Month: November 2012

Charitable Giving

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This is the time of year when many people reach out to their favorite charities.  Consider a charity that is helping with disaster relief after SuperStorm Sandy, provides meals for families and seniors, provides housing assistance for those in need, and so much more.  No, it is not the Red Cross, the Meals on Wheels program or Habitat for Humanity.  The charity is the U.S. government.  They are desperately in need of funds.  As they help clean up after Sandy, they have not even finished paying for damages from hurricane Katrina that battered Louisiana, Mississippi and Alabama in 2005.  Anyone can donate online at the U.S. Treasury.  As with other charities, you can use a credit card.

During and since the drafting of the U.S. Constitution over two hundred years ago, we have argued over the wording of the “general welfare” clause of the Constitution (Article 1, Section 8).  James Madison, a Federalist and chief drafter of the Constitution, said that the phrase was a limited power conferred on the federal government; that “general welfare” meant that welfare which applied to all the people.  You can read Federalist Paper No. 41 for his more lengthy explanation of this controversial phrase.

The anti-Federalists, always suspicious of the powers given to a large and powerful central government, replied that “general welfare” could mean anything.  What, they argued, was to prevent this newly formed Federal Government from becoming a charity?

Madison scoffed, arguing that the taxing power was restricted to only those taxes which were uniform throughout the country.  The taxing power is specified in the same sentence as the “general welfare” clause, separated only by a semicolon.  Therefore, it was preposterous that anyone could argue that “general welfare” could mean anything.

Alexander Hamilton, also a Federalist and an advocate of a strong Federal Government, argued that the “general welfare” clause was essentially a plenary power given to Congress, in line with its power to spend.  To the anti-Federalists, this violated the spirit of the Constitution which was designed to enumerate, or limit, the powers of central government.

In short, Madison says general welfare is limited by the taxing power that immediately follows.  Hamilton says it is not limited because Congress’ power to spend is not limited. 

United States vs. Butler in 1936 and Helvering vs. Davis in 1937 were two Supreme Court decisions that sided with Hamilton.  What the anti-Federalists had warned about was about to come true.  The U.S. Government was on its way to becoming – over the next 75 years – the largest charity in the world.

Some think that charity should be part of a government’s role; although some of those would argue that charity should not be the chief role of a government, as it is now.  Some argue that charity should not be in the hands of government.

Many of us will receive appeals from many charities during this season of giving.  The Treasury does not mail appeals for money despite the fact that it is performing the same helpful acts as other charities.  Charity Navigator, a charity watch dog organization, does not rate the U.S. Treasury for its management of the funds it receives.  But the Treasury really does need the money as it helps to feed, cloth and house millions of people each month.  

Cliff Diving

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November 18th, 2012

This past week, President Obama gave a post-election news conference, answering a number of questions about the fiscal cliff due to take effect on January 1st if the lame duck Congress and the President can not come to an agreeement on some budget bandaging.  The stock market has had the jitters since the first week of October, falling 9% since then; about half of that decline came after the election.  At almost the same hour that it became apparent that the balance of power in Washington would remain the same came the unwelcome forecast of no growth for the Eurozone in 2013.  When in doubt, get out.

For the past two years, there have been few “Kumbaya” moments in the halls of Congress or the White House.  The market has had a good run this year; capital gains taxes could increase next year; many decided to take their profits and run.  A I wrote a month ago, the drop in new orders for durable goods was troublesome.  Three weeks ago, the newest durable goods report showed further declines yet consumer confidence was up, creating a tug of war and I waved the yellow flag, saying that the “prudent investor might exercise some caution.”

For the long term investor who makes annual investments in their IRA, this drop in the stock market is an opportunity to make some of that contribution for this year.  If the wrangling over revenue and spending cuts continues over the next few weeks, the market could drop another 10 – 15%. When budget negotiations collapsed in July – August 2011, the market declined almost to bear market territory – about 19%.  All too often, some of us wait till the last minute in April to make our annual IRA contribution. 

The “cliff” terminology was spoken by Fed Chairman Ben Bernanke at a hearing in February.  He probably wished he had chosen less colorful language but he was probably trying to wake up some of the senators at the hearing.  How bad is this cliff?

The total measured economic output of the U.S., its GDP, is estimated by the BEA (Bureau of Economic Analysis) at around $16 trillion – $15.85 trillion, to be exact, based on this year’s estimated growth of about 2.2% and next year’s average 2.75% estimate of growth.  What’s a trillion dollars?  About $9000 for every household in the country.

The non-partisan Congressional Budget Office (CBO) estimated some of the economic impacts if we did go over the cliff; in other words, if the spending cuts and revenue increases occurred next year.  Below is a chart of the percentages of GDP that each component of spending cuts and revenue were to occur.

The total of these is 3.2% of the economy.  Well, that’s not Armageddon, you might think and you would be right. As I mentioned earlier, forecast growth is only about 2.75% for next year so that means that GDP would contract slightly next year.  On the other hand, the cliff sure helps the deficit for next year, cutting it by almost half.  The deficit is projected at about $1.1 trillion before spending cuts and revenue increases.  In more manageable numbers, the country is going to go further into debt next year to the tune of almost $10,000 for every household.

Politicians in front of a microphone are prone to hyperbole.  So are news anchors.  Politicians try to sell their version of the story; news anchors try to keep our attention.  Small numbers like 3.2% of GDP might not get our attention so we could hear more dramatic numbers.  News anchors may say “Spending cuts of $100 billion” because $100 billion sounds important.  But without a total or a percentage, we have no context to evaluate the amount of money.  Is $100 billion a little or a lot?  $100 billion in spending cuts is .6% of the entire economy, or 2.6% of the budget for this coming year.  We may hear “Revenue increases of $400 billion,” which sounds gigantic.  It is 2.5% of the economy, or an additional 13.8% of the projected federal revenue.  Remember, even with the revenue increases, should they take effect, the country’s budget will still be “in the red” an estimated $600 billion dollars, or $5400 per household.

This country needs more revenue and it needs to cut expenses.  Each side of the aisle will fight to protect the “job creators” (interpretation: people with money) or the “working poor” (interpretation: people who are barely making it week to week) or the “middle class” (interpretation: the rest of us).  Tax the other guy, not me.  Cut the other guy’s deductions, not mine.  Cut subsidies, but not mine.  Cut expenses but not in my industry or area of the country. This is the same kind of behavior that 5 – 8 year old kids exhibited in an experiment featured on CBS’ 60 Minutes tonight.  Maybe, just maybe, we need to grow up.

Fiscal Cliff

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Just pulled out of ElectionVille.  Next stop is FiscalCliffe.   Some of us ride in plush seats, some in coach, others stand in the aisles or ride on the roof, but we are all on the train. In the front car are the really plush seats where the President and Congress sit.   They occupy the front car because they are supposed to be looking out for what comes ahead but they spend most of their time arguing with each other. 

“We need to hook up some more cars so that those people riding on the roof can sit in safety,” the President says. 

“We won’t have enough coal for the engines to pull that many cars,” Republicans say.

“We need have those who are sitting in the plush seats pay more,” the President insists.

“They are already paying way more than their fair share,” Republicans counter.

“The passengers on the train have spoken.  They want the plush seats to pay more,” the President responds.

“They kept us in power in the House because the House controls the money.  They trust us to manage the money and we can not betray that trust.  If we make the plush seats pay more, then the plush seats won’t need as many porters and we will lose jobs,” the Republicans parry.

“I am not going to make the other passengers pay more when the plush seats can easily afford a little more,” the President maintains.

In September, I wrote about the coming “fiscal cliff”, a self-imposed austerity program of spending cuts and tax increases that is due to take effect Jan. 1, 2013, unless the President and Congress can agree to some fiscal balancing program.  After all the election talk and negative campaigns now comes the fiscal cliff chatter, which I am now adding to.

We are about $250 billion away from the debt limit of over $16 trillion dollars.  The Treasury will run out of money by the end of this year.  With some financial sleight-of-hand, the Treasury expects that they can make it till February of next year before the debt limit must be raised.  In July and August of 2011, President Obama and the Republican House could not come to an agreement to raise the debt limit and avoid default.  The fiscal cliff of upcoming spending cuts and tax increases became the devil’s bargain that were agreed to in the compromise that led to the raising of the debt limit to its current level.  The President did not want to come back to Congress for more money until after the election.  After the momentum of the 2010 elections, Republicans thought the election just past might give them control of the Senate and the Presidency.  The grand bargain was set to take effect after the 2012 election, each party thinking that the voters would make a clear choice in the elections.  Instead, the voters chose a divided government with the same power balance as before the election.  In short, voters said “Work it out.”

“Grandpa, what’s the pistol cliff?”

I snort a quick laugh and the inner comic in me speaks up.  “It’s a place where we are all going to shoot ourselves in the foot with pistols.”

“Will somebody shoot my foot?” 

I’ve really stuck my foot in it this time.  “No, your feet will be fine.”

“Will mommy be able to walk after her foot gets shot?”

“Your mom is not going to get her foot shot.  No one is going to get shot.  I was just making a joke.”

“I was on a cliff over the ocean this summer and there were big rocks at the bottom on the beach and the water was going ‘whooompf’ all over the rocks.”

“I’ll bet that was pretty,” I say.

“Cliffs won’t hurt us as long as we stay on the path and don’t climb over the rail.”

Amen, I think.

In the early nineties, the Democrats made a deficit cutting bargain with the first President Bush:  in exchange for tax increases, the Democrats would agree to spending cuts – after the recovery from the recession.  The tax increases were put into law and cost President Bush a second term.  The spending cuts that the Democrats promised never came.  In 1994, the Republicans took the House and forced the issue.  The symbol of the Republican Party is an elephant – and elephants don’t forget.  The President and Democratic Senate Majority Leader, Harry Reid, will be in budget negotiations with John Boehner, the Republican House Majority Leader, who was in the House in the early nineties.  Also present will be Mitch McConnell, the Senate Minority Leader, who was in the Senate at that time.  It is doubtful that either of these two Republicans have forgotten.    

Power To The People

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A moment to acknowledge the personal caring and effort of ordinary people, the courage and doggedness of first responders during the superstorm “Sandy” and a heartfelt sympathy for those who lost loved ones during the storm.  Mile long lines of cars waiting for gas brought back vivid and unpleasant memories of the 1970s when many of us who lived in NYC would get up at 4 AM just to wait in line for a few hours to buy gas so we could get to work.  Resilience and persistence are bred into many New Yawkers (that includes you guys and gals in Jersey, too).  The clean up and repair will test every ounce of both during the next year.  Some losses, of course, are not the kind that can be repaired, only endured with the support of family and friends.

                                                                  _________________

The October employment figures released two days ago showed an increase of 171,000 jobs this past month, about 50,000 more than expected and a welcome relief to the Obama campaign.  Retail and restaurant jobs posted strong gains and health care jobs continued their strong growth. 

More people started looking for jobs, bringing the unemployment rate up a smidge to 7.9%. The year over year percent change in unemployment is relatively healthy, as shown on the 60 year chart below.

This past week came a series of positive reports.  Consumer spending rose .8% in September and home prices continue to improve, showing a .5% monthly gain in the Case Shiller index of 20 leading cities.  Both of these indicators have shown recent strength but the year-over-year gains for both consumer spending and home prices is a plodding 2%.

Consumer confidence has shown strong improvement the past four months and is expected to have about the same positive sentiment level as last month’s survey. As I noted last week, the consumer has lately shown more confidence than the business community.  The Chicago manufacturing index dropped last month and is now at a stall speed.  Tomorrow the national manufacturing report will be released.  The manufacturing sector is certainly responding to the weakness in Europe and slowing growth in China and southeast Asia.

While the employment gains were welcome, there are too many negatives that continue to show.  We are barely keeping ahead of population growth.  Below is a chart showing an index of employment and population growth.  We are still down about 7% from the peak in late 2007, which was more of a bubble level of employment.  We could reasonably target mid-2004 levels.

The core work force of those aged 25 – 54 is showing a little upward movement over the past two years but is still anemic.

Most of the job gains are going to older workers above 55. “Get out of the way, pops!” may become the mantra of younger generations. 

The loss in production jobs leads to a continual increase in the proportion of management and professional jobs.

Hourly Earnings gains are flat out terrible, hitting an all time low.

There are still too many people working part time because they can’t find a full time job.

The number of discouraged workers is declining but is not healthy.

Retail sales, particularly auto sales, are an indication of rising consumer demand.

But after adjusting for population growth in the past decade, we have finally climbed back up to where we were 8 years ago.

To show the correlation between retail spending and employment, I’ve overlaid an index of one over the other.

As you can see, retail sales lead employment gains and losses.  I sincerely hope that retail sales will continue to improve and turn around the recent business pessimism.  My chief concern is the lack of competence and character in Congress on both sides of the aisle.  This coming election will do little to alleviate those concerns.