Are We Misinterpreting the Populist Political Movement?

Posted on April 19, 2016 by tonyj126

The popularity of Donald Trump and Bernie Sanders this primary season has baffled many political players. They speculate that the electorate is sending a message, or that the country has gotten so polarized that only the candidates with extreme views are inspiring such emotional support. I think it’s something else. I think it’s desperation – the kind of desperation that makes one take a network marketing job because there are just no other options out there.

The economy has been improving steadily, but for a lot of people, too slowly and with too few of the “good jobs” that were lost during the recession. The impression that the economy is doing poorly comes from conservative and liberal pundits telling us that everything is terrible and it’s the other side’s fault.

A lot of Americans were hit hard during the Great Recession. Many lost their jobs or houses. Some panicked and sold their investment portfolios after the market had dropped substantially. Everyone remembers the stress and anxiety and most know another downturn could come at any time. Americans just don’t feel as secure as they did ten years ago, and for good reason – they’re not.

So what do you do at times like this?

Some take steps to protect their assets by paying down debt and controlling their spending. Some evaluate predictions for employment sector growth and begin working toward degrees or certifications in fields which are expected to grow or are less susceptible to outsourcing or automation (e.g., automation (ironically), programming, plumbing).

Others swing for the fences (baseball term – it means the batter swings with reckless abandon rather than precision, and if successful, gets a home run). Often, one swings for the fences out of desperation.

The populist movement which manifests as fervent support for Donald Trump and Bernie Sanders is a result of people swinging for the fences. Out of desperation, they are placing their bets on these two outsiders because the current system is not working for them.

Donald Trump’s supporters want to turn back time to when the U.S. was the world leader in manufacturing and good jobs were easy to find. Bernie Sanders’ supporters want to turn back time to when we collectively took better care of our fellow citizens.

But why do their supporters believe that Trump and Sanders can do what they say? Because they’re desperate and they’re swinging for home runs.

The connection to network marketing companies occurred to me while researching for the “Donald Trump’s American Dream” post. Trump’s promises of financial success in his promotional video for The Trump Network sound exactly like his political promises. The video is available at http://www.nationalreview.com/article/432468/donald-trump-networks-failure-harmed-small-investors and I’ve included a partial transcript below:

“At no time in recent history has our economy been in the state that it is today. It’s a mess. The economic meltdown, greed, and ineptitude in the financial industry have sabotaged the dreams of millions of people. Americans need a new plan. They need a new dream.

“The Trump Network wants to give millions of people renewed hope and with an exciting plan to opt out of the recession. Let’s get out of this recession right now. With cutting edge health and wellness formulas and a system where you can develop your own financial independence, The Trump Network offers people the opportunity to achieve their American Dream.”

I do not have a high opinion of multi-level marketing businesses. They are designed to enrich those who get in first and are built on a pyramid scheme-type model. I’m not saying they are pyramid schemes, but in order to succeed, they need an ever increasing number of marketers to join up. The person at the top makes money from everyone who joined after him or her, while the multitudes at the bottom have a difficult time getting others to join once the market becomes saturated.

Great salespeople and those with a lot of friends whom they might be able to convince to buy in may do very well in this kind of business. For most who join a mature multi-level marketing company, however, it may be desperation that drives their decision – they just didn’t have any better options. Still, they recognize that they will have to work hard in order to succeed.

Donald Trump is a great salesman. CBS News produced the story about The Trump Network because it was a failed business venture that incorporated the Trump name, and because Donald Trump constantly reminds the public that he is a great businessman. Trump is right. While CBS News considers The Trump Network to be a business failure, I doubt it was a failure from Trump’s perspective. I assume Trump made millions of dollars – perhaps tens of millions – in the 2-1/2 years of the company’s life. I would consider that a business success.

Now Donald Trump is selling himself as a fantastic businessman and tells us that he wants to do for the country what he has done in his business life. That concerns me. While his companies employ plenty of people, his business ventures are designed to funnel money from the lower and middle classes up to himself. Most marketers in The Trump Network did not reap the financial rewards that Donald Trump promised in the promotional video. Many lost money from the venture.

One difference between Trump’s political supporters and the marketers in The Trump Network has to do with hard work. The marketers knew they would have to work hard to succeed, but the political supporters seem to thing that Trump will just take care of the country’s problems on his own. Why? He tells them so, and because he’s a great salesman, they believe it.

For Bernie Sanders’ supporters, there’s more of a cause-and-effect relationship. His policies will provide a better social safety net for less fortunate Americans, and he’ll do it by collecting more taxes from the wealthy. While that makes sense, Hilary Clinton’s claim that it would be hard to accomplish with the republicans in control of Congress is reasonable. Still, Sanders’ supporters can dream, can’t they? Like Trump’s supporters, they are desperate for a change.

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A Baby Boomer Worries About Millennials

Posted on April 18, 2016 by tonyj126

That may not be a surprise, but I don’t mean it in a, “Get off my lawn!” kind of way. I mean I’m worried for millennials. I’ve touched on this a couple times in earlier posts, but my thoughts coalesced into worry following a piece on The Daily Show.

In the piece “Vitamin Flop” which aired on April 13, The Daily Show highlighted a failed business venture of Donald Trump’s which seemed to have targeted recent college graduates in a multi-level marketing “opportunity.” Check out my “Donald Trump’s American Dream” post for the details.

Here’s what Donald Trump had to say in the 2009 promotional video:

“At no time in recent history has our economy been in the state that it is today. It’s a mess. The economic meltdown, greed, and ineptitude in the financial industry have sabotaged the dreams of millions of people. Americans need a new plan. They need a new dream.

“The Trump Network wants to give millions of people renewed hope and with an exciting plan to opt out of the recession. Let’s get out of this recession right now. With cutting edge health and wellness formulas and a system where you can develop your own financial independence, The Trump Network offers people the opportunity to achieve their American Dream.”

Most of the 20,000 marketers for The Trump Network were recent college graduates who couldn’t find jobs in their chosen fields, or people who lost their jobs during the recession. The vast majority of marketers did not see the promised riches and most likely lost money on their network marketing businesses. I’m sure Donald Trump, on the other hand, made out very well from the 2-1/2 year business venture.

So this is an example of a billionaire using his wealth to further enrich himself at the expense of others (It takes money to make money). Those who lost out were mostly millennials because they were desperate and inexperienced. It doesn’t seem fair, does it?

Here are some other areas in which I see a transfer from the less fortunate to the Top 1%:
1. Rental real estate: The wealthy from our country and abroad are purchasing large numbers of residential property, especially in large cities. Real estate prices have soared and rents have followed. The rule used for decades is that you shouldn’t spend more than 30% of your income on housing. In a Bloomberg article from July 2014, forty-one million U.S. households exceed that rule. High rents which affect the poor and middle class will act as a tax and be a drag on the economy;
2. Banking: Most capitalist countries use an independent reserve banking system to stimulate and slow economies by way of interest rates. While interest rates have been near historic lows for several years, any increase in rates disproportionately benefits those with money to invest and harms those with little money. Millennials, who have had less time in the job market, are generally less affluent than people from prior generations;
3. Social Security: The Federal Insurance Contributions Act (FICA) mandates the collection of money from working people in this country and payments to retired people. Some of the retirees who receive these regular federal payments are wealthy, but that does not disqualify them from the plan’s benefits. If there are no changes, the entire Social Security fund is expected to run out of money completely by 2034. Millennials will not receive benefits unless major changes are made, but they and their employers are still paying 12.4% of their income into the system;
4. The republican presidential candidates’ tax plans, if enacted: Based on flawed data, all plans cut taxes on the wealthy to stimulate the economy. Some also cut taxes on the less wealthy, but all raise taxes on the poor which will be an economic drag. With such large proposed tax cuts, either the deficit and debt will balloon or federal spending will be cut dramatically which will gut social welfare programs. Neither of these outcomes will benefit Millennials.

Now you can see why I’m worried about Millennials. On the plus side, their adaptation skills are much more advanced than for us older Americans. They are technologically savvy and can do well in the sharing economy. In other words, they have positioned themselves to be less dependent on the institutions upon which we rely.

I guess Millennials will be okay after all.

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Donald Trump’s American Dream

Posted on April 18, 2016 by tonyj126

In the piece “Vitamin Flop” which aired on April 13, The Daily Show highlighted a failed business venture of Donald Trump’s. The Trump Network was a company started in 2009 by Ideal Health. The anti-Trump National Review claims that Donald Trump purchased Ideal Health in early 2009, but Trump’s lawyer states that he was not an owner and did not endorse the products. They both could be telling the truth if one of Trump’s cleverly crafted legal entities was the actual owner.

CBS News produced the story and reported it on CBS This Morning. The video is available at http://www.cbsnews.com/videos/how-donald-trump-recession-proof-supplement-venture-failed/.

The “Vitamin Flop” piece on The Daily Show is based on the CBS This Morning report and can be found at http://www.cc.com/video-clips/orcn8a/the-daily-show-with-trevor-noah-the-trump-network–donald-trump-s-failed-pyramid-scheme

The reported facts (some come from http://www.statnews.com):
1. Donald Trump pitched the company as a “recession-proof” business in a 2009 promotional video;
2. “Marketers” started by purchasing a starter kit for $497;
3. They were then encouraged to enroll others in this multi-level marketing business;
4. The Trump Network sold a urine test kit called “PrivaTest” for $139.95 and claimed to tailor supplements based on the urine test results;
5. The Trump Network recommended retesting every 9-12 months and the annual costs of tests and supplements could exceed $900;
6. For marketers, there were seminars which cost several hundred dollars to attend;
7. According to marketers, the company grew about 300% in its first year, but it couldn’t manage the growth and some marketers stopped receiving commission checks;
8. Per CBS News, “a reported 20,000 independent sales representatives bought the Trump Network products;”
The agreement between The Trump Network and Trump expired at the end of 2011 and was not renewed;
10. The company was sold to Bioceutica (www.statnews.com), perhaps after declaring bankruptcy (CBS News)

About minute 1:20 into the CBS This Morning video, or about minutes 4:00 into The Daily Show video, there’s a look at the attendees at a Trump Network seminar for marketers. The vast majority of attendees look to be of recent college graduate age. They likely entered college when housing and stock market values were increasing steadily and graduated into a changed nation. For a large percentage of recent college graduates in 2009, there were no jobs available.

I was in a similar situation after my wife & I moved to the New York City area where she attended medical school. I remember scouring the want ads and found plenty of network marketing schemes. These companies prey on the desperate, and I considered a few. I found employment as a chemist a few months later, but my first job in the area was as a car phone salesman. My first sale was to a hand surgeon for $5,000, but that included installation into his Jaguar. Times have changed.

Some people do well in multi-level marketing businesses – generally those who got in early and/or are very aggressive salespeople – but the vast majority do not. Many lose money on their businesses when all fees and product purchases are figured in. In this way, The Trump Network isn’t different than most other network marketing companies.

To call The Trump Network a failed business for Donald Trump is probably incorrect. I’m sure Trump did very well on this business venture. A quick calculation shows that 20,000 marketers times an probable average of around $2,000 generated $30 million in income, plus don’t forget the up to $900 per year for the customers who were not marketers. In 2-1/2 years, Donald Trump likely received a substantial share of the profits from a lucrative business. Trump emphatically stresses his success as a businessman and this is a case of his business prowess. The company may even have been designed to be a short-term entity because, unless it turned into an Amway or Mary Kay success, most of the profits are made early – before the foundations begin to fail (e.g., not enough new marketers).

Don’t forget the old adage that it takes money to make money.

The Trump Network is a perfect example of this. As with the majority of multi-level marketing businesses, it was designed to reap financial rewards for the owners by taking $1,000-$3,000 from tens of thousands of desperate people. That wasn’t how it was marketed, of course. Here’s what Donald Trump had to say in the promotional video:

“At no time in recent history has our economy been in the state that it is today. It’s a mess. The economic meltdown, greed, and ineptitude in the financial industry have sabotaged the dreams of millions of people. Americans need a new plan. They need a new dream.

“The Trump Network wants to give millions of people renewed hope and with an exciting plan to opt out of the recession. Let’s get out of this recession right now. With cutting edge health and wellness formulas and a system where you can develop your own financial independence, The Trump Network offers people the opportunity to achieve their American Dream.”

Donald Trump certainly seems to be living his American Dream. Of course, his American Dream seems to result in a transfer of wealth from the poor and middle class to the top 1%. Trump’s tax plan would do the same – cut taxes on the rich and raise them on the poor. I don’t think a network marketing presidency would be very good for the country.

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Uh-Oh!

Posted on April 15, 2016 by tonyj126

The U.S. presidential primary season has certainly been unusual. For some of us, it’s been a nice change. I don’t mean that the slate of candidates is wonderful or it has been a pleasant experience to watch the news. I definitely do not mean that. I mean that there are more people interested in discussing politics this year, and some of us like to discuss politics.

I’ve noticed a change recently though. There seem to be fewer people willing to talk to me, and my political posts are getting fewer “Likes” than they used to. I think people are getting turned off and I’m not sure what that means for the election in November.

The Uh-Oh moment for me came in the form of my brother-in-law who has been visiting the past few days. They’re actually visiting my father-in-law following his accident, but we still get a few hours together each day. In the past, we would spend a fair amount of time talking about political and economic issues, but not so much on this visit. If fact, he and his wife have a saying when some unpleasant political story comes on the television (they consider almost all political stories to be unpleasant these days). They say in comically accented voices, “Politicians! They are dead to me!” And then they change the channel or press the mute button.

I get together with a small group for breakfast once a week and there, too, the political discussions have decreased in number and duration. I realize this is a small sample size, but I think people are getting tired of talking about the presidential campaign.

It’s possible that people are just getting busier. Here in West Michigan, we haven’t had snow in nearly a week and soon the grass will need to be mowed. (Okay, those of you in more southern states can stop laughing now.) Perhaps we’re willing to put the campaign aside for a little while and start our spring cleaning. In fact, I have ten cubic yards of mulch coming tomorrow and really should get back outside to prepare.

I wanted to check something though. I looked at the television ratings for the presidential debates and there is a significant drop off. Through February 12, the average viewership for the republican debates was 16.2 million, and that for the democratic debates was 9.2 million. The last republican debate was on March 10 and had 11.9 million viewers. The last democratic debate was April 14 and had 5.6 million viewers.

Those are substantial drops in viewership – down 27% for the republicans and 39% for the democrats.

I think Americans are getting sick of the presidential campaign and disgusted with the overwhelming and sensationalized new coverage. Collectively, we need a break.

The funny thing about this – it’s actually an exciting time in presidential politics. New York, Pennsylvania and especially California rarely have an impact on picking the nopines. In most presidential election years, the candidates have clinched enough delegates to ensure the nomination before mid-April, let alone early June. We should be paying attention.

The main turnoff may be talk of contested conventions. The discussions include strategies about how the republicans can rewrite the rules shortly before the convention begins which could ensure Donald Trump’s defeat, and possibly bring in a nominee who hasn’t even entered the race. The democrats have the super delegate system which was specifically designed to dilute the voters’ influence in choosing a nominee following disastrous selections such as George McGovern in 1972 (lost 520-17 to Richard Nixon).

So in a year when the outsiders are the most popular candidates because they are not beholden to the politically powerful, the contested convention talk tells the voters that the politically powerful can still design systems to get their own way.

It is a way of thumbing their noses at the American voter. It’s not a smart idea unless, of course, your goal is to reduce voter participation outside of traditional voter groups.

In that case, this may be exactly what they want. Low voter turnout caused by disgust in the system leaves a higher percentage of political establishment voters and gives the politically powerful what they want. I feel manipulated. Again.

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Strong Women – Different Interpretations

Posted on April 15, 2016 by tonyj126

In a story on Morning Edition about life-long democrats in Western Pennsylvania turning to Donald Trump, NPR’s David Greene spoke to Trump campaign volunteer Trisha Cunningham. She is drawn to the candidate because of his strong position against illegal immigration. She explained that illegal immigrants without insurance are unfairly competing against her husband’s tree clearing business by undercutting his prices.

When the reporter asked whether she was bothered by some of the things Trump has said about women, she said no.

GREEN: “She said strong women like her and her mom should just brush it aside.”

CUNNINGHAM: “Strong women are not going to be offended by anything anybody says.”

They then visited with Cunningham’s mother in a nursing home. Amy Dudley was a factory worker who voted for Ronald Reagan more than three decades ago. For her, too, strength is the most important characteristic for a leader. In fact, she recently registered republican after a lifetime as a democratic in response to Donald Trump’s strong position statements.

She doesn’t think that Hilary Clinton is a strong woman, and that opinion goes back to the Monica Lewinsky scandal in the mid-1990’s. Ms. Dudley felt that Ms. Clinton was too accepting of her husband’s behavior and consequently, twenty years later, she holds a lasting impression that Hilary Clinton is not a strong woman.

Another NPR story that figures into this discussion was from yesterday’s All Things Considered. In light of the new HBO movie Confirmation, Nina Totenberg recalled the drama over the Clarence Thomas Supreme Court confirmation hearings in 1991. From the transcript:

SHAPIRO: And as you say, Anita Hill was also viciously personally attacked. Clarence Thomas was viciously personally attacked. But I suppose the upshot of all this is how much the event changed the workplace. All over the United States today there are policies in place that exist in large part just because of this

TOTENBERG: Totally because of this. The number of sexual harassment claims doubled over the next year or so. Up until this point, most professional women in varying degrees had been sexually harassed. Some had been actually attacked, some simply profoundly embarrassed, whatever. But women didn’t talk about this for a reason that may seem odd to the millennial generation. We were embarrassed to talk about it.

What do we take away from these two stories? What are the characteristics of a strong women and how does a women’s age figure into this?

I’ll start with a cartoon from John Atkinson at https://wronghands1.com.

image

Nina Totenberg is at the very beginning of the Baby Boomer generation while Trisha Cunningham is a Gen Xer. Anita Hill was born right in the middle of the Baby Boomer years. Unlike the cartoon above, Trisha Cunningham does not appear to be a whiner. To her, a strong women brushes off inappropriate comments about women.

For professional baby boomer women, on the other hand, a strong women is one who stands up for her rights and her gender. Most of them had experienced sexual harassment in the workplace and it wasn’t until Anita Hill’s public accusations against Clarence Thomas that they realized there was an alternative to just putting up with the abuse. Anti-harassment laws and policies are a direct result of this awakening.

Trisha Cunningham may never have experienced sexual harassment because as a 17 or 18-year old at the time of the confirmation hearings, the workplace may have changed quickly enough to greatly reduce its prevalence. Her mother is a baby boomer though, and she worked in a factory. She probably would have experienced sexual harassment.

And that may be the difference. It may not be generation that matters as much as geography and vocation. Perhaps the emphasis on strong women by Trisha Cunningham and her mother, Amy Dudley, is cultural. Perhaps they have experienced many adverse situations in their lives and they feel strong women like them just overcome or ignore them. It is just what strong women do.

So these particular strong women don’t worry about Trump’s inappropriate comments about women. That’s not worth fighting for? What is? Illegal immigration. Thats an abuse which affects their livelihood and is a case of changing (or ignoring) the rules to benefit someone else over them. Ms. Cunningham doesn’t blame the people who hire the immigrants; she blames the immigrants themselves for breaking the rules.

Would a President Trump give them what they want? I doubt it. Most experts believe that he would not be able to keep his promise to deport 11 million illegal immigrants or get Mexico to pay for a wall. His idea to stop remittances from the U.S. to Mexico would sow economic unrest on our southern border. We’ve seen what problems are caused by economic downturns in countries around the world. Do we really want to make things worse in more countries and so close to home?

So who are the stronger women? Is it those who pledge their support based on who they feel is the toughest, and easily forgive indiscretions? Or is it those who stand up for themselves and work toward fairness? There is strength in both groups.

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Why Trickle-Down Economics Won’t Work

Posted on April 14, 2016 by tonyj126

I’ve gotten a little blog writing advice – stick to one topic per post. Good idea. Most of the following is from my last post, but it’s less cluttered here.

In his economic working paper “Tax Cuts For Whom? Heterogeneous Effects Of Income Tax Changes On Growth And Employment,” Dr. Owen M. Zidar reports that tax cuts or increases for the top 10% earners in the U.S. have no impact on job growth over the following two years. Tax changes for the bottom 90%, however, have a substantial impact. For every 1% change in tax burden as measured by percent of a state’s gross domestic product (GDP), there is a 5% change in job creation over the following two years.

These data clearly state that the wealthy save their money and tax cuts do not trickle-down. Those who earn less spend a higher percentage of their total income and that provides significant economic stimulation following a tax cut and equally significant economic drag following a tax increase.

Some warn of capital flight from high tax states to low tax states – that is, the wealthy moving residence to pay less state income tax. There is no evidence of this in the U.S. (See:http://news.stanford.edu/news/2012/november/millionaire-migration-myth-110212.html.)

Others argue that the wealthy do stimulate the economy following tax cuts because they invest in capitalist institutions – businesses, real estate & stocks, for example. Let’s take these separately.

Business Ventures: If the wealthy take their income tax savings and start businesses, that will stimulate the economy. No question. According to Dr. Zidar, that doesn’t happen within the first two years, so tax cuts for the wealthy are not a good strategy for a quick economic stimulus.

Real Estate: The wealthy are investing in real estate and some of the properties they purchase are from people with less wealth. This is a good example of successful trickle-down economics. The less wealthy will spend their real estate windfall and stimulate the economy.

There’s an area of concern though. Rents and property values in most cities have increased at a much higher rate than inflation. Some people with less wealth are forced into selling because they can no longer afford the real estate taxes and an ever increasing percentage of residential housing is owned by the wealthy. High rents mean that the poor and lower middle class can no longer live near their jobs and they have to spend a higher percentage of their time and income on transportation, rent, and perhaps childcare. This will act like a tax on the bottom 90% and Dr. Zidar’s work shows that it will be a drag on the economy.

This is trickle-up economics, not trickle-down.

Stocks: Stock purchases do not stimulate the economy unless they are stocks awarded in exchange for start-up capital. The vast majority of stock purchases are from one shareholder to another and the company receives no capital from such transactions.

So why did trickle-down economics work during the Reagan administration? Taxes were reduced for almost every taxpayer in the country so those extra funds received by the bottom 90% earners led to increased consumer spending. In addition, the federal government spent a lot of money – much of it on the military – and government spending is a large driver of economic growth.

Before the Economic Recovery Tax Act of 1981, there were sixteen tax brackets topping off at 70%. When Reagan left office, there were two tax brackets, 15% and 28%. Revenues decreased the first two years after the tax changes, but increased during the rest of Reagan’s term. Unfortunately, spending increased at a faster pace and the annual deficits averaged $192 billion vs. a high prior to Reagan of $73 billion.

The U.S. currently has seven tax brackets topping off at 39.6% for taxable income greater than $450,000 for married filing jointly. The top 1% earners pay somewhere between 25% and about 35% of their income in taxes. Because the current tax rates are much lower than those when Reagan took office, there’s less to work with. I’m worried that our leaders will reduce taxes on the wealthy and increase taxes on the poor in an attempt to stimulate the economy. If they take such action, it will backfire.

I am convinced the road to economic prosperity for the country is to get our deficits under control, set up a consistent, simplified tax code for businesses and high income earners to remove uncertainty, and eliminate the capital gains tax rate incentive for money sitting on the sidelines in stocks (Jeb Bush’s idea).

If we make decisions based on trickle-down economic policy when we already have high deficits, moderate tax rates, and little opportunity to cut spending with 10,000 Baby Boomers retiring every day, we’re going to cause economic hardship.

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It’s Annoying When Your Friends Preempt Your Indignation

Posted on April 13, 2016 by tonyj126

I have a friend who knows a lot of stuff. I’m generally a glass-half-full kind of guy, but every now and then I rail against some injustice or stupidity; it’s the stupid things that bother me the most. But sometimes, I can’t enjoy the pleasure of my indignation because my friend informs me of the reason why the thing I’m annoyed at is the way it is. To take a quote from the movie Airplane, “What a pisser.”

Here’s an example. The cleaning cycle discharge from the water softener in our basement was placed off-center over the drain in the floor and the salty water foams up and pits the concrete. After six years of this, the drain cover corroded and the salty discharge tube was loosed. It sprayed the control panel on our hot water heater and destroyed it. Because of this off-center placement, we had to replace our hot water heater. I was indignant.

My friend, on the other hand, calmly stated that off-center positioning was required to prevent contamination of the house’s fresh water supply should the sewer back up. Know-it-all!

There have been other cases when I have been bothered by one thing or another and my friend has straightened me out. These generally involve car or home maintenance topics – I’ve never been a car guy, and he replaces engines and rebuilds transmissions in his spare time. Lately, however, our discussions have a lot to do with politics and macroeconomics, and we’ve spent a fair amount of time discussing the issues.

One of his observations is that our experiment with capitalism may be coming to an end and serfdom may be returning. He’s considering guest writing a post about it so I don’t want to give too much away here, but he and I had completely different ideas about about what the new serfdom would mean.

I though he meant that the widening income and wealth gap and the shrinking middle class means that the very rich will be the new lords and everyone else will be dependent on what they provide by way of employment and charity. My friend, who comes from a more conservative background, meant that the government is the new lord and everyone will be dependent on what the government provides. How’s that for extremes.

One of the followers of my blog is Shray Srivastava at https://shreysfinanceblog.com. Shray is an economically conservative 15 year old from the U.K. who writes posts on economic issues, many directed toward the U.S.

I would like to write a counterpoint to one of his posts. In “Why trickle-down economics works” from October 8, 2015, Shray argues that:
1. High taxes leads to capital flight;
2. “Do not be fooled by socialist propaganda telling the lie that it is the normal person, the average Joe, that fuels the economy of America, or any country, in fact, because it isn’t.”
3. “It is the rich and famous that encourage growth and economic expansion….”
4. “…the only place the rich will put the extra money that they have is into other economic industries, meaning that the money they save will always be reinvested….”

I purchased an economic working paper a few months ago which evaluated job growth and economic expansion or contraction in the U.S. in the two years following tax cuts or increases (TAX CUTS FOR WHOM? HETEROGENEOUS EFFECTS OF INCOME TAX CHANGES ON GROWTH AND EMPLOYMENT, by Owen M. Zidar).

Dr. Zidar determined that there was statistically no impact on economic growth or contraction following tax changes for the top 10% earners (slope of the graph: -0.1%). For the bottom 90% earners, on the other hand, there was a 5% economic expansion or contraction for every 1% of state GDP change in tax burden.

These data clearly state that the wealthy save their money and tax cuts do not trickle-down. Those who earn less spend a higher percentage of their total income and that provides significant economic stimulation following a tax cut and equally significant economic drag following a tax increase.

To address Shray’s points that I noted above:
1. High taxes may lead to capital flight in the EU because of open borders and duty-free commerce, but the same is not true in the U.S. The U.S. equivalent would be movement from a high tax state to a low tax state following the implementation of a “Millionaire Tax.” Stanford researchers found no evidence of capital flight following such tax changes (http://news.stanford.edu/news/2012/november/millionaire-migration-myth-110212.html);
2. As noted above, Dr. Zidar’s paper refutes this;
3. Ditto;
4. The wealthy more often invest in stocks than in starting new businesses. Stock purchases do not stimulate the economy unless they are actually stocks awarded in exchange for start-up capital. The vast majority of stock purchases are from one shareholder to another and the company receives no capital from such transactions.

I fear the same is starting to happen with real estate in major cities. The wealthy are purchasing the apartment buildings and high rents are acting like a tax on the poor. The rent goes to the wealthy and there’s less left over to drive the economy. It’s not quite the same as stock purchases because some manpower is required to run the rental businesses, but it’s less labor intensive than operating a factory or trucking company, for example.

So why did trickle-down economics work during the Reagan administration? Pretty simple actually. Taxes were reduced for almost every taxpayer in the country so those extra funds received by the bottom 90% earners led to increased consumer spending. In addition, the federal government expanded the policy of deficit spending – much of it on the military – and government spending is a large driver of economic growth.

Before the Economic Recovery Tax Act of 1981, there were sixteen tax brackets topping off at 70%. When Reagan left office, there were two tax brackets, 15% and 28%. Revenues decreased the first two years after the tax changes, but increase during the rest of Reagan’s term. Unfortunately, spending increased at a faster pace and the annual deficits averaged $192 billion vs. a high prior to Reagan of $73 billion.

The U.S. currently has seven tax brackets topping off at 39.6% for taxable income greater than $450,000 for married filing jointly. The top 1% earners pay somewhere between 25% and about 35% of their income in taxes. Unlike the situation that existed when Reagan took office, there is much less to work with that would stimulate the economy if, in fact, cutting taxes for the wealthy promoted economic growth.

I’ve written about this economic reality several times now, but I keep coming back to it because I’m worried that our leaders will reduce taxes on the wealthy and increase taxes on the poor in an attempt to stimulate the economy. If they take such action, it will backfire.

I am convinced the road to economic prosperity for the country is to get our deficits under control, set up a consistent, simplified tax code for businesses and high income earners to remove uncertainty, and eliminate the capital gains tax rate incentive for money sitting on the sidelines (Jeb Bush’s idea).

If we make decisions based on trickle-down economic policy when we already have high deficits, moderate tax rates, and little opportunity to cut spending with 10,000 Baby Boomers retiring every day, we’re going to cause more economic hardship. If so, we may end up with a modern day serfdom, whichever form it takes.

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Mental Fidgeting

Posted on April 12, 2016 by tonyj126

That title comes from one of my favorite lines in Anne Tyler’s The Accidental Tourist.

“But his study was so dim and close, and it gave off the salty, inky smell of mental fidgeting. He walked in and felt overwhelmed by his task, as if chaos had finally triumphed. He turned around and walked out again.”

I have been experiencing a related phenomenon the past few days. It is not that I don’t feel like writing, though. It’s that I know I have a lot of other work to do and realize that if I make a determined effort to get that work done, I’ll be able to more consistently follow a writing discipline. While my logical mind knows this, however, other parts of my brain have mutinied and gained control.

In the next few weeks, I need to update a bathroom in our vacation rental property in Traverse City, Michigan, and I have to do a great deal of cleaning and landscaping work at home. Now that my father-in-law is in a skilled nursing facility, I need to fix up his house and get it rented to offset the costs and make his money last longer.

I start off most days pretty well and get quite a bit accomplished by early afternoon. Right now, I’m writing this short blog post, vacuuming the master bedroom, cooking spaghetti sauce, doing laundry and making beds. But then the daily mutiny occurs. I blame this on the binge watching I did while sick a few weeks ago. Even though I know better, I turn on the TV to watch a show while I eat lunch.

I’ve been watching NCIS or The West Wing on Netflix. Those shows are about 45 minutes long and generally my lunches don’t take that long to eat. Once I’m done eating, I try to sit down and watch the rest of the show, but since I know I should be doing other things, I decide to multitask. Unfortunately, it’s hard to vacuum or make beds or do laundry or write while there’s a show playing, so my multitasking the past few days has been overeating.

I’m smart enough to know what’s been going on, but it doesn’t mean that the logical part of my brain can regain control from the mutineers without a struggle.

The counterattack has begun though. I started running again yesterday and physical exercise makes me feel empowered. That feeling lasted for several hours until I ran into problems while trying to cancel my father-in-law’s cable television service and navigate through the murky waters of his Medicare and supplemental health insurance coverage. I turned the TV back on and binge watched until quite late last night.

Time to go. The washing machine is beeping at me and there’s a lot more vacuuming to do, but this has proved cathartic. It’s good to discover that spending a few minutes standing at the kitchen island and writing a blog post is likely the catalyst I need to bring me out of this rut. At least for the time being, I don’t feel like turning on the TV and I’m not hungry. We’ll see if that changes when I start cleaning the bathrooms.

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Favorite First Chapters: The Accidental Tourist

Posted on April 9, 2016 by tonyj126

While in Italy a month ago, I began writing a novella, or perhaps a novel. Actually, I began writing a short story based on this interesting idea I had a couple months ago, but I seem to be too verbose for the 7,000 word maximum for short stories.

The opportunity to begin my career as an author came with laundry. After the rest of the family went to bed on our last night in Rome before traveling to Tuscany, I was left in charge of the laundry. If you’re unfamiliar with dryers in Europe, they are small front loading units which use heat to remove the water from the clothing and a cooler section to collect the condensation. They do not vent to the outside as is typical in the U.S. and they dry very slowly. I thought the collected water was allowed to evaporate in a pan at the bottom of the dryer, but for the apartment in Rome, the water condensed into a plastic bin which needed to be emptied when full. It was a few hours before I discovered the condensation bin, so laundry took a long time and I began writing my novel.

By the way, I strongly recommend the apartment in which we stayed in Rome. It’s nicely located and has three large bedrooms, two baths and full kitchen. It’s available at http://www.vrbo.com/468953.

So back to the novel. I wrote the first four chapters that night and felt pretty good about how freely the story was flowing. In Tuscany, I was able to spend a few more hours on the project and did some tweaking on the flight home. I was pleased with the progress and was up to 6,000 words.

Then we got home. I got sick for a couple weeks and didn’t do a lot of writing. Then I completed eight individual, business and trust income tax returns for us and the rest of the family. That took a couple more weeks. My father-in-law fell and broke his pelvis and is now in a (hopefully) short-term skilled nursing facility for rehab, and that was a learning experience. (Side note: a broken pelvis generally heals well even in the elderly and there’s a decent chance he will recover enough to move back to assisted living.)

Yesterday was the first day in a month that I looked over those chapters I wrote. Chapter One is dry. Part of this could be that my expectations were high. In my memory, the writing flowed well and I associated the writing with that feel good state of mind that comes from being on vacation in Italy with family. Now that I’m home and it’s cold and dreary, the writing wasn’t as good as I remembered.

So, what to do?

I got my copy of The Accidental Tourist and started reading. Actually, I have three copies – hardcover, digital & audio which is read spectacularly by George Guidall. How exactly did Anne Tyler hook me so quickly with her first chapter? She did it with the senses and by appealing to my emotions. She wrote that chapter in such a way that I could hear, see, feel and smell what her protagonist experienced.

Here are some examples of how Ms. Tyler tickled my senses and tugged at my heart.
1. “They were supposed to stay at the beach a week, but neither of them had the heart for it and they decided to come back early.”
2. “Macon drove. Sarah sat next to him, leaning her head against the side window. Chips of cloudy sky showed through her tangled brown curls.”
3. “Sarah had a tan but Macon didn’t. He was a tall, pale, gray-eyed man, with straight fair hair cut close to his head, and his skin was that thin kind that easily burns.”
4. “Macon switched his wipers on. Tick-swoosh, they went – a lulling sound; and there was a gentle patter on the roof.”
5. “Rain flattened the long, pale grass at the sides of the road.”
6. “There was a moment of watery blindness till the truck had dropped behind. Sarah gripped the dashboard with one hand.”
7. “She had a broad, smooth face that gave an impression of calm, but if you looked closely you’d notice the tension at the corners of her eyes.”
8. “Earlier the air conditioning had been running and now some artificial chill remained, quickly turning dank, carrying with it the smell of mildew.”
9. “They shot through an underpass. The rain stopped completely for one blank, startling second. Sarah gave a little gasp of relief, but even before it was uttered, the hammering on the roof resumed.”
10. “Great lashings of water flung themselves at the windshield.”
11. “He passed a line of cars that had parked at the side of the road, their windows opaque, their gleaming surfaces bouncing back the rain in shallow explosions.”
12. “A wide lake, it seemed, in the center of the highway crashed against the underside of the car and slammed it to the right.”
13. “Then he started rubbing his knees with his palms. Sarah huddled in her corner. The only sound was the drumming of rain on the overhang far above them.”

When I first read that chapter as a twenty-something, I could feel the car hydroplane, smell the dank, mildewy air, hear the brief silence of driving through the underpass. Like Macon, I was more likely to drive through a storm than pull over and wait for it to pass.

With those quotes, I wanted to present some of the lines which triggered my senses and made me experience the action. I hinted at the emotional issues with a couple of those quotes, but I don’t want to spoil the story for those who wish to read it.

After rereading the first chapter of The Accidental Tourist, I realized I had a problem. The things that hooked me in Anne Tyler’s novel are missing from my first chapter. She likely went through many drafts before she got to the finished product, but I’ve decided to work on my first chapter until I’m satisfied. It’s a test. I want to see if I have the skill to write a chapter that can hook a person like me.

It will not be easy unless I make a major change to the story. Anne Tyler began The Accidental Tourist with a drive which started off hot and dry and changed into a strong summer storm. The storm was indicative of the changes that had happened and were about to happen to the protagonists. There was also dialog. Two characters were in the car and they could and did interact.

With a drive through a violent storm, there are many opportunities to introduce sights, sounds, smells and emotions to the reader. My story begins with a single character hiding alone in a well-fortified bunker in a desert. Oh well, I do like a challenge.

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Fifteen Years of Change in U.S. Automotive Manufacturing

Posted on April 8, 2016 by tonyj126

The 2000 Numbers
1. # of motor vehicles produced in the world: 58,374,162;
2. # of motor vehicles produced in the U.S.: 12,799,857 (21.9%);
3. # of workers employed in U.S motor vehicle and automotive parts manufacturing = 1,313,400;
4. # of cars produced per worker: 9.7.

The 2015 Numbers
1. # of motor vehicles produced in the world: 90,683,072;
2. # of motor vehicles produced in the U.S.: 12,100,095 (13.3%);
3. # of workers employed in U.S motor vehicle and automotive parts manufacturing = 910,000 (30.7% drop from 2000);
4. # of cars produced per worker: 13.3.

More Numbers
1. # of automotive plants in Mexico: 21 (17 now, 4 more under construction/in planning);
2. # of Mexican motor vehicles manufactured in 2014: 3,368,000;
3. # of automotive workers in Mexico in 2014: 550,000;
4. # of motor vehicles per worker: 6.1;
5. Average automotive worker pay in U.S.: $37.62/hour (6th highest behind Germany, France, Japan, Italy & Canada);
6. Average automotive worker pay in Mexico: $8.24/hour;
7. # of countries with free trade agreement with U.S.: 20 (0 in Europe);
8. # of countries with free trade agreement with Mexico: 45 (28 in Europe).

What The Numbers Tell Us
1. Businesses make decisions which best benefit them financially;
2. While U.S. manufacturing is more efficient in U.S. plants (higher cars/worker), that advantage is more than offset by lower wages in Mexico;
3. Free trade agreements between Mexico and most European countries save car companies thousands of dollars for every car shipped from Mexico to Europe vs. from the U.S. (10% EU import tax);
4. Free trade agreement between Mexico, the U.S. and Canada means there is no financial penalty for car companies to ship vehicles north from Mexico;
5. Free trade agreements between Mexico, the U.S. and Canada mean that European car companies would save hundreds to thousands of dollars per vehicle shipped from Mexico to the U.S. versus from European countries.

Now What?
Things have changed substantially in the automotive industry, and much of that change is irreversible. Okay, that’s pretty obvious to most of us, but I decided to write about this because of the presidential campaign.

Both Donald Trump and Bernie Sanders have considerable support from those who want a change in the status quo. These two candidates are “outsiders” which is a big advantage in this presidential campaign. There may even be some crossover in their support. I would not be surprised to see Sanders’ supporters voting for Trump in November, or vice versa.

Why are outsiders so appealing this year? It is because there are large groups who feel left behind by today’s economy. For Trump’s supporters, there are many who want to turn back the clock to an era when the U.S. reined supreme in manufacturing, military power, and ingenuity. In short, they want to feel the same energy and promise they felt during their youth in the 60’s, 70’s, 80’s, & 90’s.

Yes, even the 70’s with Watergate, the oil embargo, high inflation and recession. When faced with such challenges, this country pulled together and found solutions. We built the Alaska oil pipeline and expanded oil production in many parts of the country to reduce our dependence on foreign oil. The Space Shuttle program not only produced a reusable space vehicle by 1981, it greatly expanded our scientific leadership and that research led to countless advances in everyday products.

I believe Bernie Sanders’ supporters also want to turn back the clock, but in a different way. His popularity with young voters highlights the fears they harbor over their futures. Many are struggling with high student loan debt, unaffordable rent, poor job prospects, and they have no illusions that their employers will look out for their needs when times get tough – a lesson they learned from the Great Recession. They want to turn back the clock to a time when we took better care of each other. They’re scared, and who can blame them?

So, why did I start off by talking about the auto industry? During the “good old days,” manufacturing supported a large number of good paying, secure jobs even for those without a college degree. If you were born at the beginning of the Baby Boomer wave (about 1943 – 1953), you could find lifelong work in a factory with a only high school diploma, and thus, no student loan debt. I decided to examine the auto industry because it is the quintessential example of the American Dream, and therefore, of what made America great.

Your eyes may have glazed over at the numbers I presented at the beginning of this post. Sorry about that, but they’re important. Manufacturing has changed significantly in the past few decades. Many of those good paying jobs have been shipped overseas because labor is one of the largest costs for most businesses.

U.S. factories that have been built or retrofitted recently employ many fewer workers than the factories of old. In just fifteen years, productivity has increased by 37% as measured by # cars produced per worker. Today’s modern factories – both in the U.S. and abroad – employ a small number of highly skilled workers who can program, adjust and maintain the equipment, and a larger number of people who do the same simple job over and over again.

The higher productivity comes from replacing the latter group with automated equipment if the financial calculations show that it’s beneficial. For example, if a manufacturer could replace 5 workers by purchasing Robot X, they are likely to do so if the wages and benefits saved over three years is less than the cost of the equipment and maintenance. The company will buy the machine and lay off 5 workers. Businesses do what is best for their owners – the shareholders.

The American auto industry was built largely in the upper Midwest. With wide scale adoption of central air conditioning in factories, manufacturing shifted to the states in the southern U.S. Weather and wages were the main drivers of this change. Fewer days of icy roads, lower cooling costs in the south than heating costs in the north, and a potential workforce which had little experience with high union-negotiated wages. Remember for modern factories, workers generally perform just one task repeatedly, so leaving the Midwest’s skilled manufacturing workforce wasn’t an issue.

The states in the southern U.S. are now losing out to Mexico because of trade barriers. Tea Partiers are quick to remind us that the United States did not always have an income tax. This is true. In the old days, this and every other country collected duties, tariffs and excise taxes as the primary source of income. For many countries, these barriers to free trade have dropped significantly, and as measured by Percent of Gross Domestic Product, revenue from excise taxes and customs duties have dropped 49% and 25%, respectively, when comparing the last ten years to the previously forty.

Mexico has much to offer car companies wishing to build manufacturing and assembly factories in the Americas. Wages are low ($8.24/hour versus $62.63 in Germany), but the free trade agreements are also a major draw. A key factor: Mexico has a trade agreement with the EU and the United States does not. Cars manufactured in Mexico can be shipped duty-free to the U.S., Canada, many Latin American countries and the 28 member nations in the European Union.

By contrast, on a $45,000 vehicle manufactured in the U.S., a car company would pay a $4,500 import tax to bring it into the European Union. In the opposite direction, a German produced $45,000 vehicle shipped to the U.S. would be subject to a $1,125 tariff. It’s no wonder so many factories are being built in Mexico.

During our current economic recovery, U.S. auto manufactures are positioning themselves to build small cars in Mexico and trucks and SUVs in the U.S. Americans are buying a lot of vehicles because they put off their usual purchases during the recession and the anemic beginning to the recovery. Now that they feel better about the economy, and with gas prices so low, we are buying larger vehicles and not worrying too much about fuel efficiency.

This works for U.S. car manufacturers because there are higher profit margins on trucks and larger cars. But what happens during the next recession or the next large spike in gas prices? We’ll stop buying the gas guzzlers and start buying the smaller cars. In other words, U.S. manufacturing jobs will be lost and Mexican manufacturing jobs will be gained.

So our economy is changing. What should we do about it?

Option 1: Prepare the next generation for the new economy. Reengineer schools, vocational programs and universities to produce graduates who are prepared to succeed in the industries that are and will do well in this country. It would also be good for the country if recent graduates were not overburdened by student loan debt so they would consider making purchases like homes which help the economy grow.

Option 2: Turn back the clock to when things were great in this country. With so much more manufacturing in other parts of the world than was true in the second half of the last century, this will be difficult. We could end our free trade agreements and put very high tariffs on every import. That would promote manufacturing in this country, but with great pain caused by product shortages and very high prices. I don’t think this will work.

I’m afraid the only way to truly turn back the clock to a time when most manufacturing was in the U.S. and we were the world’s largest exporter is to eliminate manufacturing in other countries. It seems to me that Option 2 calls for World War III.

I vote for Option 1.

Posted in Economics, Make America Great Series, U.S. Politics, Uncategorized | 1 Comment