Think the Economy Is Hard to Predict? Try the Midterms. | Big Indy News
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Think the Economy Is Hard to Predict? Try the Midterms.



Based on the economy alone, Democrats face a big problem in the midterm elections.

Inflation has been extremely high and economic growth has been weak or even negative. That is a toxic political combination — bad enough for the Democrats to lose the House of Representatives by a substantial margin.

That, at least, is the forecast of an econometric model run by Ray Fair, a Yale economist. He has used purely economic variables to track and predict elections in real time since 1978, with fairly good results, which he shares with his students and which are available on his website for anyone who wants to examine the work.

The party in power always starts off with a handicap in midterm elections, and a bad economy makes matters worse, Professor Fair said in an interview. “At the moment, the Democrats definitely have an uphill climb.”

Yet Professor Fair acknowledges that his model can’t capture everything that is going on in the country.

While his analysis shows that the Democrats have fallen into an increasingly deep hole as the year has gone on, prediction markets and public opinion polls are more upbeat for the Democrats right now, and show a surge that began in late June.

Eric Zitzewitz, a Dartmouth professor who has studied prediction markets extensively, says the improved odds for the Democrats may be linked to an important development beyond the economy: the Supreme Court’s decision to overturn Roe v. Wade.

No one would question whether economic conditions have a major influence on politics.

But Professor Fair’s work goes further than that. In his book “Predicting Presidential Elections and Other Things,” and in a series of papers and online demonstrations, he has shown that the economy is so powerful that it explains the broad outcome of most national elections since 1916. His relentlessly economic approach does not include any consideration whatsoever of the staples of conventional political analysis: the transcendent issues of the day, the personalities of the candidates or the tactics employed by their campaigns.

This year, as high inflation has persisted and economic growth has slowed, he finds that the electoral prospects for the Democrats have worsened. Based on data through July, he estimates that Democrats will get only 46.70 percent of the raw national vote for congressional candidates in November.

How this projection translates into results for individual congressional seats is beyond the scope of Professor Fair’s grand experiment.

“That’s not what this model is built to do,” he said. “I leave that to the political scientists. But I think the model is showing that, because of the economy, the odds aren’t good for the Democrats holding the House of Representatives.”

Yet, as Professor Fair readily acknowledges, his model’s single-minded exclusion of noneconomic factors inevitably misses some important things.

In the 2016 presidential election, for example, it projected that Hillary Clinton would lose the popular vote to Donald J. Trump. She won the popular vote but lost the presidency in the Electoral College.

“It’s possible,” he said, “that some of that was Trump’s personality, and that the model couldn’t pick that up.”

Something similar may have happened in 2020. The model estimated that Joseph R. Biden Jr. would receive only 47.9 percent of the popular vote but he actually got 52.27 percent. In both cases, Professor Fair said, “Trump did not do as well as he was predicted to do by the model.”

The model’s singular focus may be unable to adequately account for what Professor Fair calls “the Trump effect.” That shorthand encompasses the array of norm-shattering behaviors and issues associated with President Trump and his adherents, including the Jan. 6 insurrection; Mr. Trump’s denial of President Biden’s election win in 2020; and the decision of the Supreme Court, with three Trump appointees, to overturn Roe v. Wade, which had been the law of the land for 50 years.

In theory, the prices in perfectly efficient markets synthesize the knowledge of each participant, making them better at assessing complicated issues than any individual can. But perfect conditions don’t exist for any market on earth and certainly not for prediction markets. Still, Professor Zitzewitz says these markets are highly informative.

He pointed out that as recently as June 23, PredictIt, a leading prediction market, gave the Republican Party a 76 percent chance of taking the House of Representatives and the Senate from the Democrats in November.

But the next day, June 24, the Supreme Court overturned Roe v. Wade. By June 30, the probability of a Republican sweep, calculated from bets placed on the PredictIt site, dropped to 60 percent. They were down to 39 percent on Thursday, with a higher probability, 47 percent, given to a different outcome: Democratic control of the Senate and a Republican victory in the House.

Public opinion polls appear to have moved in a similar direction. The average of the polls tracked by Real Clear Markets has shifted from total Republican dominance to a virtual dead heat in the generic congressional ballot. On the other hand, Mr. Biden’s job rating in those polls is still awful, with nearly 16 percent more people disapproving of his performance than approving of it.

Did the Supreme Court ruling shift the odds for the midterms? Did the Jan. 6 hearings swing public opinion? Has a string of legislative victories added luster to the Biden aura and moved some voters toward Democrats?

It’s impossible to prove cause and effect for any of these things.

It is conceivable that the unique economic situation is muddling the projections in Professor Fair’s model.

Gross domestic product and the inflation rate are the only economic factors the model uses, and may not be adequate for analyzing the state of the economy now, with the pandemic and Russia’s war in Ukraine causing disruptions around the globe. Both the G.D.P. and inflation numbers for the United States are bleak and the Federal Reserve is raising interest rates, giving rise to speculation that the country is heading into a recession or is already in one.

But other metrics, like gross domestic income and the unemployment rate, have been more positive. If the economy turns out to be in better shape than the core G.D.P. and inflation data indicate, the vote projections for the incumbent Democrats would improve, and they would worsen for the Republicans.

Then again, Professor Fair said, “The economy and the political situation are always unique.”

Reality is recalcitrant. Human behavior never fits entirely into any model or market yet invented.

It’s worth knowing as much as you can about the underlying factors, but they come down to people. I find that reassuring.

In the end, elections depend on the voters coming out and the public as a whole respecting the results. Astonishingly, in 2022, that basic civics lesson needs reinforcement. The legitimacy of the 2020 election is still under attack.

So, remember, whatever the models, the markets, the polls, the pundits or the candidates say, the future is in your hands. When Election Day comes around, it’s more important than ever to get out and vote, and to make sure your vote counts.

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Sister Patricia Daly, 66, Dies; Took On Corporate Giants on Social Justice



For years, Sister Pat and other environmentalists had urged ExxonMobil to take significant steps to reduce greenhouse-gas emissions from its operations and products. In 2007, she proposed a resolution that called on that energy giant to set a firm date to report on its progress.

“We’re the most profitable company in the history of the planet,” she told Rex Tillerson, then the company’s chief executive (and later secretary of state in the Trump administration), at the company’s annual meeting, “but what will be our long-term health when we are really faced with the regulatory and other challenges around global warming?”

She added: “We are now, this company and every single one of us, challenged by one of the most profound moral concerns. And we have the wherewithal to respond to that.”

The proposal won 31 percent of the ballots, or about 1.4 billion shares, the largest tally for an ExxonMobil climate-change resolution. If not an outright victory, it was a page in a decades-long narrative that led ExxonMobil to put a climate scientist on its board in 2017. Three executives who recognized the urgency to address climate change joined the company’s board in 2021, nominated by a tiny activist hedge fund, Engine No. 1.

“The arc of her work led us to those victories by working from the inside and the outside,” John Passacantando, the founder of Ozone Action, an anti-global warming group, and a former executive director of Greenpeace, said in a phone interview.

In 1999, Vanity Fair named her to its Hall of Fame, applauding her as one who “translates belief into commitment and never backs down from a fight.”

Mary Beth Gallagher, who replaced Sister Pat as executive director of the Tri-State Coalition in 2017, said Sister Pat had not become frustrated when her resolutions were routinely voted down.

“She lived in hope,” Ms. Gallagher said. “We never talked about winning or losing. It was about raising consciousness and educating. If we’re not asking these questions, who will?”

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Families can make a tax-free rollover from 529 plans to Roth individual retirement accounts starting in 2024



Maskot | Maskot | Getty Images

Americans who save for college in 529 plans will soon have a way to rescue unused funds while keeping their tax benefits intact.

A $1.7 trillion government funding package has a provision that lets savers roll money from 529 plans to Roth individual retirement accounts free of income tax or tax penalties.

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The House passed the measure Friday and the Senate did so Thursday. The bill heads to President Biden, who’s expected to sign it into law.

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The rollover measure — which takes effect in 2024 — has some limitations. Among the largest: There’s a $35,000 lifetime cap on transfers.

“It’s a good provision for people who have [529 accounts] and the money hasn’t been used,” said Ed Slott, a certified public accountant and IRA expert based in Rockville Centre, New York.

That might happen if a beneficiary — such as a child or grandchild — doesn’t attend a college, university, vocational or private K-12 school, or other qualifying institution, for example. Or, a student may receive scholarships that mean some 529 funds are left over.

Millions of 529 accounts hold billions in savings

There were nearly 15 million 529 accounts at the end of last year, holding a total $480 billion, according to the Investment Company Institute. That’s an average of about $30,600 per account.

529 plans carry tax advantages for college savers. Namely, investment earnings on account contributions grow tax-free and aren’t taxable if used for qualifying education expenses like tuition, fees, books, and room and board.

Retirement plan changes in the omnibus spending bill

However, that investment growth is generally subject to income tax and a 10% tax penalty if used for an ineligible expense.

This is where rollovers to a Roth IRA can benefit savers with stranded 529 money. A transfer would skirt income tax and penalties; investments would keep growing tax-free in a Roth account, and future retirement withdrawals would also be tax-free.  

Some think it’s a handout for the rich

However, some critics think the rollover policy largely amounts to a tax handout to wealthier families.

“You’re giving savings incentives to those who can save and leaving behind those who cannot save,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

A 2012 analysis conducted by the Government Accountability Office found the typical American with a 529 account had “much more wealth” than someone without: $413,500 in total wealth for the median person, about 25 times the amount of a non-accountholder.

You’re giving savings incentives to those who can save and leaving behind those who cannot save.

Steve Rosenthal

senior fellow at the Urban-Brookings Tax Policy Center

Further, the typical owner had a roughly $142,000 annual income versus $45,000 for other families, the GAO report said. Almost half, 47%, had incomes over $150,000.

The new 529-to-Roth IRA transfer provision doesn’t carry income limits.

Limitations on 529-to-IRA transfers

While the new tax break primarily benefits wealthier families, there are “pretty significant” limitations on the rollovers that reduce the financial benefit, Jeffrey Levine, a certified financial planner and certified public accountant based in St. Louis, said in a tweet.

The restrictions include:

  • A $35,000 lifetime cap on transfers.
  • Rollovers are subject to the annual Roth IRA contribution limit. (The limit is $6,500 in 2023.)
  • The rollover can only be made to the beneficiary’s Roth IRA — not that of the account owner. (In other words, a 529 owned by a parent with the child as beneficiary would need to be rolled into the child’s IRA, not the parent’s.)
  • The 529 account must have been open for at least 15 years. (It seems changing account beneficiaries may restart that 15-year clock, Levine said.)
  • Accountholders can’t roll over contributions, or earnings on those contributions, made in the last five years.

In a summary document, the Senate Finance Committee said current 529 tax rules have “led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education.”

“Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education,” it said.

Are 529 plans already flexible enough?

Some education savings experts think 529 accounts have adequate flexibility so as not to deter families from using them.

For example, owners with leftover account funds can change beneficiaries to another qualifying family member — thereby helping avoid a tax penalty for non-qualified withdrawals. Aside from a kid or grandkid, that family member might be you; a spouse; a son, daughter, brother, sister, father or mother-in-law; sibling or step-sibling; first cousin or their spouse; a niece, nephew or their spouse; or aunt and uncle, among others.

Owners can also keep funds in an account for a beneficiary’s graduate schooling or the education of a future grandchild, according to Funds can also be used to make up to $10,000 of student loan payments.

The tax penalty may also not be quite as bad as some think, according to education expert Mark Kantrowitz. For example, taxes are assessed at the beneficiary’s income-tax rate, which is generally lower than the parent’s tax rate by at least 10 percentage points.

In that case, the parent “is no worse off than they would have been had they saved in a taxable account,” depending on their tax rates on long-term capital gains, he said.

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Goldman grumbling grows for banking giant to sack CEO David Solomon



The knives are out for Goldman Sachs CEO David Solomon, and this time the people brandishing them aren’t the usual suspects — his junior staffers annoyed that they have to work late or come into the office several times a week.

Solomon’s problems are more serious and existential, I am told, and how he handles what can best be described as a revolt in some quarters of Goldman’s middle and upper management ranks could determine how much longer he stays in his job.

Solomon, 60, took the job in 2018 and was always somewhat of an odd choice to run the white-shoe investment bank that usually cultivated its leaders from within. He cut his teeth at a decidedly un-Goldman-like venue: the scrappy investment bank Bear Stearns (ultimately one of the causalities of the 2008 financial crisis).

He joined Goldman in 1999, as a partner, no less, because his deal-making chops allowed him to skip layers of management.

In other words, Solomon is an outsider at a firm with a wickedly insular culture. He has a quirky side gig as a DJ in the summer Hamptons party circuit. He’s also not one for small talk, and doesn’t consult with a lot of people before handing down his edicts. 

“He doesn’t breed a lot of love,” said one former Goldman executive who knows Solomon well.

Lots of people at Goldman don’t like him, and they’re letting their views be heard both internally and with pals at rival firms.

Solomon as a DJ
Solomon is an outsider at a firm with a wickedly insular culture.
David Solomon/Instagram

For the record: I’ve met Solomon and like him for his no-BS style. And until pretty recently, the numbers show him doing a great job. Goldman was running on all cylinders in deals and trading. Even as the market corrects, shares are up about 60% since Solomon took over as CEO in 2018 compared to around a 44% rise in the S&P during that time.

Goldman is still the top M&A shop, even widening its market share over rivals in that important business line. Solomon was the first among his fellow CEOs to see the downturn and enact significant layoffs to cut costs.

Still, the grumbling about Solomon is spreading to the managing director and partner class. High-priced Wall Street talent don’t call all the shots at any firm, of course. But Goldman’s MDs and partners have historically been a powerful force when the board decides the fate of current management, which makes Solomon’s hold on his job increasingly precarious as more and more of them defect from his camp.

David Solomon as a DJ
Solomon was the first among his fellow CEOs to see the downturn and enact significant layoffs to cut costs.
David Solomon/Instagram

Here’s how they’re building a case against him: Goldman’s longtime archrival investment bank Morgan Stanley now easily dwarfs Goldman in market value, $144 billion to $116 billion, continuing a trend that predates Solomon. That comes amid a slowdown in banking deals, Goldman’s bread-and-butter business, and Solomon’s home turf.

Morgan’s CEO James Gorman deftly expanded the firm’s wealth management operations, which provide steady revenues. Solomon’s effort to diversify was an overindulgence in something called Marcus, a digital retail bank launched by his predecessor Lloyd Bankfein that Solomon made his baby. So far, it’s been a disaster, so much so that Solomon has been forced to scale back, possibly on the way to winding it down.

Goldman, meanwhile, has missed targets in its recent earnings announcements, and more downward surprises could be in store as markets continue to wobble. Bonuses are down, in some places cut in half, albeit from the nosebleed levels of 2021.

Goldman Sachs headquarters
The grumbling about Solomon is spreading to the managing director and partner class.
AFP via Getty Images

Traders did well in 2022 because Goldman’s are particularly adept in profiting off turbulence, but part of their pool is being diverted to bankers to keep them in-house until the deal slowdown ends.

Since Solomon is a banker, he’s also being accused of favoritism, which in truth is a pretty lame charge, since bankers often subsidize trader bonuses when the markets aren’t profitable. Still, the Goldman trading department is powerful and can spark management change, as it has done in the past.

There’s also a question about Solomon’s allegiance to Goldman’s stand-alone culture. In its 153-year existence, Goldman has operated on the assumption that it would be the acquirer in any major strategic acquisition. Solomon’s experience at Bear, then one of the most transactional places on Wall Street, means he could be looking for a deal and not one that keeps Goldman in charge.

Morgan Stanley CEO James Gorman deftly expanded the firm’s wealth management operations, which provide steady revenues.
Morgan Stanley’s James Gorman deftly expanded the firm’s wealth management operations, which provide steady revenues.
AFP via Getty Images

At a time when most Goldman insiders believe he needs to do a “transformational deal,” i.e., something big that allows it to better compete against Morgan Stanley and super banks like JP Morgan, there is speculation that Solomon might allow Goldman to be swallowed whole by, say, a big asset manager or bank if the price was right.

As best I can tell, this grumbling, though real, doesn’t immediately threaten Solomon’s job. Then again, there is something to be said for keeping your producers happy.

Jack Welch, the legendary CEO of General Electric, was a notorious screamer and demanding beyond belief. Yet Welch knew how to nurture his people.

Former General Electric CEO Jack Welch
Jack Welch was a notorious screamer and demanding beyond belief. Yet Welch knew how to nurture his people.
Getty Images

“Jack could chew your ass, then put his arm around you and make you feel great,” one of his longtime executives, Bob Nardelli, once told me.

It’s why so many other talented execs chose to stay around under Welch, abuse and all, and left when his successor took over, watching GE implode from the outside.

Maybe it’s a good time for Solomon to take a page from Welch and start hugging it out.

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