Tuesday, November 16, 2010

The Middle-Class Squeeze: Thanks Social Conservatives

One of our readers raised several questions related to my last post:
  1. I get that the wealthy have done real well, but what about the middle-class?
  2. In the 80’s Republicans told us that wealth would “trickle down,” did it?
  3. If things are getting worse for the middle and working class, why do they keep voting for people who clearly work against their financial interest?

The Economic Policy Institute data tracking income and wage patterns show that the majority of income growth has for decades gone to a startlingly small number of top earners, while other workers have suffered a persistent stagnation or even decline in real earnings.  While many middle-income families have lost jobs, homes, and retirement savings during the latest recession, their economic woes date back much further.
34.6% of all income growth over the past three decades has gone to the top one-tenth of 1% of all earners. By contrast, the bottom 90% of all earners has collectively seen only 15.9% of all income growth over the same period.

And it shows that this general wage stagnation has occurred even as the country has enjoyed large gains in productivity:
“The benefits of this growth have not accrued to the typical worker,” said Mishel, co-author of The State of Working America, during his recent Senate testimony.  For the past 30 years, the real income of the middle class, adjusted for inflation has been stagnant, while the wealthy capture the lion’s share of our economy’s output.
  The reader can discern from the two charts above that the major changes happened 30 years ago when corporations and the wealthy made their concerted effort to capture more of the pie, as discussed in my last post.
So why have the middle and working class allowed this to happen, or more precisely, why do they keep voting for people who pass laws that clearly work to reduce their financial well-being?  The answer is best captured in the landmark book, “What’s the Matter with Kansas,” by journalist and historian Thomas Frank.
Frank discusses how the corporations, their lobbyists and the wealthy, who want to push laws that benefit them – tax policy and deregulation – co-opted the social conservatives to form a powerful coalition.  The economic conservatives promised the social conservatives that they would fix the laws on abortion, gay rights, school prayer and the like, if they supported them.
This conservative coalition is the dominant coalition in American politics, and that since the coalition formed in the late 1960s, it has been "fantastically rewarding" for the economic conservatives. The policies of the Republicans in power have been exclusively economic, but the coalition has caused the social conservatives to be worse off, due to these very economic policies and because the social issues that this faction pushes never go anywhere after the election. Abortion is never outlawed, school prayer never returns, gay rights increase in every cycle.  The very capitalist system the economic conservatives strive to strengthen and deregulate promotes and commercially markets the perceived assault on traditional values.
Ronald Reagan was the premier example of a politician who represented the interests of the wealthy while making all sorts of promises to the social conservatives.  Once in office, he spent almost no time pushing a social agenda, focusing instead on cutting taxes and regulations.  George Bush 1 and 2 followed the same pattern, as do most conservatives in Congress.  The social conservatives continue to hold out hope for social change, while their chosen representatives spend the majority of their time redistributing their constituents’ wealth to Wall Street and the corporate executives, instead of fighting the culture wars through legislation. 
So, thirty years later, the social conservatives, partnering with economic conservatives,  have little to show in the way of wins on the social front, but they have lost tremendous ground economically, along with the rest of the  middle and working class, experiencing  massive debt, income stagnation, loss of homes and jobs, AND a lower life-expectancy than their wealthy neighbors.  Well done!




Monday, November 15, 2010

Sorry RIch Dudes, Time to Pony Up

To extend the Bush tax cuts for the richest Americans will require the US to borrow $700 billion from the Chinese.  Not only will the tax cuts add to America’s financial wows, but the growing income inequality it will create will tear at the very fabric of our society.  It’s not even compelling to argue for tax cuts on fairness grounds, given how the rich have become so rich over the last 30 years.
Yale’s Jacob Hacker and Berkeley’s Paul Pierson, in their ground-breaking book, “Winner Take All Politics.” argue persuasively that the economic struggles of the middle and working classes in the U.S. since the late-1970s were not primarily the result of globalization and technological changes but rather a long series of policy changes in government that overwhelmingly favored the very rich.
Those changes were the result of increasingly sophisticated, well-financed and well-organized efforts by the corporate and financial sectors to tilt government policies in their favor. From tax laws to deregulation to corporate governance to safety net issues, government action was deliberately shaped to allow those who were already very wealthy to amass an ever increasing share of the nation’s economic benefits.
The book describes an “organizational revolution” that took place over the past three decades in which big business mobilized on an enormous scale to become much more active in Washington, cultivating politicians in both parties and fighting fiercely to achieve shared political goals.
The outcome of this concerted effort is that the richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976.   From 1980 to 2005, more than 80% of the total increase in American incomes went to the richest 1 percent.  
 C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Last year was a terrific year for those at the very top.  Executives at the nation’s 38 largest companies earned a stunning total of $140 billion — a record. The investment firm Goldman Sachs paid bonuses to its employees that averaged nearly $600,000 per person, its best year since it was founded in 1869. 
Have corporate executives earned their hefty pay-checks?   Just look at the stock-market over the last 10, 20 or even 30 years to see that corporate executive pay has far outstripped the value they’ve added to their companies share prices.  The Wall Street gang, who get enormous rewards when their bets payoff, and receive no penalty when they don’t, have a built in incentive to take crazy risks with your money, and they do.  Main-stream economists have shown clearly that Wall Street actions have eroded the financial system’s stability while creating unprecedented risk, all the while lining the pockets of a few very clever financiers.
To raise the taxes on this group, is only to recover some of the wealth that can easily be thought of as ill-gotten gains.  In economics parlance, the government would simply be re-claiming the transaction costs, the externalities, as it were, embedded in the flawed system that tilts toward the stinking rich.
Another compelling reason to focus on taxation is that income-tax policy has changed very dramatically during the last 30 years. Before Ronald Reagan's election in 1980, the top income tax bracket stood at or above 70 percent, where it had been since the Great Depression.   As the economy boomed and income inequality dwindled, the top bracket resided at a level that even most Democrats would today call confiscatory. Reagan dropped the top bracket from 70 percent to 50 percent, and eventually pushed it all the way down to 28 percent. Since then, it has hovered between 30 percent and 40 percent. If President Obama lets George W. Bush's 2001 tax cut expire for families earning more than $250,000, Tea Partiers will call him a Bolshevik. But at a whisker under 40 percent (up from 35), the top bracket would remain 30 to 50 percentage points below what it was under Presidents Eisenhower, Nixon, and Ford. That's how much Reagan changed the debate.
And if Republicans are worried about long-term budget deficits, a reasonable concern, why are they insistent on two steps that nonpartisan economists say would worsen the deficits by more than $800 billion over a decade — cutting taxes for the most opulent, and repealing health care reform? What other programs would they cut to make up the lost $800 billion in revenue?
If you aren’t convinced that we need to let the Bush tax cuts expire on purely economic grounds, maybe a look at the societal consequences of income inequality will move you.  Robert H. Frank of Cornell University, Adam Seth Levine of Vanderbilt University, recently wrote a fascinating paper suggesting that places where inequality increased the most also endured the greatest surges in bankruptcies.  Another consequence the scholars found: Rising inequality also led to more divorces, presumably a byproduct of the strains of financial distress.
Richard Wilkinson and Kate Pickett, two medical researchers based in Yorkshire, relate income inequality trends to mental and physical health, violence, and teenage pregnancy. But their larger point—that income inequality is bad not only for people on the losing end but also for society at large—seems hard to dispute.

The United States' economy is currently struggling to emerge from a severe recession brought on by the financial crisis of 2008. Was that crisis brought about by income inequality? Some economists are starting to think it may have been. David Moss of Harvard Business School has shown that bank failures tend to coincide with periods of growing income inequality. "I could hardly believe how tight the fit was," he told the New York Times. Princeton's Paul Krugman has similarly been considering whether the Great Divergence helped cause the recession by pushing middle-income Americans into debt. The growth of household debt has followed a pattern strikingly similar to the growth in income inequality.

Some scientists believe that growing inequality leads to more health problems in the overall population — a situation that can reduce workers' efficiency and increase national spending on health, diverting resources away from productive endeavors like saving and investment.
Other researchers have focused on how income inequality can breed corruption. That may be especially true in democracies, where wealth and political power can be more easily exchanged, according to a study of 129 countries by Jong-Sung You, a graduate student at the Kennedy School of Government at Harvard, and Sanjeev Khagram, a professor of public affairs at the University of Washington in Seattle.
Corruption, of course, can hurt growth by reducing the efficient allocation of public and private resources and by distorting investment. That may end up creating asset price bubbles.
Unchecked inequality may also tend to create still more inequality. Edward L. Glaeser, a professor of economics at Harvard, argues that as the rich become richer and acquire greater political influence, they may support policies that make themselves even wealthier at the expense of others.
In the United States, there is plenty of evidence that this has been occurring. Bush administration policies that have already reduced the estate tax and cut the top income and capital gains tax rates benefit the well-to-do. It seems hardly an accident that the gap between rich and poor has widened.
As Warren Buffet recently said, “we are in a class war, and my class is winning.”  If we are serious about financial stability, fairness, and a well-functioning society, we can start by increasing the taxes on the wealthiest Americans, who have for too long enjoyed a field heavily tilted in their favor.  Long-term, we will need to address the dynamics that have enabled the wealthy to take so much ground.  As Warren Buffet recently said, “we are in a class war, and my class is winning.”




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Monday, November 1, 2010

The Truth About Welfare

It appears that many Americans are stuck in the 80’s when it comes to understanding the state of Welfare in 2010.  Let me bring you up to date.  On August 22, 1996, President Clinton signed welfare reform legislation, effectively “ending welfare as we know it.”  The legislation eliminated the generous benefits contained in Aid for Families with Dependent Children (AFDC) in favor of the limited benefits of the Temporary Assistance to Needy Families (TANF).  New rules applied, requiring all able bodied adults to work, and for families to move from “welfare to work.”   Strict limits were placed on the length of time a family could spend in the program (states had latitude on limits, and most chose 2 years as the limit, some up to five years for extreme cases).   Fifteen years later the results are mixed.
In one sense, welfare reform has been extremely effective, reducing the welfare rolls from nearly 15 million in the early 90’s to less than 4 million in 2009.  As a percent of the total population, the number of recipients of welfare is at the lowest level ever. 
Pre-reform, the knock on welfare was that it created “an endless cycle of generational poverty.”  This was hotly debated with many studies showing that the abuses of welfare were small and inconsequential.  Still, both Democrats and Republicans found it politically rewarding to push for welfare reform.  Today, over half of TANF recipients are on the program for less than 4 months, and over two-thirds for less than a year.  The days of endless welfare support are virtually gone.  Yet the perception of the welfare queen endlessly abusing the system at enormous tax-payer expense lingers on.
The worst fears of welfare reform did not materialize in the high-employment years following its passage.  The economy easily absorbed those transitioning from welfare to work, providing new skills, hope, and economic improvements for many.  It was not all good news of course.  Many people found work in low-paying, mind-numbing jobs with no future, no healthcare, and no real improvement to their lives, but, hey, they were off the dole.
The question today, amidst  the worst employment environment since the Great Depression, is, have we gone too far? 
There are now roughly 40 million Americans living below the poverty line, the majority women and children.
Although 10.6 million, slightly more than two thirds, of adult women in poverty have health insurance to help cover costs, another 4.9 million (32 percent) are not covered. For nutritional support, 5.9 million women in poverty are using food stamps, but 9.6 million (62 percent) are not. Meanwhile, fewer than 750,000 poor adult women with children receive cash aid through TANF while 5.4 million — a substantial majority of women in poverty with children (88 percent) — do not get that support.
Making the rolls decline got to be a badge of honor for states," says Ron Haskins of the Brookings Institution, who led the Republican staff on the House panel that wrote much of the welfare reform law. "The evidence now is that it is not a very good safety net."
Read more at


How bad is that deficit?

Every time there is a down cycle in the economy, there is a cacophony of demands to cut taxes, slash “entitlements,” and balance the budget.  All things equal, lower taxes and more efficient government programs are desirable, but just how bad are things really, and what can be done about it?  Let’s drill down on the data and see if we can critically and calmly assess the situation.
In 2009, the Government received $2.7trillion (income tax, social security tax, corporate taxes, etc.), and created a budget of $3.1trillion.  By the way, the wars in Afghanistan and Iraq aren’t part of the budget, and there are other mandatory expenditures which are also off budget.   As best as most experts can tell, we had a deficit of about $1.4 trillion in the 2008-2009 budget (Bush’s last), and to balance the budget by 2015 will take finding over $1trillion each year.  So, where do we find that?
Of the $2.7trillion taken in, 54% ($1.5 trillion) was spent on military-related items  including 80% of the interest on the national debt which was created due to military spending.  This is important folks, so I will repeat:  80% of interest paid on the national debt is directly related to the debt incurred to support the military.  Most analyses of the US Budget create a separate wedge in the budgetary pie chart called “interest on the debt,” never identifying where it came from.   This masks the source of that interest which is debt to support the military.  Roughly $200billion of this expenditure is “The Global War on Terror.”   Of course defense spending is a sacred cow.  No Republican would vote to cut defense spending , and woe to the Democrat who tried.  He would be called an unpatriotic traitor.  O.K., so where else do we cut?
Social Security makes up about $644Bilion of the budget, no politician is willing to touch this one either.  Can you imagine the political ads against the guy who tried to cut grandma’s social security?  Where do we look next?
Medicare is $408Billion, the bulk of which is for the Bush prescription drug program passed in 2003 with a  10 year cost around $1trillion.  Again, imagine the ads of the politician who suggests cuts here.
 The next biggest item on the list is a big bucket of safety net programs that includes unemployment and poverty related benefits to the tune of $308billion.  We could take a whack at that.  Assuming most Americans are compassionate and wouldn’t want to eliminate these programs, how much would you be willing to cut to balance the budget - $10billion, $50billion, more?  You think there is fraud?  How much?  50%, more?  Independent analysis suggests that the range of fraud could be as much as 20%.  We could invest in more oversight to reduce that amount, but it is well understood that you reach a point of diminishing returns pretty quickly.  Even if we magicly cut benefits by 20% to save $60billion per year, we are a drop in the bucket on the $1trillion-plus needed.  But does cutting the deficit really matter?
The deficit, which has been rising since the Bush Tax Cuts eliminated the surplus created during the Clinton era, is roughly 10% of GDP, and not near any historical highs.    Likewise, our overall debt is not particularly high by historical standards on an inflation adjusted basis.  For example, we have roughly four times as much debt today as we did in 1950, but we have over 12 times the GDP.   When making historical comparisons, make sure you do it on an inflation adjusted basis!  It’s not the absolute numbers that matter.  Our national outlays continue to run at roughly 20% of GDP.  You can play with all of these fun numbers at http://www.marktaw.com/culture_and_media/TheNationalDebt.html and http://en.wikipedia.org/wiki/2009_United_States_federal_budget
But lets say, you still feel strongly that “something should be done” to reduce the debt and/or deficit.  Well, like all good politicians, President Obama has assembled a blue ribbon bi-partisan commission to look at getting the budget balanced by 2015.  The panel is made up of Republicans and Democrats and thought leaders from industry and academia.  You’re gonna love what they came up with. 
Well, I’m sure they saw, what you see when you break down the budget.  Going after things like welfare, or NASA or National Endowment for the Arts, might feel good at some base level, but it won’t save much money.  No, the real money is in middle-class entitlements (and defense, of course).  So, if you want to balance the budget by 2015, the panel recommends saving $1 trillion dollars per year by eliminating or reducing
1.       Interest rate deductions on home mortgages.
2.       The child tax credit
3.       The ability to pay health care premiums with pre-tax dollars.
They also saw the obvious need to go after defense spending, honing in on what we spend with outside contractors.  Passing this through Congress should be fun.  You can read about the committee at http://online.wsj.com/article_email/SB10001424052702304354104575568643889337142-lMyQjAxMTAwMDIwNTEyNDUyWj.html
Maybe, the deficit isn’t so bad after-all?

Wednesday, October 13, 2010

Vermont Economics and the Creative Economy

There are many great and vibrant places in the world.  Having lived in some (Boston, London, SanFranciso, Sevilla), and visited many more (Shanghai, Tel Aviv, Buenos Aires, to name a few), I've always been fascinated by the conventional wisdom in Vermont that we have a great quality of life that should attract businesses, but for our horrendously negative business environment.  Taxes, Welfare, Permitting, fix those and businesses will move here in droves, I hear.  I'm told Vermont has more than its share of lazy workers who would prefer to be on the dole.  What's the Truth?

It turns out that Vermont is middle of the pack on most giveaway programs.  A little research on state and federal sites like http://www.usgovernmentspending.com/ and http://www.bls.gov/ and projects.propublica.org, to name a few, shows that, for example, Vermont spends $928 per capita on welfare, versus $1,114 in Massachusetts and $1200 in New York.  The national average is $800, and New Hampshire is $640.  There is no evidence that people are streaming into Vermont for the great benefits.

Vermont provides middle of the pack unemployment benefits that range from $60 to $425 per week at yearly cost of $329 per worker.  Workers comp is similarly unexceptional.  Our unemployment rate is one of the lowest in the country.

Now, we can all tell stories of the "welfare queen" (a term coined by Ronald Reagan about a woman, who turned out not to exist, who exploited the welfare system in Chicago), or the person we know who was a crappy employee, but one doesn't develop policy on anecdotes.  Facts work much better.  Of course, one can cut the numbers in any number of ways to try to make the case that Vermont is anti-business, but as someone who built businesses in "Taxachusetts" and has worked with many excellent Vermont businesses as a strategy consultant, I just don't see it. So why does Vermont struggle economically?

Well, I'll grant that Vermont does have an issue related to labor.  No one will want to hear this, but at the macro-level, Vermont does not attract enough of the best and the brightest - entrepreneurs, venture capitalists - who drive an economy.  Richard Florida of Creative Economy fame makes the case vividly that the best and the brightest choose to be around others of their ilk, and flock to Boston, New York, SanFrancisco and other centers of innovation and excitement, creating a virtuous cycle of opportunity and attractiveness. 

Florida goes on to demonstrate that rural economies will increasingly face a competitive disadvantage in the global economy because the regions that have been winners in the information age, will continue to win (check out housing costs in Boston, NY and Silicon Valley, to test the theory).  Anecdotally, most of my Wharton buddies simply would not have considered Vermont as a place to build a career when Manhattan, Cambridge and Silicon Valley beckoned.  Further, as an angel-investor helping to finance young companies, I can tell you that there are very few exciting deals in Vermont compared to the more thriving entrepreneurial centers.  During the dot-com boom, not a single IPO came out of Vermont, at a time when any sharp MBA with a good idea was going public (for better or worse).  Yes we have great individual success stories here, but again, that is not what sound analysis is based on.

So what do we do?  Well first we need to stop using our tax, welfare and permitting policy as a scapegoat.  Then we have to acknowledge that there are structural issues associated with being a rural state (especially a very cold and cloudy rural state)  that make it impossible for us to compete in the global economy on MOST dimensions.  We need to stop hoping that Vermont can be a leader in the Green Economy (we might be able to win in certain very narrow subsegments). 

We need to recognize that not everyone was cut out to be an entrepreneur and run their own business.  Having a profitable business is not a right.  It is not our job to provide subsidies, tax credits or marketing dollars so that every small business owner can make a profit.  I would love it if the government would pay people to hear me sing Bruce Springsteen songs, but as a singer I suck.  Being a business owner is no more a right than being a Rock Star.  Great business people with great products don't need government handouts (though they'll always take them if offered).  If we are going to help businesses, lets be smart about it, and help businesses that can really win, and create jobs and wealth. 

We need to hire McKinsey, Monitor or Bain to do a detailed analytical study on the Vermont economy to find those very narrow niches where we might be able to compete globally (yeah, I know they come from the coastal elite class, but they've helped other states and regions beyond measure).  It will mean picking winners and losers.  It will mean tough conversations with parts of the state that may never excel, but may benefit from the growth in others.  Once we have clarity on where we can generate a competitive advantage, we need to invest.  It will require tremendous focus from our academic institutions, business leaders and government.  And it will still be tough because of the dynamics associated with The Creative Economy, but at least we'll be focused on the right problem.

Thursday, October 7, 2010

Taxes, Jobs and The Deficit

What's a policy-maker to do?  Forget whether it even makes sense to try to stimulate jobs and/or reduce the deficit, the public demands both.  So do you let the Bush Tax Cuts expire, extend them for all, exclude the wealthy? 

Let's ask Bruce Bartlett, former Reagan Economic Advisor (from his blog):
Anyone who thinks that raising the top rate to 39.6 percent, as President Obama has proposed, will produce less revenue than the current top rate of 35 percent produces is nuts. Rich people are not going to quit working or make a significant effort to hide income or engage in tax-sheltering activity at that rate. We know this with certainty because the top rate was 39.6 percent during most of the 1990s and we did not see that happening. It's worth remembering also that the top rate was 50 percent during the Reagan administration.

What does Robert Reich, Clinton's Labor Secretary have to say:
From a strictly economic standpoint – as if economics had anything to do with this – it makes sense to preserve the Bush tax cuts at least through 2011 for the middle class. There’s no way consumers – who comprise 70 percent of the economy – will start buying again if their federal income taxes rise while they’re still struggling to repay their debts, they can’t borrow more, can no longer use their homes as ATMs, and they’re worried about keeping their jobs.
But the same logic doesn’t apply to people at the top, earning over $250K, who represent roughly 2 percent of tax filers. Restoring their marginal tax rates to what they were during the Clinton administration (36 and 39 percent) won’t inhibit their spending. That’s because they already save a large portion of what they earn, and already spend what they want to spend. (During the Clinton years the economy created 22 million net new jobs and unemployment dropped to 4 percent.)
But restoring those top marginal tax rates will help bring down the long-term debt, pulling in almost a trillion dollars of revenues over next ten years. That’s not nearly enough to make a major dent in the nation’s projected deficits, but it’s not chicken feed either. It would at least signal to financial markets we’re serious about cutting that long-term deficit – and the rest of us will chip in when the economy strengthens.

What About A Flat Tax?
Any discussion of tax reform should include an open-minded discusion of the flat-tax.  We can all agree that the current tax system is messy, and the flat tax seems so simple and "fair."  But fairness is always in the eyes of the beholder.  If we switched to a flat tax today, it would create a massive transfer of wealth from the poor and middle-class to the wealthy.  We have 40 million Americans living in poverty, and many middle-class Americans living on the edge.  Adding to the tax burden of most Americans just to simplfy the the tax system and create the patina of "fairness" for the wealthy would not be smart.

Clemson University economics professor Holley Ulbrich, a longtime foe of the flat-tax, who asks: how would you feel about losing your mortgage-interest deduction on your taxes? She warns of:
"...the disruptive effect of eliminating deductions, credits and exclusions that benefit the middle class as well as the rich and that play important roles in our lives—pension contributions, employer-provided healthcare, and deductions for mortgage interest, property taxes, and charitable contributions that support everything from soup kitchens to education to the arts. A flat tax would shift tax obligations from the rich to the poor, and especially the middle class, and eliminate desirable tax incentives for retirement savings, home ownership, and charitable contributions. Simple? Yes. Efficient and equitable? Not so much."
What about fairness to the wealthy?
My friend Jeff is concerned that "unfairly" taxing the wealthy who only comprise 2% of the population, and thus have a small electoral voice, is taxation without representation. 

Again Robert Reich speaks:
"Not only is income and wealth in America more concentrated in fewer hands than it’s been in 80 years, but those hands are buying our democracy as never before – and they’re doing it behind closed doors.
Hundreds of millions of secret dollars are pouring into congressional and state races in this election cycle. The Koch brothers (whose personal fortunes grew by $5 billion last year) appear to be behind some of it, Karl Rove has rounded up other multi-millionaires to fund right-wing candidates, the U.S. Chamber of Commerce is funneling corporate dollars from around the world into congressional races, and Rupert Murdoch is evidently spending heavily."

The wealthy have always had political access and influence far beyond their numbers.  They have done very well in the past few decades, accumulating wealth as never before.  It was not the poor and middle-class who have over time moved the top-rate from 91% under Eisenhower to 35% under Bush.  It was not the masses who lobbied Congress successfully to ensure the income of hedge fund managers are taxed at cap gains rates.  No, the wealthy are doing just fine ensuring their interests are represented, buying votes with their campaign contributions. 

Strongjoe

Strongjoe was born in a cafe in Stowe Vermont. His mother drank too many triple- shots while nursing, and now the guy is an over-caffeinated defender of truth. He will use this blog to unmask the Misleaders who distort and manipulate the truth. Be aware Strongjoe is arrogant, sarcastic, and biting, but he tells the truth. If you like your politics the way you like your coffee - strong and a little bitter- stick around.