want with your money because you are obligated to repay a loan of some kind. This includes all the things traditionally classified as “good debt” like mortgages and student loans.

I asked around to gather more opinions about the personal meaning of financial independence. Here are a few of the responses I received on Twitter and Facebook:

  • It means to have a passive income that gives you the freedom to say, “Go to hell!” to your boss (via @rullopat). I prefer tact, but the underlying message is the same.
  • Sleeping on a big pile of money, because you’re too rich to be bothered with buying a bed (via @gl3media). If Scrooge McDuck were alive today, he’d be smiling.
  • Financial independence is being able to do something you want without worrying about the financial consequences. Can be a candybar for some, vacations for others (via @DanielPacker). Anyone can do something without worrying about financial consequences; in fact, that’s how many people end up in debt. The difference is that with financial independence, you know what the financial consequences are, and you know you can handle them.
  • There’s being financially independent of others, meaning you don’t need cash from Mom and Dad. Or being independent of finances which would mean that your passive/investment income is greater than your expenses (via @calebhicks) This is a great distinction. You could say the college graduate who finally moves out of his parents’ house is now financially independent, but that’s only one of the first steps.

To me, the core of financial independence is being able to make important life decisions without the constraint of your finances. How do you financial independence, and how do you know when you have achieved it?

I apologize to everyone who left a comment on this article on December 30. I needed to restore a day-old back-up of Consumerism Commentary and all of the comments for about 24 hours were lost.

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Patriotic Millionaires for Fiscal Strength

by Flexo

A group of millionaires — the definition of which is any individual with an annual income of over $1,000,000, not a net worth of $1,000,000 — has assembled to let the government know that they’d like the tax cuts for that income level expire, in patriotic duty to the fiscal solvency of the United States. ... Continue reading this article…

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TARP Bailout: It’s a Success and Failure

by Flexo

The Troubled Asset Relief Program (TARP), created and enacted by President George W. Bush’s administration in 2008 with strong support from Republicans, has been deemed a success for taxpayers by President Obama’s administration on the date of its so-called ending, despite being criticized by opponents both liberal and conservative. Only $386 billion of the original ... Continue reading this article…

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GMAC Changes Name to Ally Financial

by Flexo

A year ago, GMAC Bank, or its brand, ceased to exist. In order to distance itself from its parents, General Motors and GMAC Financial Services, the bank changed its name to Ally Bank. With government funding, Ally Bank went on to become a competitive online bank, offering interest rates high enough to draw the ire ... Continue reading this article…

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Finding a Good Job in a Bad Economy: A Job Hunt Post-Mortem

by Revanche

This is a guest article by Revanche, a twenty-something west coast girl who writes about money at A Gai Shan Life. You’ve all heard that line about not burning professional bridges, right? That goes double or even triple for job interviews. I started my job hunt 20 months ago — as soon as there were ... Continue reading this article…

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