National Debt Nightmares

Posted on January 31, 2016 by tonyj126

I tossed and turned in my sleep last night. I generally sleep well when I have had a fruitful day, and I finished the very difficult post on the 2016 Congressional concurrent budget resolution (H.R. 114-96) shortly before going to bed. I should have been satisfied, and I should have slept soundly. I wasn’t, and I didn’t.

It was my concerns about the national debt that kept me up. I was skeptical about Congress’ claim to balance the budget by 2024, but I still expected some solid plans in the budget resolution to get the deficit under better control. After all, I’m old enough to remember the last time we had a budget surplus, so the concept of a balanced budget is not an unreasonable idea. But I’m also old enough to remember the situations that impacted changes in the federal deficit and I feel we have placed ourselves in a very difficult situation. My mind hashed these ideas out while I should have been soundly asleep.

We have become a country of short-term thinkers. Or rather, some of our leaders may think long-term, but they act for short-term gain. Donald Trump’s “Make America Great Again” slogan sounds like long-term thinking, but his supporters want change that will improve their lives immediately. Improve to what? To the way things were – good pay for jobs that do not require a college degree, the defeat of terrorism, an end of political correctness so white people can say and do as they wish. You know – the good old days.

So here’s my abbreviated history lesson. President Nixon left office in disgrace and the American voters punished the Republican Party by electing the Democratic candidate In 1976 – Jimmy Carter. The top income tax bracket was 70%. Yes, 70%.

Carter’s one term was plagued with problems. The 1973-1974 Arab oil embargo triggered a recession from November 1973 through March 1975, but it’s impact lasted throughout the Carter presidency and into the first Reagan term. Generally during a recession, inflation drops because there is less demand for the available products, and consequently, less price support. Carter received some bad advice from economists who were absolutely wrong about how to bring the country out of recession and the government’s monetary policy led to very high interest rates. The Consumer Price Index hit a high of 14.8% during Carter’s term and was at 12.5% the month he lost the presidential election to Ronald Reagan.

During the Carter’s presidency, prices were skyrocketing, fuel and heating oil were expensive and in short supply and recovery from the 1973-1975 recession was slow, and another recession began in 1980 as a result of high interest rates. Reagan promised to change all that, and he did. Working with a willing Congress, Reagan reduced the top income tax bracket to 50% in 1982, to 38.5% in 1987, and to 28% in 1988. With the lowered tax rates, the recovery from the 1980-1981 recession was the strongest of all post World War II recoveries in both GDP and employment growth.

The federal budget deficits began to grow during Reagan’s presidency and the national debt went from $908 billion when he took office to $3 trillion when he left. President Bush presided over a income tax increase and the top tax rate became 31% in 1991. Despite the higher tax rate, the growth rate of federal income (total receipts) slowed during Bush’s term and the budget deficit remained a problem.

Average Annual Change in Federal Income, Carter-Obama
Carter: +12.8%
Reagan: +6.7%
Bush (41): +4.4%
Clinton: +7.4%
Bush (43): +2.5%
Obama (1st 6 years): 2.5%

Average Annual Change in Federal Spending, Carter-Obama
Carter: +10.9%
Reagan: +7.0%
Bush (41): +6.3%
Clinton: +3.2%
Bush (43): +6.2%
Obama (1st 6 years): 2.5%

Shortly after taking office, Clinton and Congress raised taxes and the top tax rate became 39.6% in 1993. There is some revisionist thinking going on in fiscally conservative media sources. The Cato Institute has a commentary entitled, “No, Bill Clinton Didn’t Balance the Budget.” The Heritage Foundation has an article entitled, “Ten Myths About Budget Deficits and Debt.” In both, of these sources, the credit for balancing the budget is not given to Clinton, but to the Republican Congress or pure chance. In some sources, the tax increase is reported to have led to a decrease in revenue; in others, it’s a non-factor.

The data shows, however, that federal government revenue increased significantly following the tax increase – up 5.8% in 1993, 9.0% in 1994 and between 7.4% – 10.8% during the remainder of Clinton’s term. http://www.justfactsdaily.com/blame-for-the-national-debt contains a graph which shows that revenues increased and expenditures decreased beginning in 1993. The decrease in spending came from welfare reform, reduced military outlays in the wake of the fall of the Soviet Union, and other cost cutting legislation.

I think it is also important to emphasize that the economy did not collapse – in fact, it performed very well – following the Clinton tax hike. Note that the tax hike was designed to have little impact on low and middle income families and individuals. It incrementally raised taxes on the higher income earners.

Now I’m beginning to feel hopeful again. While the promise of a balanced budget from Congress seems to be mostly trickery and marketing, there is evidence that changes can be made to once again achieve a balanced budget. We have a big hole to dig out of, but there is hope. Let’s think about this.

Posted in Economics, Make America Great Series, Musings, U.S. Politics, Uncategorized | Leave a comment

Part III-B: An Evaluation of the Concurrent Resolution on the Budget For Fiscal Year 2016 (America Great Series; Taxes, Economy & Jobs)

Posted on January 31, 2016 by tonyj126

“Uncle … Uncle … UNCLE!” I give up – you win, Congress!

That’s how I feel after trying to figure out the federal budget. That is also what you might be saying after trying to read through this post. I apologize in advance – it is pretty dry. I also had to give up reading through budget resolutions and appropriations bills before I was irreversibly trapped in the budget research quagmire.

So, how does Congress intend to balance the federal budget by 2024 with their tax and spending plan.

The Concurrent Resolution on the Budget for Fiscal Year 2016 (House of Representatives Report 114-96) is sometimes interesting, sometimes confusing and sometimes boring. It is written by politicians and their staff, many of whom are lawyers, and some sections require a few read-throughs to figure out the meaning, if that’s even possible for the layman. There are veiled and not-so-veiled statements which condemn the political opponents of the Congressional leadership, and many of the country’s woes are blamed on the President. There are also statements that seem pretty childish. Here’s one of my favorites:

“SEC. 6216.(a)(4) The President’s fiscal year 2016 budget irresponsibly ignores current law and requests a defense budget $38 billion above the caps for rhetorical gain. … (b) …However, in total with $90 billion, the House of Representatives Budget estimate for Overseas Contingency Operations funding for the Department of Defense, the fiscal year 2016 budget provides over $613 billion for total defense spending that is higher than the president’s budget request for the fiscal year.”

In other words, the President wants to increase spending for national defense and he wants to include the funds for overseas contingency operations and the war on terror within the defense budget to better represent the government’s actual spending. The Iraq and Afghanistan Wars were paid for off-budget by use of this overseas operations category. The House calls the President irresponsible for adopting this approach and approves a budget which again keeps some military spending ($90 billion) off-budget. Many people feel this off-budget category is the more irresponsible action.

In my last “America Great” post a few weeks ago, I attempted to calculate a “minimum size of federal government” based on the statements and website information of the republican presidential candidates. I used some substantial cuts to the discretionary spending limits proposed by the president, but increased military spending to bring it back to 2011 levels. With those changes, I arrived at a minimum size for the federal government of $3.65 trillion versus the 2015 budget of $3.68 trillion, a 0.8% decrease. Not much of a reduction and probably impossible to balance the budget with the tax cuts proposed by the republican presidential candidates.

When I looked further, I discovered that the approved fiscal year 2015 budget was in fact $3.626 trillion, so my minimum size of the federal government was a slight increase over the enacted budget laws. Congress has gotten into the habit of passing appropriations bills at the last minute that both increase spending and delay taxes so the actual spending is generally higher than the approved budgets. The president signs these bills into law so the federal government can pay its bills, and as a consequence, the deficit increases.

A quick note about the difference between “Net Budget Authority” and “Outlays.” Net budget authority is the amount approved by congress for operations in a given fiscal year. Outlays are the monies actually spent in a fiscal year and may include payments from a previously year’s net budget authority that were not disbursed until the current year. Consider, as an example, payments to a defense contractor who is building a ship for the Navy, but the payments are made at different stages of the construction which span more than one year.

Today’s topic, however, is the Congressional report that promises to balance the budget in eight years without new taxes. It is certainly worth a look.

How Do You Balance The Federal Budget?
Easy question – all you have to do is to make sure you don’t spend more than your income in any given fiscal year. While the question is easy to answer in simple terms, the realities are very difficult when you consider the size and scope of the federal government. Throw in politics, ideologies, emotions and a bunch of economists who do not agree on the benefits or consequences of various actions, and you have a very unclear situation. (What do you call a group of economists? A flock – as in sheep? A gaggle – as in geese? A murder – as in crows? I hope it’s not a murder.)

For the family with one or two steady incomes, we can have a good idea of how much spending is allowed in order to have a balanced budget. Each month, the total income is $AAA, the rent or mortgage payment is $XXX, the groceries cost $YYY on average, the car payment, gas and maintenance totals $ZZZ, etc. These are examples of mandatory spending, although for some people, you can substitute bus or train fare for car expenses. Discretionary expenses would be things like dining out, vacations, movies, alcohol and gift giving. Since the income is steady, this family knows how much can be spent to stay within budget.

For the federal government, there are also mandatory and discretionary spending categories, but the income is harder to predict. The Congressional Budget Office makes predictions of how the economy will grow or contract over the next 10-year period and the president and congress are supposed to use those numbers to predict tax receipts and social safety net and entitlement costs (Medicaid, unemployment compensation, disability, Social Security & Medicare). Those predictions, however, can change substantially between when the president submits his budget on or before February 1 and when the budget is approved by the end of September, although in recent years, the appropriations bills have not come until late December.

For fiscal year 2016 (October 1, 2015 – September 30, 2016), the president submitted a budget request to congress for $4.066474 trillion in “Net Budget Authority” of which $1.154933 falls into the discretionary category. The House of Representatives proposed a reduction to $3.7208 trillion, the Senate proposed $3.6807 trillion, and the conference committee arrived at a budget of $3.8224 trillion in expenses, of which $1.1197 trillion is discretionary spending and $2.7027 trillion is mandatory spending.

Total spending approved by congress for the 2016 fiscal year is 6.0% lower than the president’s proposal and 5.4% higher than the approved spending for fiscal year 2015.

The mandatory spending set out in the Budget Resolution needs no further action to take effect; it’s disbursements are mandated by previously enacted laws. Disbursements for discretionary spending, on the other hand, are governed by appropriations bills which are signed into law by the President.

When I began my research, I assumed that whatever cuts the House and Senate would make to the President’s budget request would come only from the discretionary side, but I was mistaken. The Congressionally approved concurrent resolution outlined in H.R. 114-96 cuts both mandatory and discretionary spending. In fact, the approved mandatory spending is 7.0% lower than the President’s request while the discretionary spending is only reduced by 3.1%. It is this larger percentage cut in mandatory spending, which is the larger portion of the federal budget, that allows the congressional plan to claim a balanced budget by 2024. So how do you cut mandatory spending?

Time to Pause and Gather My Thoughts
1. Are the economic assumptions used by Congress and the President reasonable?
2. How and from where does Congress justify the cuts to mandatory spending?
3. Same question for discretionary spending?
4. Is there any trickery going on which boosts income or hides spending in order to make the balance budget calculations work out?

The Economic Assumptions
Since the mandatory spending categories of Medicare and Social Security accounted for 39% of all spending in the 2015 budget, and an average of 10,000 Baby Boomers retire every day, all economists, the president and members of Congress realize that total spending will increase each year through at least 2030. The president and both houses of congress use assumptions to estimate the amount of that year-over-year increase. Because of the budget process timing, the President and Congress have different estimates available. Congress gets theirs from the Congressional Budget Office (CBO), but that department is constantly updating the numbers based on current data. The data:

Real GDP Growth, % Increase
President (Feb 2015): 2.8%
Congress (Aug 2015): 2.7%
CBO (Jan 2016): 2.5%

Consumer Price Index, % Increase
President (Feb 2015): 2.1%
Congress (Aug 2015): 2.3%
CBO (Jan 2016): 2.0%

Unemployment Rate, %
President (Feb 2015): 4.9%
Congress (Aug 2015): 5.4%
CBO (Jan 2016): 4.5%

10-Year Treasury Note, %
President (Feb 2015): 3.7%
Congress (Aug 2015): 3.8%
CBO (Jan 2016): 3.5%

Per H.R. 114-96, “According to CBO, if annual real GDP growth is just 0.1 percentage point higher over the budget window, deficits would be reduced by $326 billion” {SEC. 6202(a)(11)}. Consequently, if the 0.2% difference between the latest real GDP growth numbers provided by CBO and those used by Congress for the 2016 budget are consistent throughout the budget window, the national debt will be $652 higher in the next ten years. The CBO’s latest estimates, however, predict that real GDP growth will be less than 2.0% for 2017 and 2018 as a result of congressional decisions at the end of the year – namely, the Bipartisan Budget Act of 2015 and the Consolidated Appropriations Act, 2016. This will make a large and lasting negative impact on the federal deficits and debt.

In sum, the President’s and Congress’ real GDP growth estimates are too high and as a result, the anticipated income is too high and the deficit and debt prediction is too low. In 2024, for example, Congress estimates total revenue of $4.806 trillion while the CBO estimates $196 billion less revenue.

The difference in spending differs more substantially. In 2024, Congress estimates outlays of $4.774 trillion and a budget surplus of $32 billion, while the CBO estimates outlays of $5.699 trillion and a budget deficit of $1.226 trillion. The CBO numbers include the omnibus appropriations bill in December which increased spending and delayed the implementation of certain tax laws thus reducing revenue. I feel cutting taxes and increasing spending is a recipe for disaster when the country is already operating so far into the red.

Mandatory Spending
So, while the government’s year-end actions went against the concurrent budget resolution outlined in H.R. 114-96, what was the spending plan?

While mandatory spending is controlled by previously passed laws, that doesn’t mean that the president and congress have to agree on how the laws – such as those governing Social Security, Medicare and the Affordable Care Act – direct the spending. Using the figures for outlays, the largest changes congress approved versus the President’s budget request come from (top 8):
1. -$85.251 billion from Health,
2. -$62.847 billion from Transportation
3. +$54.800 billion additional for Allowances
4. -$18.610 billion from Social Security
5. -$17.773 billion from Income Security
6. +$13.806 billion additional for Commerce & Housing Credit
7. -$11.138 billion from Education, Training, Employment & Social Services
8. -$10.081 billion from Medicare

The president’s proposed budget includes programs and enhancements which I’m pretty sure he knows will not make it past a republican controlled congress, and cutting those programs is part of the process. Perhaps it’s more useful to see how the approved 2016 budget compares to that from 2015.

In order of decreasing dollar amount, congress has made the following changes to outlays from 2015 to 2016 in mandatory spending categories (top 8):
1. +$89.740 billion additional for Allowances
2. +$60.100 billion additional for Medicare
3. +$32.800 billion additional for Social Security
4. +$19.000 billion additional for Income Security
5. +$16.000 billion additional for Veterans Benefits
6. +$15.100 billion additional for Health
7. +$8.000 billion additional for Net Interest on the National Debt
8. -$3.600 billion less anticipated Social Security and Medicare Taxes received

In all categories, Congress increased mandatory spending by $239.439 billion from 2015 to 2016 – a 9.9% increase.

Discretionary Spending
Congress reduced the President’s discretionary spending request by $37.509 billion, or 3.2%. Once again, the change from 2015 may be more useful.

In order of decreasing dollar amount, congress has made the following changes to outlays between 2015 to 2016 in discretionary spending categories (top 8):
1. -$20.100 billion from Government-Wide Savings
2. +$14.900 billion for Allowances
3. +$6.900 billion for International Affairs
4. +$6.700 billion for Transportation
5. +$5.300 billion for Commerce & Housing Credit
6. -$3.800 billion from Overseas Contingency Operations/War on Terror
7. -$3.300 billion from National Defense
8. +$2.800 billion for Veterans Benefits

In total, Congress increased discretionary spending by $3.600 billion, or 0.3%, versus 2015 spending. The 2015 budget resolution showed spending of $20.1 billion for government-wide savings in 2015 and anticipated significant costs reductions in future years (-$14.2 billion in 2016, -$30.5 billion in 2017, -$38.3 billion in 2018, up to savings of -$117.2 billion in 2024). The 2016 budget resolution has no entries for this category, so it appears that the savings will not be achieved, although the expenses may have been incurred in 2015.

Any Trickery?
In a word, yes. As just mentioned, there’s the government-wide savings category which seems to have been a way to spend extra money in 2015, but claim the savings in future years and subsequent reduction in the deficit. That, however, was in the 2015 budget resolution, not the 2016 resolution.

For 2016, we have a couple tricks. The President proposed rolling the expenses for Overseas Contingency Operations/War on Terror into the National Defense budget, but Congress kept them separated. This was the same method used to keep Iraq and Afghanistan War expenses outside of the budget during the George W. Bush presidency. In this category, Congress has set a spending limit of $96.287 billion in net budget authority for 2016 with outlays of $48.798 billion. In subsequent years, the net budget authority is significantly reduced through 2021 and then set to $0 for 2022-2025. Outlays lag behind the net budget authority, but also fall from a high of $64.598 billion in 2017 to $892 million in 2025. This trick underestimates the cost for overseas operations and the war on terror and predicts lower deficit and debt figures than are reasonable.

We already discussed the higher revenue projections by Congress and the President than are supported by the CBO.

The biggest trick, however, seems to be the difference between what Congress approves in their budget resolutions and what they authorize in the appropriations bills (discretionary spending) and the laws they pass which affect mandatory spending. Their estimates of growth in mandatory spending also seem to be substantially less than what the CBO estimates. In the year 2024, Congress estimates total mandatory spending of $2.997 trillion while the CBO estimates $3.875 trillion – a $878 billion difference. Similarly, because of the cumulative effect of projecting lower deficits by way of budget tricks, Congress estimates the interest paid to service the debt at $598 billion, while the CBO places it at $719 billion in 2024 – a $121 billion difference.

So, Aside from Trickery, Where Exactly are the Spending Cuts
Laws would have to be changed to impact mandatory spending and considering Congress’ inability to work together, this does not seem likely. Therefore, less look at discretionary spending which is controlled by the appropriations bills.

This is where I gave up.

Here is a sample from the 887 page “Consolidated Appropriations Act, 2016” – it deals with the funding of the Office of the Secretary of Agriculture:

“For necessary expenses of the Office of the Secretary, $45,555,000, of which not to exceed $5,051,000 shall be available for the immediate Office of the Secretary, of which not to exceed $250,000 shall be available for the Military Veterans Agricultural Liaison; not to exceed $502,000 shall be available for the Office of Tribal Relations; not to exceed $1,496,000 shall be available for the Office of Homeland Security and Emergency Coordination; not to exceed $1,209,000 shall be available for the Office of Advocacy and Outreach; not to exceed $25,928,000 shall be available for the Office of the Assistant Secretary for Administration, of which $25,124,000 shall be available for Departmental Administration to provide for necessary expenses for management support services to offices of the Department and for general administration, security, repairs and alterations, and other miscellaneous supplies and expenses not otherwise provided for and necessary for the practical and efficient work of the Department; not to exceed $3,869,000 shall be available for the Office of Assistant Secretary for Congressional Relations to carry out the programs funded by this act….”

That’s about half of the first sentence and the agricultural programs section of the bill goes on like this for 11 pages.

Okay, I’m done – and exhausted. I have concluded that Congress’ 2016 concurrent budget resolution which promises to balance the budget by 2024 uses tricks and inflated economic estimates to achieve that goal on paper. In reality, however, Congress makes deals late in the prior fiscal year or early in the current one to reduce taxes and increase spending and that system adds to the federal deficit and debt. If the government is serious about balancing the budget, those actions need to be controlled.

The primary root of the problem is that politicians seem more concerned with getting re-elected than doing what’s right for the country. There is a significant number of people proposing a balanced budget amendment. I disagree with this approach. There are short periods of time when you want the government to spend more than it receives in revenue in order to stimulate the economy. A balance budget amendment would guarantee that recessions are deeper and last longer because with reduced revenue, the government would also have to cut jobs and costs.

What if you were not allowed to use credit cards or take out a loan? You would have to find a job, pay rent or live with your parents if they are so inclined, feed yourself, and cover your other needs out of your paycheck before you would be able to purchase a car, go to college or buy a house. They would all have to be cash deals if you didn’t have access to debt.

The same is true for the federal government. With a balanced budget amendment, the government could only pay employees, social security recipients, doctors, military personnel, fuel for the military, etc., if they had cash in the bank, so to speak. Those payments would have to be delayed or reduced if tax revenues are less than projected. This would not be a good system.

So what do we do? Good questions – I’m thinking about that.

Next Time: Part III-C: A Look at How Job Creation is Affected by Tax Cuts and Increases (America Great Series; Taxes, Economy & Jobs)

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

A Case Against Excessive Wealth Inequality

Posted on January 19, 2016 by tonyj126

I try to present all sides of an argument and leave the opinions to my readers, but in this case I’m going to take a stand. I believe wealth inequality is harming the United States and the rest of the world.

This was supposed to be a lighthearted piece in which I provide the findings of an Oxfam International report about wealth distribution which highlighted the holdings of the 62 richest people in the world, and then describe the actions of the 63rd richest person who is planning to move the St. Louis Rams football team to Los Angeles. Upon further research, however, I discovered that Stanley Kroenke is not the 63rd richest person as erroneously reported by Ben Bergman during a story on NPR’s Weekend Edition Saturday, but rather is worth $6.3 billion. That makes him tied for 225th richest with Sandra Ortega Mera of Spain who is the daughter of the 4th richest person.

More importantly to the change in tone for this post is the research into wealth inequality that I conducted. In the United States, there is an argument – generally by political conservatives – that there is no reason to worry about income and wealth inequality because everyone benefits from an improving economy. While that seems logical, the facts show that while the rich are getting richer, the poor are getting poorer. That shouldn’t be happening if the improving economy lifts all boats. Something more serious is happening and I have concluded that income and wealth inequality is a factor.

The Report

On Sunday, Oxfam International released a report (An Economy for the 1%) in which the researchers found that the top 62 wealthiest individuals in the world own as much as the poorest 3.6 billion people. Oddly enough, I didn’t find that statistic very shocking because the numbers are just too hard to wrap one’s head around; I don’t have the perspective to make that meaningful. A little further in the report, however, I found that perspective. In 2010, the wealth of the bottom half of the world was equal to the wealth of the top 388 individuals. Now it’s just the top 62. That is a big change in 5 years.

The Wealthy

For Americans, the large economic downturn that has been dubbed The Great Recession lasted from December 2007 through June 2009. As with most, if not all economic downturns, the stock market is a leading indicator of a recovery and that was true in this case. Since the bottom of the market on March 2, 2009, the S&P 500 had risen 199% (tripled) by the end of 2015. That, of course, benefits the wealthy who are much more likely to own stocks and lots of them.

Additionally, high end real estate has greatly increased in value during the same period. As my wife & I were headed from Manhattan to LaGuardia Airport in a taxi last week, I heard that the average Manhattan apartment is now selling for $1.95 million. In 1995, we sold a studio coop apartment with terrace in a 24-hour doorman building on 16th Street and 3rd Avenue for $85,000. It is now worth about $750,000. Desirable places to live are experiencing high ownership rates and high prices. This also benefits the wealthy who have the funds to purchase in these desirable locations.

So it makes sense that the wealth of the top 62 people in the world has increase by 44% in the past 5 years to $1.76 trillion. In the U.S., the unemployment rate has dropped from 9.3% at the beginning of 2011 to 5.0% at the end of 2015 – a 46% improvement in 5 years. This increased employment generates more consumption, which generates more jobs and the overall economy improves. One would expect that those with less wealth would benefit from this economic improvement, and while their savings accounts would not grow as much or as quickly as the country’s richest citizens, they would become a little wealthier.

The World

A growing American economy tends to help improve the economies of our trading partners as well because we are a consumer society. We import $40-45 billion more each month than we export and those imported goods and services support manufacturing facilities in China and Japan, call centers in India, wineries in France, and many businesses and farms in Canada, our largest trading partner. When the U.S. does well, the rest of the world tends to benefit.

The pattern is changing, however. This is partly due to conditions in the US and partly due to situations in Europe, the Middle East and China. First the rest of the world. While the U.S. was emerging from the recession, Europe was mired in a debt crisis which was the result of similar behaviors that led to the housing bubble in the US – irrational spending. For Europe, that spending was fueled by a large drop in interest rates with the introduction of the Euro in 1999, and then by the low interest rate policy of most developed countries as a way of stimulating the economy.

Governments and individuals in Europe borrowed heavily. People purchased cars, houses and other property, and banks backed risky financial ventures. In Spain, banks controlled by the Roman Catholic Church built luxury seaside condo buildings as investment property. When the recession led to job losses, the banks were left holding massive amounts of bad debt and were at risk of going out of business. Governments made guarantees to keep the banks operating and consequently, some of those countries had insolvency problems. These debt problems still plague some countries and overall economic growth in Europe has been reduced.

In the Middle East and North Africa: war, refugees, and for some countries, low oil prices. This turmoil will last for many more years – except, perhaps, the low oil prices – and will probably need more intervention from developed countries before things will stabilize.

The Chinese government has fueled a significant portion of the Chinese economy for years through massive public works projects – roads, airports, etc. Last year, they attempted to shift the economy to one less dependent on government spending and more on personal consumption. The Chinese people, however, are not very comfortable with irrational consumption; they are savers. They also have the example of the U.S. housing bubble and the European debt crisis to show them the potential problems with making purchases beyond a person’s means. Still, with the reduction in government spending on public works projects, the Chinese economy is growing more slowly and the rest of the world is nervous.

So, these external factors do have an adverse effect on the US economy, but not enough to explain the low rate of wage growth and other factors plaguing low income workers. Since the U.S. is a consumer economy, our own spending should generate the growth that would lift all boats – help all people. This is where I believe wealth inequality hurts the country.

The Middle and Lower Income Classes

While it’s common knowledge that the rich are getting richer, there is also compelling evidence that the poor are getting poorer and the middle class is shrinking. Why is this the case? While the middle class has been shrinking, both the upper income and lower income classes have been growing. The significant reasons for the move from the middle class up to the upper income group is demographic changes, pensions and social security.

We now have Baby Boomers retiring at a rate of 10,000 a day. These are the older members of that generation and most have benefited from riding the wave of the large, consumer-driven population behind them. Many have traditional pension plans in which their employers invested an average of 6% of their wages toward retirement instead of the 1.5% average for 401(k) plans that most full-time workers have today. So these early Baby Boomer retirees have social security and pension income, plus benefited from high interest rates in the 70’s and 80’s and impressive stock market performance in the 90’s through today.

Going from the middle class to the lower income group is a little easier to see. While the unemployment rate has been reduced substantially over the past 5 years, wage growth has been anemic. During that same period, certain costs have increased greatly including rents. Nearly 8 million homes were lost to foreclosure following the bursting of the housing bubble and the people who lost their homes can no longer get approved for a mortgage. Simply from a supply and demand standpoint, this surge of renters (up from 31% of all US households a decade ago to 37% now) has allowed landlords to charge significantly higher rent than just a few years ago. Household incomes have also fallen to 1995 levels so a greater portion of a working person’s income goes to living expenses, especially housing. Other factors can knock someone out of the middle class including major medical conditions or job loss.

What surprised me in the Oxfam report is that the wealth of the bottom 3.6 billion people fell by over a trillion dollars during the last 5 years – a 41% decrease. This now makes sense. Lower income workers in the US and abroad earn less and pay more of what they earn for housing and food. Gas prices have come way down, but only a small percentage of the poorest 3.6 billion people would have a car, so there’s little benefit there.

The Case Against Excessive Wealth Inequality

So why have I concluded that excessive wealth inequality is a bad thing?
1. Not all boats are being lifted. In fact, costs for lower income individuals are rising much faster than income.
2. To whom are these payments made? #64 richest individual Donald Bren (50,000 apartments), #216 richest Stephen Ross (large scale housing projects in New York, although some are affordable housing), #255 Stan Kroenke (30 million square feet of property – largely retail, but I wanted to get back to Stan, so here he is), and me (three apartments). So the increase in wealth for the top 62 richest people in the world is generally at the expense of the poorest half of the population.
3. In my opinion, this financial stress on the middle and low income classes erodes a foundation of our society and cannot continue indefinitely without social consequence (not sure how severe, but would rather shore up the foundation than deal with the collapse).

Posted in Economics, Uncategorized | 2 Comments

Is the United States in Peril?

Posted on January 14, 2016 by tonyj126

If you listen to some of the U.S. presidential candidates – especially on the republican side – you could be convinced that the United States is at risk of being overrun by illegal immigrants or terrorists, losing its superior military position in the world, degrading morals beyond all redemption, falling into another devastating economic recession, or having our guns taken away. That is not the peril to which I am referring. Most of that is fear mongering which serves the purpose of scaring the electorate into voting for the candidate who they feel can best address those risks. In most cases, it’s the candidate who speaks most frequently about the risks that is thought to be the authority on the subject – whether that is warranted or not. In politics, repetition sells.

I’m talking about a much more insidious threat – the fear of compromise in politics which now seems to be coming part of the fabric of this country.

There have always been differences of opinion about how best to approach various situations. That is especially true in economics where, even when there is strong evidence pointing to a specific solution, long-held opinions are not often changed. When it comes to how best to help the less privileged, the approaches are very different. The liberal case is that some people need extra financial or other help – a social safety net – and the funds to construct that net should come mostly from those privileged individuals with high income. The conservative view is that all people are helped when businesses are allowed to thrive, so the best way to help the less fortunate is to allow them to have a choice of jobs by removing regulation and other barriers that hobble businesses. One of those barriers is a high income tax rate for high earners which leaves less money for the business owners to create those jobs.

What I didn’t mention is the compromise position in which all sides work together to develop a complete program of education and tax reform, long-term planning to remove uncertainty, a review of regulation and a targeted social safety net for those who fall through the cracks. The cooperation that would be needed to construct an integrated system like this just doesn’t exist in Washington these days. I am a moderate and I would very much like to see bipartisanship and the fruits that would result from those efforts.

There is a very good reason why cooperation may get worse before it gets better – gerrymandered congressional districts. The practice of drawing congressional districts to benefit one party over the other goes back to 1788 in Virginia in which Governor Patrick Henry convinced the legislature to redraw the 5th district to disadvantage political adversary James Madison. The term gerrymander came from the federalist-leaning Boston Gazette which combined the surname of Governor Elbridge Gerry and the shape of a newly drawn district in Essex County that resembled a salamander.

If a state leans democratic as a whole, for example, and the democrats are in the majority in the state legislature, they may choose to draw districts in such a way that each district is comprised of 53% democratic voters. In that way, it is likely that more democrats will be elected to the House of Representatives than republicans. Note that whoever is elected in this situation is more likely to be a centrist because that candidate needs to appeal to members of both parties.

If the districts are drawn in a different way, you end up with representatives on opposite sides of the political spectrum. The districts could be drawn so a majority of them have 65% democratic voters and a minority have 65% republican voters. To win these races, the candidates would need to appeal more to the extremes in their political parties – strongly liberal and strongly conservative.

There have been many cases of redrawing districts to carve out safe conservative or safe liberal seats perpetrated by both parties in state government, and some strangely shaped congressional districts have been the result. The congressmen and women like these safe seats because this system offers the chance to become a career politician rather than serving one or two terms and losing to someone from the other party when a popular presidential candidate brings out more voters than usually participate in an election. Unfortunately, this has resulted in a partisan House of Representatives in which compromise is almost never achieved.

Not only is compromise elusive, rhetoric is getting mean. For many congressmen and women, the only challengers who may beat them come from their own party and often have more extreme views. Members of Congress show how conservative or liberal they are when they speak on the House floor or speak to reporters and those speeches and interviews are often laced with insults and derision for their colleagues and others whom they feel are not worthy. For many of these Representatives, that derision can be directed toward the American people who do not share your views. Liberals have attacked the super rich and conservatives have attacked welfare mothers.

That is the real peril for the United States – we are becoming a country of “us” versus “them.” This conflict is reinforced by political pundits and shouted out of our televisions and radios. I have often wondered if we human beings are programmed to destroy each other. The frequency, and sometimes duration, of wars throughout history is pretty impressive. It’s possible that our willingness to fight each other is a natural selection-honed instinct that strengthens the herd by killing off the weak. Modern weaponry has changed the equation, especially with the advent of nuclear weapons.

I’m not 100% sure of this, but I would bet good money that we are living in the longest period without a major war – that is, one that affects a large portion of the population – since the development of the first city-states. We can thank nuclear weapons for that. (You rarely find people expressing their thanks for nuclear weapons, do you?) But now, our natural instincts may be looking for that fight, and we’re identifying the Americans who are not like us as the enemy.

Donald Trump is a genius at tapping into this fight instinct and he has redirected it. His supporters accept his claims without question, or at least without feeling that they need to verify the facts, and turn that need to fight against the targets he gives them. Mexicans, Muslims, the other presidential candidates. He makes a claim and his supporters embrace it. He is actually bringing the “us” and “them” Americans closer together while they focus on the outside enemy. Pure genius.

I don’t know how long this coming together can last, however. After the presidential election, we will still have a very partisan House of Representatives and the rhetoric will continue. When two separate set of ideas – let’s call them theologies – exist within one nation, conflicts will inevitably arise. We’re seeing some of that now. The “We are the 99%” movement has been replaced by the “Black Lives Matter” demonstrations. The “us” versus “them” scenario seemed pretty obvious to me when affluent white middle age men started saying “All lives matter.” To me, that seemed like a way of discounting the other side.

Why do I call this a peril? Do you remember the ISIS capture of Ramadi last May. In the Western media it was portrayed as a failure of the Iraqi military forces because they abandoned their weapons and retreated. They offered little resistance to the ISIS fighters. Why? Poor training? Ineffective command? There is another more compelling reason. The Iraqi forces are largely Shiite and Ramadi is a largely Sunni city. There is such long running animosity between Shiite and Sunni that the military personnel may have had a different perspective than we Westerners can imagine. Perhaps it wasn’t considered to be a conflict between Iraq and ISIS, but rather another in a long line of Sunni-Shiite conflicts. The soldiers may simply have decided that they were not going to risk their lives to save a Sunni city, so they left.

If the American “us” versus “them” rhetoric continues, we may end up fighting ourselves and that could get ugly. There’s a little of that going on right now in Burns, Oregon, with the armed takeover of a federal wildlife refuge. Let’s not forget the anger in the African-American community whenever a black person dies at the hands of the police. Things are simmering right now and they could boil over if we’re not careful.

As Donald Trump has so brilliantly done, we need a common enemy to bring us together. Perhaps that enemy could be opioid addiction or gun violence in Chicago. There are many choices for enemies we could attack together and come out of it a better country.

Finally, I would like to point to a community that put their differences aside and worked and worshipped together. The often violent Sunni-Shiite rift has been going on for many centuries and on numerous occasions, one side has committed atrocities against the other. That is in fact what is happening today in Syria and Yemen. But in one country, the two religious sects have worshipped together peacefully for many years – the United States. The 300,000 or so Muslims in this country are a shining example of how people with different beliefs can coexist in peace and harmony.

Posted in Economics, Musings, U.S. Politics, Uncategorized | Leave a comment

Of Ladybugs and Congressmen

Posted on January 13, 2016 by tonyj126

Did you catch the Steinbeck reference in the title?

I’m still working on the next part of the America Great series, but there’s a lot of research still to do, and sometimes I just feel like writing. That was, in fact, one of the reasons I began this blog: to hone my craft – to become a better writer. (Note to self: look up the best way to use dashes & colons). So while I will have one or two series in progress at any given time, I’ll write on completely unrelated topics as well to keep the writing process flowing.

My primary research source for the next part of the America Great series is the Conference Report on the Concurrent Resolution on the Budget For Fiscal Year 2016 (House of Representatives Report 114-96). Bad weather gave me the chance to read through more of the report than I had expected because my flight was delayed more than four hours on Sunday when the Detroit Metropolitan Airport was closed by snow. Still, I did fall asleep a couple time while trying to read the report – it’s not easy reading.

My last post about investing for a Millennial Generation economy grew out of Sec. 6202. The House of Representatives Policy Statement on Economic Growth and Job Creation (page 80). The statement laments the “slightly more than 2 percent” real Gross Domestic Product (GDP) growth rate from 2010-2014 and the projected 2.3% growth rate for the next 10 years versus the historic 3.2% rate. The policy statement goes on to describe how the sluggish growth negatively impacts many aspects of the economy and Americans’ quality of life, and proposes fixes.

That is when I developed the idea that this new norm – if that’s what it is – is the result of changes in spending patterns from an aging Baby Boomer population. If so, the country needs to look forward and plan accordingly, not look back and take drastic actions designed to bring back the glory days. With the generational shifts that are happening in this country, those glory days may not be achievable within the next few decades. The children of the Millennials may grow wary of their parents’ frugality and become the new big spenders, but that will take a while.

As I mentioned in that earlier post, my wife and I are at the tail end of the Baby Boomer generation, and our spending habits have also been changing. As is the way of the world, our children have moved out of the house and are pursuing their own lives. That leaves two of us living in a 5-bedroom house that we really should sell and move into something smaller.

Before then, I have do some work to get the house ready to sell. I, of course, will do the work myself because I like to be frugal (my wife would probably use the term “cheap”). Until I can get everything done and put the house up for sale, I’m taking measures to reduce the costs of living in such a large house. For winter, that can best be described as hypothermia.

I have closed off bedrooms that are not being used and covered the heat vents. I have programmed the thermostat for a 4°F difference between when I’m home alone and when my wife is at home. I’m willing to be cold to save money. I burn a fire in the soapstone fireplace to warm up the family room & kitchen area for the day (free energy!), then go up to my cold office to work because the fireplace also warms up the thermostat and the heat doesn’t come on as often as it otherwise would. In addition to the fireplace, we have a hot tub so I can always go to bed warm. Yes, I ran the electric, poured the concrete and built the deck around the hot tub myself. My wife may be right in the “cheap” versus “frugal” debate.

And that brings us to the ladybugs. I got annoyed with our cable TV supplier when they raised the price of our service by about 35%. They supplied our high speed internet, about 150 television channels that we almost never watched and a home telephone service. I wasn’t going to stand for a price increase like that. I purchased my own cable modem & wireless router, reduced my service to just the high speed internet and about 10 TV channels and saved about 65% off the new higher price. I lost the phone service, but we barely used that anyhow, so it didn’t matter. Or so I thought.

I have a security system (installed myself, of course) which monitors temperature and sound and calls me if something is outside of its designated range. I can then go online and view the live camera images to see what’s going on and decide on the next course of action. The system also controls the programmable thermostat and with a phone call I can turn the temperature up or down. That is why I need a phone line.

Before our recent trip to New York, I purchased a Voice over Internet Protocol (VoIP) phone service package, but didn’t have time to install it before we left for our flight. With my wife in agreement, I lowered the thermostat to 52°F to save energy during our time away. Since our flight back was early in the day, and we have the fireplace and hot tub, we could be warm while the house heated back up once we got home. I hadn’t counted on that 4+ hour flight delay or appreciate the length of time it takes to heat up the house. My wife spent a couple hours walking on the treadmill in a winter coat and hat, and it was too windy to go into the hot tub. Live and learn.

One unexpected result of the 10 day drop in house temperature followed by a return to 70°F was the effect on our hibernating ladybug population. During the summer, I put our house plants outside so they don’t die while I’m away or busy with one project or another. When I bring them back in before the first frost, some ladybugs come along for the ride and end up hibernating until spring. The ladybugs thought spring had arrived on Sunday evening. We now have one to two dozen confused looking ladybugs all over the house and I’m giving them some water and putting them back in the plants. At least I assume they were in the plants – I really have no idea where ladybugs hibernate.

Well, I should probably go and do some of that other work I have been neglecting. I’ll make a promise to myself. If I win tonight’s $1.5 billion PowerBall jackpot, I’ll hire someone to get the house ready to sell instead of doing all the work myself. Maybe.

Posted in Economics, Musings, Uncategorized | Leave a comment

How Should We Invest for a Millennial Generation Economy?

Posted on January 12, 2016 by tonyj126

My wife and I are Baby Boomers – the tail end of that generation, but Baby Boomers nonetheless. The named generations for those born in the twentieth and twenty-first century are:
– GI Generation (born 1901-1924)
– Silent Generation (born 1925-1942)
– Baby Boomers (born 1943-1964)
– Generation X (born 1965-1979)
– Millennials (born 1980-2000)
– Generation Z (born 2001-2015)

The U.S. economy has been largely consumer driven since the end of World War II because the Baby Boomers and Generation Xers are known more for buying stuff than for saving money. There is a logical chain of events that can explain this consumerism. The Great Depression and World War II had a lasting effect on the GI and Silent Generations. The GI Generation were savers because you could never be sure when another era of deprivation would be coming.

For their children, that deprivation came from their parents in the form of stinginess and dire warnings about what could happen if they were not prepared for financial upheaval or the next inevitable war. And that war seemed awfully close and would be more devastating that any that preceded because of the destructive power of nuclear weapons. The Silent Generation was raised to fear so many things beyond their control that they held tightly to the things they could control. The worked hard, saved their money and tried to raise their children to live the same way.

Their children would have none of it. By the time the earliest Baby Boomers reached those rebellious late teen years, World War II was fifteen years in the past and neither the U.S. nor the Soviet Union had attacked the enemy with nuclear weapons. There had been conflicts between communist and capitalist countries during the Baby Boomers lives, but it affected a much smaller percentage of families than did previous wars. More Americans died during the Korean War than during World War II, but the geographical scale of the conflict was much smaller and the war was further away. With the U.S. economy booming, the Baby Boomers developed an optimism that their parents could not have mustered after their upbringing during the Great Depression and World War II.

The United States became the manufacturer to the non-communist world following the war. This is an easy thing to achieve when, other than Pearl Harbor and a couple Aleutian Islands, the fighting was not done on American soil. The competition to U.S. manufacturing was almost completely destroyed in Japan and Continental Europe, and the United Kingdom suffered substantial Industrial losses as well. The U.S. was also in a strong financial position. The United States suffered more than any other country during the Great Depression and entered World War II rather weak financially, but by the end of the war, the U.S. was a large creditor nation. Many European countries owed large sums to the U.S. for military supplies provided during the conflict.

Finally there was the social change. The Baby Boomers’ parents grew up with the warning that irrational exuberance was followed by disaster – that is, the Roaring 20’s was followed by the Great Depression. Consequently, for the Silent Generation, there was a resistance to changing the country’s social landscape. The Baby Boomers had less prejudice to change. The country’s prosperity made change inevitable. The most important vehicles for social change came from expanded electrical service throughout the country and a greatly improved highway system. Very quickly people could see what was happening far away by either traveling there or watching the news or entertainment on newly acquired televisions. While by no means unanimous, the Baby Boomers more readily accepted that someone was no less a person just because of the color of his skin. For some, their embrace of new music trends led to a community feeling which leant power to the idea that change was a force for good.

So Baby Boomers lived during a time of economic prosperity, nuclear threats that never came true, and significant social change in the country. For the older members of this generation, the jobs were plentiful, employees and companies were loyal to each other, and success was available for anyone who had talent or the ability to work hard. They had the advantage of riding the Baby Boomer wave. The large size of the generation ensured that they would fuel the economy for many years and the older members could reap the financial rewards from their established positions within companies.

So how did the Baby Boomers become so obsessed with obtaining possessions? There is a term in this country known as “Keeping up with the Jones.” The wealth acquired by the older Baby Boomers led to the purchase of new and better cars, houses, televisions, etc. Those houses were generally outside of the cities (in the suburbs) so that the “wife and kids” could have places to plant flowers, run and play without the concern of the crime that was a problem in American cities. As more people moved to the suburbs, the cities looked more dangerous because there were fewer people who looked like the wealthier Baby Boomers.

Once in the suburbs, people’s possessions were more on display. Unlike apartments in the cities in which the exteriors looked pretty much the same, life in the suburbs meant that the appearance of the house, landscaping, car in the driveway and breed of dog were under constant scrutiny. I believe suburban living and the desire by a large number of Baby Boomers to “Keep up with the Jones” by purchasing the newest and best products available led to the our consumer driven economy. Let’s not forget with whom they were keeping up with. The “Jones” weren’t just the neighbors on your street, they were also all those wonderfully happy and successful people portrayed in magazines and on television programs and advertisements.

So now let’s consider Millennials. We are the parents of two considerably different members of that generation. One is driven and will graduate as a chemical engineer in a few months. She has signed a 2-year commitment to work for a large food products manufacture and will begin her professional life this summer. The income is very good for a single women. Our son is living in a beautiful part of the country, hikes or runs in the mountains almost every day, has minimal expenses, works part-time by choice, teaches himself to play new musical instruments for fun and is very much enjoying life. He’s taking some online classes and exploring his options, but strongly feels that he will end up working outside the traditional employer-employee relationship.

From an economic standpoint, these considerably different Millennials are quite similar. They can be entertained for countless hours with a $7.99 per month Netflix account, or with video games played on a $350 Xbox, or watching shows or movies on an iPad or on the TV using ChromeCast. They don’t need the big house, the new car, the perfect landscaping. My daughter would like to live in a vibrant city and is willing to drive an hour one way to the manufacturing plant, if necessary, but her day-to-day costs will still be low. If she could find a chemical engineering job within a desirable city, she wouldn’t even own a car.

This generation likes to travel, but inexpensively; they like to hike and camp. They don’t have loyalty to employers because they know that the companies will not be loyal to them. Many work from home in the contractor-rather-than-employee economy which is prevalent in this age group.

Relationships are more casual and marriage may not be in the cards. The number of 30-year-olds who reported never being married doubled in the 2010 census versus the fairly consistent numbers reported in the 1980, 1990 and 2000 censuses. If they do have children, they will buy the best and are willing to pay for it, especially if they live in or near affluent cities. They’ll get the best locally grown organic foods and a super-stroller of some sort, but they’ll teach their children to live simply as they do and appreciate nature and public art. Because many work from home, they will not necessarily pay for childcare, but rather work out a bartering arrangement with other parents for time away without the kids.

So what will the Millennium Generation economy look like. Less consumption, but there will certainly be areas that will benefit. Technology, especially software that entertains or informs using inexpensive or existing hardware, will be in demand. Socially conscience products which make the purchaser feel as if he or she is helping correct an injustice will also be appealing to this demographic. Millennials will purchase fewer products and more services such as eco-travel, rock climbing memberships, parent-child exercise classes, weeks at ecologically-themed camps for the kids, and probably dining out.

So, how does one invest for this new economy? With consumer purchases driving 70% of the U.S. economy, what will happen when the Baby Boomer and Generation X consumption is replaced with Millennial Generation thriftiness? Keep in mind that Baby Boomers hit retirement age at a rate of 10,000/day for the next 15 years.

Targeted investment is going to be very important. Unless U.S. consumerism is replaced by purchases of U.S. products and services in other countries, the economy will grow more slowly. The Congressional Budget Office seems to recognize this and predicts a real Gross Domestic Product growth rate of 2.3% over the next ten years. The post-World War II historic real GDP growth rate is 3.2%.

For the first time ever, I am advising against having an S&P 500 Index Fund as the core investment in a portfolio designed for the long term unless you purchase it after some panicked selling. Of course, trying to predict the bottom of a market correction is like trying to catch a falling knife – you may get hurt.

So, what to buy? I think multi-family rental real estate in desirable cities and organic farms within a couple hours of affluent cities would be good investments, but not liquid ones. Alternative schooling options could be lucrative if you choose the right one. There’s a lot of money in education and I have some ideas, but I’ll save that for another post. Stocks of certain companies will rise even when the rest of the market falls, so the right tech and food company stocks could work out.

A Tale of Two Bubbles and One Stock

I’m already beginning to miss the Baby Boomer spending patterns. I bought stock in Corning, Inc. in 1998 for $42/share. The Dot Com bubble drove the stock price up to about $340 because all those new technology companies were going to generate a huge demand for fiber optic cable and Corning was #1. There was a 3 for 1 stock split and the bubble burst. Corning’s stock dropped to $1.10/share – more than a 99% loss. That was the first bubble.

If I had bought shares of Corning at around the $2 range in late 2002 and held it, there would be a better ending. The Baby Boomers came to the rescue for Corning. When interest rates for treasury bonds fell, investors wanted a safe investment vehicle that paid more than treasury bonds. That was the beginning of the housing bubble because Wall Street invented a way for investors to obtain a good yield with little risk by bundling mortgages together. This was a very smart idea (no, I’m not being sarcastic – it was a brilliant idea as originally designed). Investors loved it and wanted more and that’s when things went wrong. Garbage loans were made to people who couldn’t afford them and the investments no longer contained a normal collection of mortgages where the long-term default rate was known, but a higher and higher percentage of bad mortgages just to generate more investment options to meet the huge demand.

So the Baby Boomers were convinced that housing prices would always rise and generate high rates of return on their houses and rental property. They took out mortgages which they could never pay if the market dropped, took equity out of their houses by refinancing those loans into other mortgages they could never pay and spent the money. One of the popular things to buy in order to keep up with the Jones – big screen television sets. As the world’s #1 glass maker, Corning’s business picked up and the stock rose nicely. If I had picked up those $2 shares five years earlier, I could have sold them for about a 1,300% gain in late 2007 and paid for my kids’ college by sticking the profits in 529 education accounts. For such an astounding investment success, you could thank the Baby Boomers.

The Millennials, on the other hand, watch shows and play games on tiny screens on their cell phones. Kids these days! How am I supposed to invest now?

Posted in Economics, Musings, Uncategorized | Leave a comment

No, Really. Donald Trump Could Win the U.S. Presidency

Posted on January 9, 2016 by tonyj126

Strange things are happening. I had an earlier post in which I suggested that Donald Trump could win the presidency if he has a large number of closet supporters – that is, supporters who do not want other people to know that they support Trump. For some, they may wish to keep their support a secret because they don’t want to be thought of as intolerant which is how many media organizations portray Trump and some of his supporters. That is not an issue in the voting booth. There, no one knows who received your vote.

Yesterday, in a bathroom stall at the Museum of Natural History in Manhattan I saw some surprising graffiti. It was correctly spelled and read,

“Obama Hilary Sanders
Socialist anti-American
Communist
Send all socialists to
Cuba and Venezuela”

This strikes me as strange and prompts a few questions.
1. Who typically vandalizes bathroom stalls with graffiti?
2. Who visits museums like the Museum of Natural History?
3. What is the demographic makeup of those who believe that the current president and the top two democratic candidates to replace him are socialists and communists?
4. Who would express those beliefs in the anonymous format of bathroom stall graffiti instead of via some online format?

1. Believe it or not, there have been multiple studies on bathroom gravity. Men are more prolific than women at bathroom poetry, and in general, men use the space to exaggerate their manhood and women are more likely to write insults and knock others down. In this way, the museum graffiti did not follow the norm. It was an attack written in a male bathroom stall. As far as demographics, most bathroom stall graffiti is perpetrated by high school students and they are more likely to have brought the marker with them for when nature calls.

2. Students of all ages visit the museum along with their adult chaperones. There are plenty of tourists – many with their families. Looking at this demographic doesn’t really clarify the picture much.

3. There are some strong emotions being stirred up by this U.S. presidential election and the wording of the graffiti shows how powerfully the perpetrator feels about the situation. It could be a middle-aged man on vacation with his family or a chaperone for his kid’s school trip. It could be a student who absorbs and regurgitates the opinions he hears at home or on very conservative broadcast media. It could be a museum employee who just happened to have a permanent marker in his pocket and took the opportunity to express his views.

4. It’s probably safe to assume that the person who would use the bathroom stall instead of online forums is either a middle-age or older man who’s not as comfortable with social media, or someone who believes that the federal government monitors the internet to the point where he would be found out. Alternatively, the bathroom stall may be just one of his outlets and he is also active spreading his message online.

So what does this graffiti tell us? A man feels very strongly that democrats do not serve the people – as their bumper stickers state – but are in fact anti-American and should be deported. This person holds an extremely conservative ideology. This man also decided that he needed to share this ideology with other men in a way that kept his identity secret. The message is not the norm for bathroom stall graffiti, so it likely means that the perpetrator is not the typical bathroom stall vandal – i.e., a student. He brought a marker with him, so this was a premeditated act and there are probably other similarly defaced bathrooms around New York City.

I think that the graffiti is the product of a very angry middle-aged man who subscribes to the views of extremely conservative television and radio programming, but doesn’t want to share his views publicly. It’s possible, of course, that the bathroom stall is just one outlet for this man, and he is not shy about spreading his ideology, but I don’t think so. Let’s not forget that the graffiti was correctly spelled. To me, that suggests that the bathroom stall was chosen for anonymity and that this man is not actively spreading his beliefs in a way that would lead to his unmasking.

Let’s assume that he does not want to be identified as a believer of these extreme views. If so, he is part of that group which I call Trump’s closet supporters. The characteristics that identify this group are:
1. Middle-age men and women;
2. Angry (the condition at which that anger is directed doesn’t matter as long as it can be directed toward democrats);
3. Secretive (they don’t want others to know their views).

Truly strange things are happening in this election campaign, and Donald Trump could be our next president if he has a large number of closet supporters. It certainly isn’t a boring election season.

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Part III-A: What Should We Use for the Minimum Size of the Federal Government? (America Great Series; Taxes, Economy & Jobs)

Posted on January 8, 2016 by tonyj126

For today, I will describe the U.S. Federal government budgeting process, break down federal spending based on the 2015 fiscal year budget, and determine a “minimum size of federal government” based on a rough consensus of economic plans and statements from the field of republican presidential candidates. In my next post, I’ll discuss the 2016 budget resolution from the House of Representatives in which the budget deficit would be eliminated within nine years (it may take a while before I can make that post – the budget resolution is 210 pages of descriptions and tables).

In order to figure out the number of jobs that would be lost from a cut in government spending, we need to know the size of that cut. For 2015, the federal government spent $3.68 trillion to pay for the expenses dictated by law, as determined by appropriations bills passed by Congress and signed by the president. That spending falls into three categories: Interest on Federal Debt ($229 billion, 6.03%), Mandatory Spending ($2.45 trillion, 64.63%), and Discretionary Spending ($1.11 trillion, 29.34%). I’ll provide more detail on the spending categories a bit later, but first I wanted to give a primer on how those appropriations bills become law.

The Budget Process in the United States
1. The President submits a detailed budget request to Congress by the first Monday in February for the fiscal year which begins in October of that year;
2. Congress holds hearings to question administration officials about their requests and then develops its own budget plan which is called a “budget resolution;”
3. Congress passes annual appropriations bills to authorize disbursements to federal agencies in the amounts outlined in the budget resolution;
4. The President signs the appropriations bills which thus become law.

Current Breakdown of Spending
Based on the 2015 fiscal year budget, the government spends $3.68 trillion as follows:
Social Security, Unemployment & Labor: $1.28 trillion (33.26%)
Medicare & Health: $1.05 trillion (27.42%)
Military: $609.3 billion (15.88%)
Interest on Debt: $229.15 billion (5.97%)
Veteran’s Benefits: $160.63 billion (4.19%)
Food & Agriculture: $135.7 billion (3.54%)
Education: $102.26 billion (2.67%)
Transportation: $84.99 billion (2.22%)
Housing & Community: $61.48 billion (1.60%)
International Affairs: $50.22 billion (1.31%)
Energy & Environment: $44.85 billion (1.17%)
Science: $29.81 billion (0.78%)

The U.S. Treasury divides all federal spending into three groups: mandatory spending, discretionary spending and interest on debt. The breakdown:

Mandatory Spending
Social Security, Unemployment & Labor: $1.25 trillion
Medicare & Health: $985.74 billion
Military: $10.81 billion
Veterans Benefits: $95.31 billion
Food & Agriculture: $122.57 billion
Education $0
Transportation $58.7 billion
Housing & Community $0
International Affairs $0
Energy & Environment $0
Science $0
Other $0
Government $0
TOTAL: $2.57 trillion

Discretionary Spending
Social Security, Unemployment & Labor: $29.13 billion
Medicare & Health: $66.03 billion
Military: $598.49 billion
Veterans Benefits: $65.32 billion
Food & Agriculture: $13.13 billion
Education $69.98 billion
Transportation: $26.28 billion
Housing & Community: $63.24 billion
International Affairs: $40.94 billion
Energy & Environment: $39.14 billion
Science: $29.7 billion
Other: $58.18 billion
Government (split among the departments listed above): $72.89 billion
TOTAL: $1.11 trillion

Guidelines
Since I’m evaluating the economic plans for the republican presidential candidates in this post, I will make the “minimum size of federal government” decisions based on the general consensus of candidates’ campaign promises. In general, the republican candidates have indicated that they would cut the size of the federal government, but end the sequester cuts to the military and increase support to seniors, veterans, Israel, and energy exploration. In addition, all candidates would repeal and replace ObamaCare. Based on these statements, I formulated the following assumptions to calculate the amount of money to cut, if any, from every discretionary line item in the 2015 federal budget. I also assume some partisan actions. Guidelines:
1. Cut programs which benefit likely Democratic voters (e.g., mass transit) more than those for likely Republican voters (e.g., farm income stabilization);
2. Don’t cut programs that benefit seniors or veterans;
3. Cut programs with a regulatory component to reduce regulation;
4. End the sequester funding cuts to the military;
5. No cuts to programs which help businesses;
6. Cut environmental programs;
7. Don’t cut law enforcement programs;
8. Don’t cut aid and military guarantees to Israel;
9. Repeal and replace ObamaCare.

Minimum Size of Federal Government
Since spending from the Mandatory category is off-limits, how do these guidelines reduce the $1.11 trillion Discretionary spending?

Discretionary Spending: 1.11 trillion
minus $102 million from National Defense
minus $31.8 billion from International Affairs
minus $24.636 billion from General Science, Space & Technology
minus $2.152 billion from Energy
minus $23.687 billion from Natural Resources and Environment
minus $639 million from Agriculture
minus $2.654 billion from Commerce and Housing Credit
minus $931 million from Transportation
minus $5.83 billion from Community & Regional Development
minus $20.568 billion from Education, Training, Employment & Social Services
minus $3.039 billion from Health
minus $0 from Medicare
minus $12.484 from Income Security
minus $0 from Social Security
minus $0 from Veterans Benefits & Services
minus $630 million from Administration of Justice
minus $2.089 billion from General Government
plus $100 billion to bring Military back to 2011 funding level
EQUALS $1.083 trillion

Together, these assumptions represent a total reduction in government spending of $31.241 billion and a total budget of $3.65 trillion instead of the $3.68 trillion for the 2015 budget, a 0.8% reduction. Note that using these assumptions, there would be no or greatly reduced federal spending on science research, environmental protection and cleanup, foreign aid other than Israel, housing & community, international peacekeeping, and many other programs.

Additional federal government savings could come from a repeal and replacement of ObamaCare, however, that is by no means a given. The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) – excluding the effects of macroeconomic feedback which is the norm for CBO evaluations – concluded that a repeal of the Affordable Care Act (ACA) – commonly known as ObamaCare – would increase the federal deficit by $353 billion over the next 10 years. The increased economic activity that the CBO & JCT expect to result from a repeal of the ACA would generate $216 billion over that same period leaving a net deficit of a repeal of $127 billion. Without detailed information on a replacement plan, it is impossible to estimate its affect. Consequently, I will not address the repeal of ObamaCare in the “minimum size of government” calculation because there is not enough information to determine a replacement program’s effect and because its repeal alone would increase the size of government.

Conclusion
The Minimum Size of the Federal Government that I will use to determine the effect of budget cuts on jobs and the economy is $3.65 trillion.

Note
I will upload a spreadsheet next week with the information showing the amounts I cut from each discretionary line item and my reasoning.

Next Time: Part III-B: An Evaluation of the 2016 House of Representatives Budget Resolution

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Cringe Factor

Posted on January 4, 2016 by tonyj126

We have a game called Cards Against Humanity. Some of you may be familiar with the game Apples to Apples and you play both games a similar way. The winner of a round for both games is the person whose answer card best matches the question card in the opinion of the judge for that round. The difference between the two games has to do with the nature of the question and answer cards. In Apples to Apples, the communal question cards (green apple cards) are mostly adjectives and the answer cards (red apple cards) are generally nouns (underlined in the following examples). You may end up with winning combinations such as Handsome Michael Jordan or Handsome Meatloaf depending on the particular sense of humor – or hunger – of the judge for that round.

In Cards Against Humanity, on the other hand, the question cards are statements with blanks to be filled in with the answer cards. This is an adult game and some winning combinations are, “And the academy award for Not giving a shit about the third world goes to White people,” or “I drink to forget drinking alone,” or “Rumor has it that Vladimir Putin’s favorite delicacy is Poor people stuffed with A lifetime of sadness.” As you can see, you get some interesting combinations and it is reasonable to expect that some people with whom you are playing the game may feel uncomfortable with some of the answers. There is a cringe factor to the game which makes it fun for some and disturbing to others. I believe most people who are willing to play the game fall into the category of considering it fun.

I thought of this game in relation to the current rebellion against political correctness in the U.S. presidential campaign. This is more than just a passing occasional statement by the supporters of one or more candidates. On December 21, Mr. Trump tweeted “THANK YOU Grand Rapids, Michigan! Time to end political correctness & secure our homeland!” Political correctness has been targeted as an enemy to be defeated by several republican presidential candidates and their supporters. They want to be able to say and do things in public that cause some people to cringe, and they feel that it’s not their problem if those people feel uncomfortable – it’s the insidious tendrils of political correctness ruining our society. It’s as if they want to play Cards Against Humanity with the whole country everyday instead of with a small group friends and acquaintances at a party.

It seems that we are becoming a country of extremes. While we have this rebellion against political correctness, there are also protests against things which, in my opinion, really don’t warrant protests. The most extreme case I have found is a protest against a yoga class at the University of Ottawa. (Yes, I know that Ottawa is in Canada so I’m not talking about the same country, but it’s such a good example, I decided to use it anyway.) Some students recently protested a yoga class because it is a case of cultural appropriation. To me, yoga is a beneficial practice that came to the attention of Western countries through practitioners and India. I don’t believe yoga’s adoption by people in the West has caused harm to the Indian culture from which yoga originated. On the contrary, a sharing of beliefs and experiences with people who are not “like you” can help build connections and foster understanding that may make future political conflicts less likely.

There are plenty of examples where the people from the original culture suffer when wealthier countries enthusiastically adopt one of their practices, but yoga isn’t one of them. Food, on the other hand, is. Quinoa is the perfect example. It has been a staple of the native diet for the people of Andean Mountain communities for centuries. Years ago, NASA scientists identified it as the ideal food source for long-term human space missions because of its essential blend of amino acids, but it remained largely unknown outside of health food stores until about the middle of the last decade. I remember first running across quinoa as a free sample at Costco and no one even knew how to pronounce it correctly. That certainly has changed. Quinoa is everywhere, it seems, and that has resulted in a problem in the poor rural communities from where the plant originates. Between 2006 and 2011, the wholesale price of quinoa tripled and its consumption in those impoverished Bolivian communities dropped 34%. Many of the people who have relied on this perfect plant food for centuries could no longer afford to purchase it and malnutrition had become a real threat.

That situation may be worth protesting, but then again, market and social forces offer hope for a solution. The increased worldwide demand will encourage more production and expand farming in other areas of the world with similar climates. Production will probably increase and prices will come down. That’s the market solution. The social forces will come from people concerned about the plight of those who are negatively impacted by these changes. That only works, of course, if they can get significant media coverage. There was a New York Times article from March 2011 which first brought the changes occurring in Bolivia to the world’s attention. Since then, there has been periodic attention paid to the plight of the people living in the Andes, degradation of the soil due to overproduction, and the benefits of quinoa for farmers in Bolivia and foodies in New York.

The jury is still out, so to speak. Perhaps we Westerners are negatively impacting the poor people of Bolivia and Peru. I cringe a bit about the harm that I may be causing those less privileged in the world, but for Christmas dinner I made a delicious shredded Brussels sprouts and quinoa salad as a side dish. Does my feeling bad about about it make everything okay? Would it help if I provide the link for the salad recipe?

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How Can We Make America Great Again? Part III: Let’s Explore Taxes, the Economy and Jobs

Posted on December 29, 2015 by tonyj126

What Actions Should a Government Take to Produce the Best Economy?
Looked at objectively, there should be an answer to that question. “Big Data” can keep track of all our searches, travels and purchases, and provide highly targeted advertising based on the patterns of our lives. Surely, it’s possible to take information on tax increases or decreases, job growth or loss, economic expansion or contraction and other factors to determine a “Best Practices” approach for government.

What we have instead is a system where politicians, economists, pundits and even people like me make bold statements about the merits of various actions and promises that their plans are the only ones that produce the best economic outcome. If policies are not derived from careful objective data analysis, but rather from our elected leaders’ long held beliefs – or cronyism – then their proposals for economic renewal or stability will differ wildly. I will try the careful objective data analysis approach.

A few givens
1. Different economic policies produce different winners and losers;
2. In general, liberal and conservative members of Congress represent opposing sides of the economic winner/loser equation;
3. The thing about long held beliefs is that it is really hard to change someone’s mind, even with indisputable evidence;
4. Indisputable evidence doesn’t seem to exist in economics – you can always find an opposing view;
5. Consumer spending accounts for about 70% of the U.S. economy when using gross domestic product (GDP) as the metric;
6. The personal savings rate in the U.S. is about 5% and wealthier Americans have a higher savings rate than poorer Americans;
7. An income tax cut gives people more spending money which stimulates the economy and leads to job creation when spent;
8. A cut in government spending reduces business income for some companies and reduces the number of public and private employees. Consequently, some people and businesses have less spending money which acts as a drag on the economy and reduces job growth;

Not everyone agrees with these “givens”
1. The wealthy get wealthier with tax cuts, but the poor may be worse off because they see less support from social safety net programs since tax cuts usually come with spending cuts. Proponents of tax cuts as a way to stimulate the economy claim that their policies lift all boats, so everyone wins when taxes are cut because there are more jobs and less need for the social safety net.
2. Conservatives generally favor lower tax rates for high income earners and liberals generally favor higher upper-income tax rates and more money for social safety net programs.
5. While the 70% of GDP number is not in dispute, some strong business proponents contend that it’s the wrong metric to use for evaluating the impact of consumer spending on the economy. GDP discounts the economic activity from the intermediate steps in the process to bring a product to market. For manufacturing, as an example, the final product of a detergent uses raw materials that were produced by another company that used other raw materials supplied by a third company and so forth. For domestic production, that detergent has a more substantial impact on the U.S. economy that does an imported detergent because of those people and companies in the U.S. who produce the raw materials. Valid point. One estimate I have seen suggests that by including the intermediate production in addition to GDP, consumer spending drives only 30% of the US economy.

Should the Federal Government Cut Taxes and Spending?
The republican presidential candidates all plan to cut taxes and simplify the tax code. They claim that the tax cuts will stimulate the economy and create more jobs than are lost from the corresponding cuts in government spending – a necessary action if the budget deficit and debt are to be contained. To figure out if tax cuts are the correct solution and if so, what the tax rate(s) should be, we need a way to judge the effect of factors which impact jobs and taxes.

The Equation – My Own Formula
Net Job Growth =
# Jobs Created by Individual Income Tax Cuts +
# Jobs Created by Business Tax Cuts –
# Jobs Lost from a Simplified Tax Code –
# Jobs Lost due to Federal Government Spending Cuts (to minimum government size) +
# Jobs Created by Increased State & Local Spending (transfers from federal gov.) –
# Jobs Lost to Inefficiencies in State/Local vs. Federal Management of Services +
# Jobs Created by Increased Social Security & Medicare Spending for Baby Boomers

I will comb the available data to arrive at numbers for each of those items in the equation and present my reasoning, calculations and sources. This is a really big topic and I’ll break it up into several parts. These posts will be less narrative and use more bullet points than I typically employ in order to make the math easier to understand (I hope). So, let’s get started.

Next Time: Part III-A: What Should We Use for the Minimum Size of the Federal Government?

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