by Archie M. Richards, Jr., CFP^®
May 12, 2003

Grayson, who has invested successfully over the years and is now retired, calls me on the carpet for not recommending equity-income funds for retired people instead of broad-based index funds. (Equity-income funds are mutual funds that choose stocks paying relatively high dividends.) He also suggests that the United States may be “at the beginning of a decade like the 1970s,” when stocks took a terrible licking. If conditions of the seventies return and he doesn’t own equity-income funds, he’d have to sell shares “at a bad time” to cover his living expenses.

Your point about equity-income funds is well taken, Grayson. Many retired people are not as comfortable as I am about sacrificing current income for long-term growth. In making recommendations, I shouldn’t disregard them. I do continue to recommend that 40 percent of a portfolio be invested half in real estate investment trusts and half in long-term bonds. These investments are diversifications, and they both pay high income.

Here’s the main point on which we differ: The United States is not at the beginning of a decade like the 1970s - nothing like it. Here are some of the policies that prevailed then:

• Top income tax rates of 70 percent. It always takes a great deal of capital investments to provide employment for one person. (Today, that cost is about $500,000.) For the most part, the money comes from rich people. In the 1970s, the wealthy paid so much income to the government that they had little left over to fund capital investments. The result: high unemployment.

• Strict price controls on trucking. In the 1970s, it was generally illegal for a trucking company to carry tomatoes into a city, for example, and return to the country with furniture. The Interstate Commerce Commission required that the truck return empty. Big trucking companies could afford the extra costs imposed by the ICC’s requirements. New companies couldn’t afford them and therefore couldn’t break into the business. Regulatory agencies tend to protect the major companies they regulate.

• Strict price controls on airlines. The Civil Aeronautics Board set high prices on airline tickets. Competition between airlines wasn’t permitted. When the price controls were repealed, ticket prices plummeted, and airline traffic soared, benefiting everyone.

• The telephone company was a government-imposed monopoly. No competition there. Telephone charges were sky high.

• The government insisted that banks pay relatively low rates of interest for deposits. But with inflation high, depositors wanted higher rates than those permitted. They withdrew their money from banks and invested in money market funds, which weren’t subject to the same requirements. Money invested in banks has more impact on the economy than money placed in non-banks. With the banks short of money, the entire economy suffered.

• The government imposed wage and price controls on the entire economy. Wage and price controls are always a disaster. The broader the controls, the worse the effects.

The improvements between then and now are enormous. Top tax rates are nearly half the 70 percent they were in the 1970s, and Congress is squabbling about reducing them more. The Interstate Commerce Commissions and the Civil Aeronautics Board no longer exist. Telecommunications are subject to competition. There are no controls on interest rates and few controls on prices.

Since the 1970s, several billion people have been released from the ravages of Communism. All over the world, people are freeing themselves from government controls and discovering the wonderful benefits of free markets. The richer foreigners are, the more they can spend on American products.

Best of all, term limits are being imposed on the legislators of more and more states. Within a few years, term limits will probably reach Congress. A rapid turnover of amateur politicians in Congress will result in greater political courage, lower government expenses, and improved policies.

Conditions are different than they were in the 1970s. They’re far better.