The Incidental Economist

This post is part of a multi-post series on the filibuster in the U.S. Senate. An index to all other posts in the series, as well as a list of main sources that have informed this series, is included in the first post.

When I began this summer project on the filibuster, I didn’t know enough about it to form my own opinion on whether and how to reform it. Now I do. I’m sympathetic to the notion that it is far too easy for the Senate’s minority to obstruct and delay. Scott Lilly makes a good case that the Senate

fails to complete much of the work for which it is responsible and falls so far behind schedule in completing the work it does do as to seriously undermine the capacity of the entire federal government to respond in an effective and efficient way to the problems facing our country.

Yet I’m also sympathetic to the notion that debate more deliberative and open than occurs in the House is of some value. Hence, the filibuster should be reformed, but not too much.

These are two principles at odds. Providing the minority rights to consider and debate, but not to unduly delay and obstruct is a balancing act. But the two principles can be better balanced. The key is to permit reasonable delay so senators can review bills and nominees, but not to allow them to be open ended. The goal should be to strengthen cloture, not weaken filibuster or make it more onerous.

As explained in the Congressional Research Service report on this topic, cloture has far more value than just ending debate. It is also a means of streamlining the process of amendments. As such, it’s used as an organizing force, to get things done, even when obstructionist motivations are not present. It helps senators with contradicting incentives accomplish the nation’s business. In fact, that’s the purpose of the two-day ripening period between submission of the cloture petition and the cloture debate. Senators need to prepare and submit their amendments. Once the two-day window closes, so does the opportunity to submit an amendment.

So, cloture has value that can be enhanced and strengthened while providing time for senators (minority and majority alike) to participate. To do so, and in looking over the various proposals I reviewed last week, I suggest the following as one set of possible reforms:

• If there need be a reduction in the cloture threshold, do it across the board, once and for all, not in steps that lengthen the legislative process, as proposed by Tom Harkin. For example, reduce the cloture threshold from a three-fifths (60 vote) to a four-sevenths (58 vote) majority.
• Adopt Michael Bennet’s idea and impose expiration dates on nomination holds, executive and legislative alike. A hold in this case should be for purposes of review, not for indefinite obstruction. Extend the expiration date in instances where the hold is bipartisan. Perhaps the length of delay could be proportional to degree of bipartisanship in some fashion.
• Institute Bennet’s proposal to reverse the bias of the cloture vote. Force the minority to produce 41-votes to continue debate, not the majority to produce 60 to end it.
• Create a one-filibuster-per-bill rule by eliminating the ability to filibuster a motion to proceed. (Separate filibusters on amendments would be possible.) Forcing the majority to wait out two rounds of cloture for each bill is unnecessarily dilatory (once on the motion to proceed, once on the bill itself).
• Further limit debate. Thirty hours per cloture vote is unnecessary and rarely fully used (never before 2003, though a few times since). Cut the time to some length that seems binding. Lilly suggests 16 hours.

Those are just my favorite ideas to date. I’m sure we’ll hear about others. Notice that they mostly focus on making cloture easier, not making filibuster harder. Moreover, they preserve important but reasonable pauses in the legislative process. Readers who can’t get enough of this stuff and want to know what someone more expert than I thinks about it should read Jonathan Berstein’s favorite reform ideas.

We should all want a more efficient Senate, provided all sides of a debate are heard as much as necessary, but no more, and largely on bills of import (not motions and minor executive nominations). So, my charge to the Senate: deliberate, not too long, mostly bills (h/t Michael Pollan).

This post is part of a multi-post series on the filibuster in the U.S. Senate. An index to all other posts in the series, as well as a list of main sources that have informed this series, is included in the first post.

I’ll go out on a limb and suggest that most bloggers who devote more than a post to the filibuster find something they’d like to change about it. I’m no exception. But at least one (actual) scholar of the subject has written a defense of the filibuster, Gregor Koger. He notes that a 51-vote majority in the senate can represent just 17.7% of the nation’s population. Thus, a check on the majority is justified to minimize chances it “tries to pass legislation that lacks public support and/or is a payoff to some organized group. …”

In a second post in defense of the filibuster Koger emphasizes its positive role in fostering debate.

[F]ilibustering empowers the minority party to insist on a fair chance to debate major bills—and this is a good thing. Not only is it fair to the minority party—and good for the electoral process—to allow real debate on major legislation, it also enhances the legitimacy of the majority party and its actions.

Of course “empowering the minority” and “allowing real debate” are qualities of a process, but don’t themselves define it. Contrary to popular perception, the Senate’s terms and procedures of debate are open to redefinition and revision. Rule reform can occur at any time with 67-vote support. At the start of a new Congress (i.e., in January of each odd-numbered year) rule reform requires only a 51-vote majority, provided the Vice President declares a new session. The cloture rule has been modified in just this way in the past. For instance in 1975 the number of votes required to achieve cloture was reduced from two-thirds (67) to three-fifths (60) of Senators.

There is also a means 60-vote route to filibuster reform, as explained in a post by Jim Hufford. In other posts, Hufford goes deep into the weeds on the 51-vote (two posts) and 67-vote mechanisms.

With Harry Reid signaling an interest in revising Senate rules and Joe Biden as President of the Senate, it appears that at least discussion, if not action, toward curbing minority obstruction of the Senate is likely. What options might they consider? The following is a list of the broad categories of ideas I’ve seen so far, along with my thoughts about which are or are not sensible and why. Many of the links and some of the ideas were harvested from Koger’s excellent post that summarizes some specific Senators’ proposals. See also Jonathan Bernstein’s two posts that review various reform ideas.

Reducing Cloture Threshold. Cloture puts a date certain on conclusion of debate (30 more hours). Changing the cloture threshold for success from a three-fifths (60 vote) majority to something less would certainly make achievement easier. Tom Harkin has proposed to allow the cloture threshold to drop by three votes with each successive attempt. I agree with Koger that Harkin’s idea is the wrong way to go as it will decrease the cost of obstruction while further delaying the process. Evan Bayh has proposed a 55-vote cloture.

Michael Bennet’s ideas kick in after the third failed cloture vote. One is to force the minority to find bipartisan support or the cloture threshold reduces from 60 to 56. The same reduction would occur if the majority finds three minority members to vote for cloture. These strike me as both needlessly complicated and suffering from the same problem as Harkin’s idea. But I do like the notion of getting something for bipartisanship (more below).

Limit Holds. By objecting to unanimous consent a single senator can initiate a “hold” and require a cloture vote, not just on bills but on nominations, whether executive or judicial. Senators can even do so anonymously. Bennet has proposed to eliminate anonymous holds on nominations and to insert an expiration date on them (30 days if bipartisan, two otherwise).  Ruth Marcus of the Washington Post also suggests that executive (but not judicial) branch nominees be immune from holds, i.e. affirmed with a simple majority vote. Since one can imagine a check on executive appointments being wise and necessary, I favor Bennet’s ideas over Marcus’s: require bipartisan support for executive nomination holds to last longer than is necessary for a senator to have time to collect his thoughts (which is a reasonable justification for a brief delay of a deliberative body).

Reverse Bias of Cloture Vote. Bennet has another intriguing cloture idea: to require the 41 senators who wish to block cloture to appear for the vote, as opposed to the current arrangement which puts the onus on the 60 senators who wish it to pass. Koger gives credit to Jonathan Krasno and Gregory Robinson for this idea, and he points to the likely result were it implemented.

[I]f the rule was adopted the majority could make a habit of filing for cloture on Thursday or Friday and keeping the Senate open on Saturday and Sunday, so that obstructionists would have to stay in D.C. to vote against cloture. For today’s “Tuesday to Thursday” Senate (on a busy week) this would be a real change, and could quite possibly swing the outcome of some cloture votes.

Reduce Scope of Filibuster Applicability. Bennet and Marcus both suggest removing the right to filibuster the “motion to proceed” (the motion to bring the bill to the floor). Requiring multiple cloture votes on the same bill, whether to end debate on bringing it to the floor or on the bill itself, has only one purpose: delay. I agree with ending this unnecessary facilitation of gridlock.

Make ‘Em Talk. The idea of returning to the good-old-fashioned, Mr. Smith Goes to Washington, talk-a-thon type filibusters is very popular, probably out of a false sense of nostalgia, though it was considered by Robert Byrd and Richard Durbin, among others, during the health reform debate and threatened during the debate over financial regulation reform. I’m not a fan, neither are Marcus and Koger, nor would be most senators. Though requiring such a filibuster would reduce its allure by increasing its cost to the minority (good), senators have far better things to do than to waste time reading the phone book on the Senate floor. We ought to be able to come up with reforms that solve the filibuster’s problems without wasting everyone’s time.

Speed it Up. As of the writing of a 2003 Congressional Research Service report on the filibuster, the 30 hours of debate that successful cloture allows had never been fully used. It has been used since then, most recently during the health reform debate in December 2009. The infrequent use of the full 30 hours is justification for reducing it. Marcus also points to the two-day delay between the filing of the petition for cloture and the start of the 30-hour clock. But that delay actually has a purpose, to which I’ll return in my next post.

This post is part of a multi-post series on the filibuster in the U.S. Senate. An index to all other posts in the series, as well as a list of main sources that have informed this series, is included in the first post.

A filibuster can kill a bill, but often it motivates changes to it and causes a delay of its passage. So, filibusters end, but in different ways. Gregory Koger classifies the three main methods of countering the filibuster: cloture (a vote to end debate), attrition (waiting it out), and reform (changing the rules). I think there’s a fourth: concede (as in giving the opposition something it wants).

No doubt the route of concession is widely used and harder to detect. That’s exactly what Max Baucus was trying to do on the Senate Finance Committee last summer. His process of crafting a health reform bill was explicitly designed to attract the votes of Republican committee members (he got one) in order to decrease opposition and likelihood of filibuster.

These days Senate filibuster is closely associated with cloture (Senate Rule XXII), the invocation of which promises a specified degree of delay. Once a motion for cloture is presented, it is not voted upon for two days (the “ripening period”). Then, if passed (requiring 60 votes), it allows for 30 hours of debate on the bill to which it pertains. However, cloture is not employed only to counter a filibuster, but also as a tool to manage the Senate’s schedule and amendments process (more on this later in the series). Hence, a cloture motion cannot be taken as an indicator of the presence or absence of a filibuster.

Opposing a filibuster by attrition was more common before the 1970s. (An amusing historical fact: the longest single speech was made by Sen. Strom Thurmond of South Carolina on Aug. 28-29, 1957, lasting just over 24 hours.) More recently Mr. Smith Goes to Washington force-them-to-speak style filibuster opposition has been superseded by other countermeasures. Reasons were covered in the second post of the series. Attrition is just too disruptive to Senators’ schedules. Moreover, it provides the opposition an opportunity to create a spectacle, which is often what it seeks. Interestingly, however, Republicans backed down in response to the Democratic threat of opposition by attrition during the April 2010 debate over financial regulation reform.

Efforts to reform the rules that shape or limit filibuster are rare. One notable reform is the budget reconciliation process, included in The Congressional Budget Act of 1974. Budget reconciliation can be used to obviate the need for a cloture vote, but the purpose for which it is used must be anticipated in the budget resolution bill that Congress passes early in the year. The Center on Budget and Policy Priorities explains,

[A] reconciliation directive [included in the budget resolution] instructs a committee to produce legislation by a specific date that meets certain spending or tax targets. … The Budget Committee then packages all of these bills together into one [budget reconciliation] bill that goes to the floor for an up-or-down vote, with only limited opportunity for amendment.

Budget reconciliation was the legislative procedure used to amend the Affordable Care Act and, therefore, received a lot of attention. One of its peculiarities is the requirement that budget reconciliation provisions directly affect federal revenue or else they are ruled out of order (the so-called Byrd rule, first introduced in 1985). Reconciliation has been employed for major legislation, including that pertaining to health care, for decades.

The next post in the series will present current proposals to reform the filibuster.

This post is part of a multi-post series on the filibuster in the U.S. Senate. An index to all other posts in the series, as well as a list of main sources that have informed this series, is included in the first post.

My filibuster education was enhanced considerably by health reform. Never before had I followed the Byzantine journey of legislation so closely. As the Republican strategy of opposition and obstruction solidified, the filibuster played a key role in shaping legislation and dictating the schedule of its passage. Of course, that passage very nearly failed. It was the prominence and influence of the filibuster during debate over health reform that motivated my study of it and the writing of this series.

About health reform’s improbably successful journey through the Senate, Jennifer Senior wrote in New York Magazine,

The measure squeaked through on the basis of an exception (a fleeting Democratic supermajority) and a technicality (reconciliation requires only 50 votes). Before that, the Senate of the 111th Congress had been an awesomely inefficient body, threatening the most filibusters and reauthorizing appallingly few bills; almost every Democrat had a story about legislation held hostage.

Senior makes clear that health reform was not the only piece of legislation filibustered during the first year of the Obama presidency. As Gregory Koger notes, the filibuster played a prominent role early in the 111th Congress.

In January [2009], Senate Democrats were compelled to trim their first major bill—a “stimulus” package of spending and tax cuts—from $940 billion to about $780 billion ($787 billion in the final law) in order to gain the votes of a centrist bloc of moderate Democrats and three Republicans.

More recently, the filibuster was employed as a delay tactic during debate over financial regulation reform.

The Senate health reform bill famously had to run the filibuster gauntlet, requiring all 60 Democratic Caucus members to pass the Senate in December of 2009. In March 2010, amendments to the bill passed in a budget reconciliation process that operates under filibuster-proof rules. So, health reform was hard to pass, but it has always been so. Historically it was killed relatively early in the process. That filibustering was so apparent in the 2009-2010 effort is, in part, testimony to a successful legislative strategy, one that gained the support (or blunted the opposition) of major special interest groups, including health care providers and organized labor.

That Democrats succeeded in turning health reform legislation into the law—the Affordable Coverage Act (ACA)—does not mean the Republican filibuster had no tangible effect. In fact, the ACA adheres more closely to conservative ideals than it might have in the absence of unified Republican opposition. It is in structure, and in some details, similar to past Republican health reform proposals and to the Massachusetts health reform championed by former (Republican) Bay State governor Mitt Romney. It also includes many of the ideas Republicans proposed as alternatives.

What Republican unanimity in opposition did was to force Democrats to appeal to the most conservative members of their caucus. Had a moderate Republican or two (e.g. Olympia Snowe or Susan Collins) voted for reform, a few relatively conservative Democrats could have either voted off or might have felt safer in supporting a bipartisan bill. You might recall that Olympia Snowe even supported a weak form of public option (via trigger). The ACA has no such thing.

The filibuster of health reform presented Democrats with a collective action dilemma. Months passed during which fewer than all 60 members of the Senate Democratic Caucus wanted to vote for the latest proposal but the party had a strong interest in seeing a bill become law. This gave rise to some of the now infamous “backroom deals” such as the Cornhusker Kickback (which was ultimately removed in the reconciliation amendment).

Given that health reform did pass, the most significant way in which the Republican filibuster affected the legislative process was to cause substantial delay. That’s not surprising since that’s what filibuster is, if nothing else. It took three months for the bill to become law (March 23, 2010) after it had passed the Senate (December 24, 2009). And there were many earlier delays as well. In fact, the broad structure of reform hadn’t changed significantly between the summer of 2009 and when it ultimately passed both chambers of Congress. One could argue that Republican opposition and obstruction delayed passage and enactment by nine months. (See the NY Times, “A History of Overhauling Health Care.”)

That’s significant because little else occurred in those nine months. With health reform dominating the news and sucking up all the political oxygen, nothing was accomplished on environmental or financial regulation reform. That’s the narrow sense in which health reform was actually a victory for Republicans. They succeeded in delaying and obstructing substantial pieces of Obama’s legislative agenda. With the clock running, every day’s delay was a day closer to the mid-terms, in which Republicans hope to regain seats and begin building toward the reestablishment of their own majority and the retaking of the presidency.

Should the Republicans regain control of Congress and the presidency, the shoe will be on the other foot. The filibuster is not a Republican maneuver. It’s a minority one. Unless rules that shape its use are changed, expect Democrats to include it among their tactical options just as did their colleagues across the aisle.

This post is part of a multi-post series on the filibuster in the U.S. Senate. An index to all other posts in the series, as well as a list of main sources that have informed this series, is included in the first post.

In this installment I summarize the history of the filibuster.

Sarah Binder, author of Politics or Principle: Filibustering in the United States Senate, explained in a March 2010 interview with Ezra Klein that the origins of the Senate’s filibuster stem from the removal of the “previous question motion.” I hate the name of that motion since it reveals to me little of its function. It suffices to know that it is essentially a simple majority version of today’s 60-vote cloture rule. That is, a previous question rule would terminate debate in the Senate with 51 votes. Binder to Klein:

In 1805, Aaron Burr … comes back to the Senate and gives his farewell address [in which] he goes through the rulebook pointing out duplicates and things that are unclear.

Among his suggestions was to drop the previous question motion. And they pretty much just take Burr’s advice. And once it’s gone, it takes some time for leaders to realize that they can’t cut off debate anymore. But the striking part to me was that we say the Senate developed the filibuster to protect minorities and the right to debate. That’s hogwash! It’s a mistake. Believe me, I would’ve loved to find the smoking gun where the Senate decides to create a deliberative body. But it takes years before anyone figures out that the filibuster has just been created.

Thus, the filibuster was not invented in a conscious effort to create a more deliberative legislative body. It was, rather, an accidental byproduct of early 19th century Senate rules reform. The Senate’s filibuster owes its existence not to design but to a lack of provisions that would limit senators’ rights to participate in the legislative process.

Though it has existed for centuries, the filibuster’s form and frequency have not been constant. Filibustering was rare before 1960 and “has skyrocketed since then, from an annual average of 3.2 filibusters during 1951–1960 to 16.5 between 1981 and 2004. … [There were] 111 during the 110th Congress (2007-2008) alone.” (Source: Koger.) The following figure documents the number of filibuster-ending cloture votes by  year (Source: David Lightman, McLatchy).

Scholars have investigated the extent to which changes in rates of filibuster are correlated with other seemingly relevant factors like Senate turnover, partisanship, and threat of reform. These factors, however, do not have a strong relationship with filibuster use historically.

The frequency of filibuster has increased as the legislative penalties for obstruction have decreased. Prior to 1917 the only available responses to the filibuster were to wait it out or to strike a deal. In 1917, Woodrow Wilson convinced the Senate to adopt a rule that could limit debate, the cloture rule. In its original form it allowed for the halting of debate if two-thirds (not today’s three-fifths) of senators agreed.

Though a cloture rule existed, it wasn’t frequently used until much later in the century. The change came after the strategy of trying to outlast a filibuster failed during debate over the Civil Rights Act of 1960. Southern senators thwarted efforts to bring debate to a close.

This failure led several senators to rethink the Senate’s tolerance for filibustering, given the body’s growing workload. After all, the federal government had expanded tremendously since the 1930s, and the United States had taken on the foreign-policy responsibilities of a world superpower. Moreover, with the growing availability and convenience of air travel, senators also enjoyed easier transportation to their home states, to speaking opportunities around the country, and to foreign travel. It was increasingly difficult for the legislature either to overcome or outlast a filibuster. (Source: Koger.)

Consequently, the necessity of cloture votes to pass major legislation become routine. In 1975, Nelson Rockefeller, Gerald Ford’s Vice President, succeeded in a decades-long effort to reduce the cloture threshold. It dropped from a two-thirds to a three-fifths majority, the level that exists today. Around the same time filibustering shifted from a round-the-clock talk-a-thon that shut down the Senate to a behind the scenes threat that blocked individual bills (“holds”). A further shift in filibuster tactics and frequency was facilitated by Robert Byrd’s dual-track system, which put filibustered legislation to the side so the Senate could take up other business. Forcing a cloture vote no longer gummed up the entire Senate. It just slowed down or blocked passage of a specific piece of legislation.

The rules governing cloture have been modified over time in other ways. For example, before 1979 there was no cap on the time allotted for post-cloture debate, opening the possibility for post-cloture filibuster (a seeming oxymoron that was exploited). Thus, in 1979 debate was capped at 100 hours after a successful cloture vote. In 1985 the cap was reduced to 30 hours. However, even that length of debate had never occurred as of the writing of a 2003 Congressional Research Service report on the issue. Since 2003, 30 hours of post-cloture debate have been used, most recently during the debate over health reform in December 2009.

Today forcing cloture votes has become a standard tactic of the minority, even when it doesn’t have the votes to sustain a filibuster. Ezra Klein explained the rationale in a March 15, 2010 Newsweek column.

The goal is to slow the Senate to a crawl. After you call for cloture, you need to wait two days to take the vote. After you take the vote, there’s 30 hours of post-cloture debate. And you can do this on the motion to debate, on amendments, on the vote on the bill itself … on everything, really. A single, committed crank … can waste weeks forcing the majority to break his filibusters.

With these innovations of obstruction, filibustering became less costly to the minority. It was less public and did not threaten other Senate business. Thus, it became a more routine means by which to extract concessions. Welcome to the modern Senate, the home of gridlock.

The legislative accomplishments of the 111th Congress have been shaped by senators’ actual or threatened use of the filibuster and responses to it. In following the legislative machinations on both sides of the health reform debate that consumed much of the 111th Congress’s first year, I’ve become more aware of the role of the filibuster and my own inadequate understanding of it. In this and five subsequent posts, I will explore the history and use of the filibuster, countermeasures to it, and proposals for changes to rules governing it. This is my 2010 Summer Blog Project.

In this post I first introduce some basic concepts and dispense with a few topics that I will not develop in detail (though they are important and explored at great length elsewhere). Following that, I present the schedule for subsequent posts. At the end of this post I list selected references that are main, but not exclusive, sources of information for this series or make for good additional reading.

The least important but among the more fun things to know about “filibuster” is the word’s etymology. It’s said to be of Dutch or perhaps Spanish origin and meant “pirate” or “plunderer.” Argh! That suggests something powerful and devious, which is not what the framers intended. But I’m getting ahead of myself.

Gregory Koger, author of Filibustering: A Political History of Obstruction in the House and Senate, commenced his own multi-post series on the subject with some definitions and basic ideas. So shall we. A filibuster is a delay or the threat of delay for strategic gain, whether legislative concessions or politically favorable attention. That definition is sufficiently broad to cover all manner of legislative obstruction, not just ones that lead to a debate-ending (cloture) vote. That is, a filibuster is not defined by the need for 60 votes in the Senate to end debate (the cloture threshold), though that is an often used modern countermeasure to one type of filibuster.

The filibuster isn’t confined to the Senate, though it has become more common in that chamber than in the House in modern times. In the 19th century filibuster frequency was higher in the House than the Senate. Subsequent parliamentary reforms largely eliminated access to delay tactics in that chamber, though some still exist. As Gregory Koger explains, House rules of debate set by the Rules Committee, which is stacked in the majority’s favor, limit the scope for filibuster.

[T]he House increasingly stages straightjacket debates in which the majority chooses how long a bill will be debated (not long, so they can go back to raising money and visiting their districts) and which amendments will come up for a vote (not many, and nothing that gives heartburn to majority party members).

For this reason in the remainder of this series I will focus exclusively on the Senate.

I will not address the extent to which the Senate’s cloture rule is constitutional. I consider that issue settled in favor of constitutionality and refer readers to Koger’s post on that issue.

Schedule

This series will include one post each Tuesday for six weeks. The link in each item below will become live once the post is up.

1. Overview — June 22, 2010 (this post)
2. History — June 29, 2010
3. Recent Use — July 6, 2010
4. Countermeasures — July 13, 2010
5. Proposals for Change — July 20, 2010
6. Deliberate, Not Too Long, Mostly Bills (my favorite reform ideas) — July 27, 2010

Selected References

Beth, R. and Bach, S. (2003). Filibusters and Cloture in the Senate. Congressional Research Service.

Binder, S. and Smith, S. (1997). Politics or Principle: Filibustering in the United States Senate.

Hufford, J. (various). A five-part series on filibuster reform mechanisms at Organon (part 1, part 2, part 3, part 4, and part 5).

Klein, E. (various). Posts related to the filibuster. Washington Post.

Koger, G. (2009). A History of Filibustering. University of Miami Arts and Sciences Magazine. Fall.

Koger, G. (2009). Filibuster Finale. The Monkey Cage. October 26.

Koger, G. (2010). Reforming the Senate 1: Reviewing the Options. The Monkey Cage. March 12.

Koger, G. (2010). Filibustering: A Political History of Obstruction in the House and Senate.

Lilly, S. (2010). From Deliberation to Dysfunction: It Is Time for Procedural Reform in the U.S. Senate. Center for American Progress. March.

Marcus, R. (2010). Yes We Can Fix the Filibuster. The Washington Post. April 21.

The New York Times. (2010). A History of Overhauling Health Care.

Senior, J. (2010). Mr. Woebegone Goes to Washington. New York Magazine. April 4.

I’d like your help. That makes this a bleg.

I only recently learned what “bleg” means. From its use and based on my favorite characterization of Yiddish–as a combination of German and phlegm (h/t Billy Crystal)–I thought for a time that “bleg” was Yiddish for “beg.” It isn’t. “Betn” is. A “bleg” is a request for feedback via a blog, as in “blog” + “beg“.

My bleg is about this: If I’m going to do a 2010 summer blog project I will have to select a topic in the next few months, and I need ideas. A summer blog project (for me) is a multi-post tutorial series on a topic. It is a way for me and you to learn a lot about something we may only know a little about. The topic of last year’s summer project was investment planning.

Is there a topic you’d like to know more about? Let me know either in a comment to this post or by sending me a message through the contact form. Nothing is off limits as a suggestion, though I’m more likely to select something that is consistent with some theme of this blog (e.g. economics, health policy, personal finance, politics, government, law). Think of this as an opportunity to have someone else do the research into something you’ve always wanted to know more about.

If you can’t think of something right now, just write yourself a little sticky note that says, “Ask Austin.” Put it on the edge of your monitor. The next time you are curious about something and don’t have time to do the work to learn about it, perhaps the sticky note will remind you to send me the idea.

This is the final post in a series on investment planning. Here’s a list of the other posts:

1. Investment Planning: The Series
2. Household Budgeting the Easy Way
3. Budget Tracking and Projections (with Quicken Tricks)
4. Willingness, Ability, and Need
5. Estimating a Retirement Budget
6. Need for Risk: The Details
7. Multi-Period Planning and Asset Allocation
8. Investment Planning: Reader Tips, Tricks, and Links [this post]

As promised in the first post in the series, in this concluding post I respond to comments received during this series and list tips, tricks, and links suggested by readers. Actually, I’ve received comments from only one individual so far. But they are good ones and worth discussing.

“traneeinvestor” raised two points in his comment to the sixth post of the series. His first point pertains to accounting for taxes in one’s retirement budget. Though he didn’t explicitly point to a weakness in my plan with respect to taxes, in thinking about his comment I found one. Here is my reply:

Invest in tax-advantaged accounts. Be mindful of taxes and seek the return that achieves your goals in light of them. I implicitly dodged the tax issue by basing one’s retirement income on one’s current income after taxes. Taxes are not explicitly included in the budgeting methodology I suggested in post 2 and post 5. Instead, I suggested including one’s income net of taxes. A safer approach is to put taxes back into the budget and to save enough to pay for those as well. What makes this tricky is that some of one’s retirement income will be tax free (that coming from a Roth, perhaps one’s Social Security income, depending on total income). Also, of course one doesn’t know one’s retirement tax rate well in advance so that requires an assumption. A reasonable conservative approach is to assume one will pay taxes on one’s entire retirement income at a rate at least equal to one’s current rate.

traneeinvestor’s second point was about the safety of the selected safe withdrawal rate (SWR), discussed in post 6. Here is my response.

One ought to regularly monitor the status of one’s pre- and post-retirement portfolio. If adjustment in SWR is required in light of performance then that is what must be done. However, the Trinity study on SWRs to which I referred in post 6 was based on back testing that included up and down years. 3% was found to be safe over a 30 year period in a wide variety of asset allocations, with the exception of 100% bonds. Not safe enough? Reduce it to 2.5% or 2%.

To the extent I thought it necessary, I’ve gone back and edited the posts in the series to reference these issues. If there are other comments made on the series I’ll update this post to include them, at least for a little while. At some point I’ll consider the series done and stop updating the content.

This post has been cited in the Carnival of Personal Finance, hosted by Stretchy Dollar.

This is the seventh in a series of posts on investment planning. For those who haven’t read the first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts in the series:

1. Investment Planning: The Series
2. Household Budgeting the Easy Way
3. Budget Tracking and Projections (with Quicken Tricks)
4. Willingness, Ability, and Need
5. Estimating a Retirement Budget
6. Need for Risk: The Details
7. Multi-Period Planning and Asset Allocation [this post]
8. Investment Planning: Reader Tips, Tricks, and Links

In the prior post in this series I illustrated how to compute the real return required to meet a future investment goal given a fixed real monthly amount to invest. Because downside risk increases with expected return (no free lunch), it is sensible to take more risk at a younger age than at an older age. At a younger age one has more time and ability to recover from a loss (one can work harder, take on another job, forego expenses, etc.). In the years just before retirement those options are more limited.

Translating this notion into expected return, it is sensible to aim for greater return (and more risk) in the earlier years of one’s investment plan and to settle for lower return (and lower risk) in the later years. To illustrate how this might be done, let’s consider a two-period plan with equal length periods. Generalizing to more periods and/or periods of varying length is straight forward.

Using the example of the prior post, suppose a 35 year old investor needs to build a $626,800 nest egg over a 30-year span with $725 to invest per month. We used the Bankrate.com savings calculator iteratively to determine that he required a 5.4% real return over that span. Now let’s break this plan into two periods of 15 years, one for ages 35-50 and one for ages 50-65. The investor wishes to take less risk in the second span and more in the first.

Suppose he expects to achieve a 7% real return in the first period (one can debate whether this is realistic). At this rate he can build up $229,798 by age 50 (calculated using the MSN Money savings calculator). With this much saved by age 50, he can settle for a real return of about 4.5% in the second period to reach $626,800 by age 65 (calculated using the Bankrate.com savings calculator). The astute reader will have noticed a degree of arbitrariness in this exercise. How should one allocate return (risk) across periods? Should the investor described above aim for a lower (more realistic) return in the first period, requiring a higher one in the second? I do not think logic alone can answer this question. One has to use one’s own subjective judgment.

With the next step we penetrate even deeper into the jungle of subjectivity. How does one select investment vehicles expected to obtain the return(s) computed in the preceding step? The ways are manifold; it is an underdetermined problem. This is the question of asset allocation about which a great deal has been written and many debates waged. The equity/bond ratio is the most basic decisions, but there are many others: the domestic/international mix of equity, the nominal/inflation-adjusted mix of bonds, whether or not to use market capitalization weights, whether or not to use index or managed funds, the placement of funds for tax efficiency, among others.

To my mind, some issues are settled, either by reason or empirics, or both. For instance, I’m convinced of the superiority of diversification, low fees, certain tax efficiency strategies, and indexing. Even with these as necessary constraints on choices, there is a lot of room for variation.

Ideally, one would like the portfolio expected to provide the required after-expenses, after-tax return with the lowest expected risk. In principle, with a precise definition of risk one could back test a wide range of strategies and select the optimal one. By equating risk with variance modern portfolio theory specifies an optimal (efficient) portfolio. To find the optimal portfolio one needs to estimate future asset correlations (recent past asset correlations can be found at assetcorrelation.com). However, asset correlations fluctuate, and predicting future correlations with useful precision is problematic (as discussed on the Bogleheads Investment Forum). This approach is just not practical, at least not for the average non-institutional, do-it-yourself investor.

The best one can do is to select a style of portfolio according to one’s taste and tune the percentage allocations to match an expected return. Fortunately, there are plenty of places to learn more about asset allocation issues. My favorites are the Bogleheads suite of sources: The Bogleheads’ Guide to Investing (new edition expected out in the fall of 2009), the Bogleheads Investment Forum, and the Bogleheads Wiki. TFB has reviewed many other relevant books. Using these (or others) as guides, one can select a class or style of portfolio that suits one’s taste and that is consistent with the constraints implied by the analyses presented in this series.

With that, I conclude my portion of this summer project on investment planning. The next post will be based on your assignment (given in the first post of the series). In it I will share reader inquiries and comments and provide any tricks, tips, and links that have been sent to me by others throughout this series.

This post has been cited in the Carnival of Personal Finance #219, hosted by Your Money Relationships.

This is the sixth in a series of posts on investment planning. For those who haven’t read the first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts in the series:

1. Investment Planning: The Series
2. Household Budgeting the Easy Way
3. Budget Tracking and Projections (with Quicken Tricks)
4. Willingness, Ability, and Need
5. Estimating a Retirement Budget
6. Need for Risk: The Details [this post]
7. Multi-Period Planning and Asset Allocation
8. Investment Planning: Reader Tips, Tricks, and Links

This post builds on prior ones in the series and I assume the reader has read them. So far I’ve covered the development of a current household budget, discussed how to use it for tracking and projections, related the surplus it indicates to ability for risk, and used it to estimate a retirement budget. The retirement budget indicates how much investment income (which includes the possibility of spending principal) one expects to need in retirement (in current dollars). What will be the source of this investment income?

The source I will focus on is a portfolio of securities, or what I will call a retirement nest egg. Other sources include various types of annuities, which I will not discuss. To keep things simple, let’s assume you expect to live for up to 30 years in retirement and you do not wish to leave funds to your heirs. In this case, how big a nest egg do you need to generate a specific level of income?

A key concept is the notion of a safe withdrawal rate (SWR): the inflation adjusted percentage of your nest egg value (at time of retirement) you can withdraw annually with very small risk of out-living your money. In the now classic “Trinity study,” Cooley Hubbard, and Walz found, based on back-testing, that a 3% SWR was safe for a wide range of asset allocations.

By definition of SWR,

[Eqn. 1] investment income = SWR x (initial nest egg),

where “investment income” is in constant dollars. Thus the initial nest egg (at time of retirement) must be

[Eqn. 2] initial nest egg = (investment income) / SWR

for a given investment income.

In the example of the previous post (see spreadsheet), an investment income of $1,567 per month or $18,804 per year was required. Using Eqn. 2 and an SWR of 3%, this translates into an initial nest egg of $626,800 in current dollars.

We have now established the necessary inputs for designing a retirement investment plan: ability to invest (the surplus of the current household budget), dollar goal (initial nest egg), and time span (between now and date of retirement). What return on investment is required to satisfy these constraints? This classic finance problem is easily solved using a financial calculator, spreadsheet, or any number of online savings calculators.

Let’s solve the specific problem implied in this spreadsheet and referenced above. Assume the budgets in the spreadsheet are for an investor age 35 years wishing retire at 65, a 30 year span. He needs to build a $626,800 nest egg and has $725 (his budget surplus) to invest per month (assuming he’s investing nothing via a payroll deduction). Using, the Bankrate.com savings calculator iteratively, we find that he will need an annual return of 5.4% to reach his goal. This is the real rate of return required. The nominal rate required will be this rate plus the inflation rate. Assuming inflation of around 3%, a rate of 5.4% + 3% = 8.4% will be required.

The investor will need to inflate his monthly investment as well: $725 is the real amount. This reflects the virtue of budget tracking. By tracking one’s budget, one can periodically reassesses one’s needs and income as they grow with inflation and be sure one’s surplus is growing at a sufficient rate.

Is the 5.4% real rate determined above reasonable to expect? If the hypothetical investor of the example thinks not then he should go back to his budget and see if he can find ways to scrape together some additional funds to invest and re-compute the necessary rate of return. What’s a reasonable maximum real rate of return? Real rates of return are expected by Rick Ferri and William Bernstein to be no higher than 7%, depending on asset class. So 5.4% does seem like a reasonable goal.

Once one has determined the necessary rate of return, the next step is to develop a plan to achieve it. That’s the topic of the next post in the series.