Author: sgstofka

Adults Wanted

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The end of another month ending involving billing customers, paying taxes, balancing the bank accounts and closing the books.  Each month it becomes apparent that one of the reasons why there is not more robust job creation is the “invisible” employee costs, both in dollars and in the business owner’s liability.  By invisible, I mean that these costs are typically out of sight and out of mind to most employees.  These costs are quite visible to the owner who, failing to account for them in their business pricing, soon goes out of business.

These costs were designed to be invisible to employees because if most employees knew all the costs, some politicians might lose their jobs.  A paycheck with a gross amount of $1000 might have $200 or more taken out for taxes and health care premiums.  The net amount of the paycheck is $800, which is what we get to spend on bills, rent/mortgage, food, transportation and a movie. We grouse about the $200 in taxes but that $200 pales in comparison to the invisible costs that don’t show on that paycheck stub.  Most of these costs are mandated by either Federal or State law and include Workmen’s Compensation insurance, Unemployment Insurance, Liability Insurance, and Social Security and Medicare taxes (employer’s half).  The cost of these mandates goes into neither your pocket or the employer’s pocket. Benefit costs include health insurance, retirement contributions, education reimbursements, vacation and sick pay.  Mandated costs and benefits can easily add $500 to $1000 in cost to that $1000 gross paycheck amount.  In addition, there are indirect costs which include office and production equipment, rent, utilities, and transportation, as well as the internal costs of accounting, supervision, and training.  After those costs, that $1000 gross paycheck can have a final cost of $2500 or more. 

The indirect costs are simply a part of any business; they are the costs of producing a dollar of revenue to the business.  My chief concern is the invisible insurance and tax mandates whose costs are hidden from employees.  By making the employer, not the employee, responsible for the payment of these costs, politicians could more easily sweep them under the rug.  Some people strongly object to the health insurance mandate but how many protest or are even aware of the Unemployment Insurance mandate or the Workmen’s Compensation Insurance mandate?  Many are not aware simply because the cost is paid by the employer.  While the employer may write the check, the employer “deducts” the cost from the employee by lowering the gross amount that they can pay to an employee.

I am not making a case against these insurances and taxes that add a safety net for workers.  What I do object to is the surreptitious way that lawmakers have enacted them in order to hide the magnitude of the costs of these safety programs.  Because these mandates are structured as a payment from the business and not the employee, Workmen’s Comp, Liability, and Unemployment Insurance are rated based on the company’s industry classification and claims history.  An employee who has worked twenty years without an accident is charged the same amount of money as his/her co-worker who does not pay attention to safety regulations and common sense.  The same holds true for liability insurance; a thoughtful employee and a careless employee pay the same amount.  In some construction industries, Workmen’s Comp and Liability insurance can be 20% or more of gross pay – not a trivial amount.  Should a careless driver and an accident-free driver pay the same amount in auto insurance?  Of course not.  Yet that is how Workmen’s Comp, Liability and Unemployment Insurance are rated.  Since there is no individual worker history, no individual experience rating, there is no direct cost tied to a worker’s actions.  An employee can become naturally divorced from the consequences of their actions.  Often an employer will not add another employee if they are not sure whether he/she will be able to keep them on six months from now.  The reason is that many, if not all, states will increase the unemployment insurance rate for that business when the employee is let go in six months and files for unemployment insurance.  It can be more cost efficient for an employer to pay some overtime to existing employees to make up the extra work till the employer is sure that business volume is on the increase. 

Unlike the other insurance mandates, the health care mandate at least makes individuals personally responsible for their own insurance.  With no direct responsibility for their own Workmen’s Comp, Liability and Unemployment insurance, employees are effectively treated, in the eyes of lawmakers, like teenage children.  A host of state and federal employment regulations only confirms that status.  In the eyes of our laws,  employees are not quite adults.  Employers are treated by state employment agencies as though they were the parents of not quite fully responsible teenagers and the burden of proof is on the employer to show that the employer complied fully with regulations.

How did we get here?  During the second World War, the Federal Government was running up extremely large war costs and experiencing severe cash flow problems.  One problem the government had was that tax payments were not due till March 15th of each year (in 1954 the date was changed to the current April 15th), which meant the government had to borrow a lot of money each month.  Many people were not paying all of their taxes, either income or the Social Security tax enacted several years prior.  The problem of collecting delinquent taxes presented yet another costly headache for the government.  A noted economist of the time, John Kenneth Galbraith, suggested a solution last used eighty years earlier during the Civil War:  make employers withdraw the taxes before they paid their employees.  This would both solve the problem of timely collection of taxes and curb much of the delinquency.  It would be much easier for the government to go after the far fewer businesses in the country than millions of individual taxpayers.  Thus the withholding system was born again. (A history of taxes)

Once the mechanism of withholding was in place, politicians realized what a boon this was.  Taxpayers dislike taxes and the politicians who enact them. Politicians could now increase existing insurance costs and mandate new ones without the taxpayers – the voters – constantly being reminded of these now invisible costs.  Politicians simply had to change the law, then notify a relatively small number of businesses to pay more.  That created a new problem for business owners.  Politicians had effectively deflected the disapproval of voters onto employers.  When an insurance cost goes up, it is difficult for an employer to say to an existing employee that the employer will have to reduce an employee’s hourly wage or salary to make up for this increased cost.  For subsequent hires, an employer can reduce the hourly wage or salary that they will offer to a new employee.  The employer has two alternatives:  raise the price it sells its product or service; or eat the increased cost.  Employers complain about this state of affairs long and loud. They form trade groups and lobby their state legislatures.  The politicians get the better of a bad situation:  listen to loud protests from a lot of voters and possibly get thrown out of office or have to listen to a relatively few employer lobbyists.

I am not advocating the abandonment of the withholding system, which does solve the problem of timely tax payments.  I am advocating for a system that directly charges those who are going to benefit from the safety net that exists – the employees.  This is no longer the paper and pencil age of World War 2.  Digitized records would enable most state and federal agencies to assign individual ratings to employees based on their history.  A new or existing employee presents their individual rating for various types of insurance to the employer and the employer deducts the amounts and sends to the appropriate agency, just as they do now.  The difference is that the employee gets to see what he/she is being charged for and might in some cases be able to control some of those costs.  Instead of being paid $20 an hour, an employee might be paid $34 an hour.  The cost to the employer is the same.  For many of these mandated costs, the tax write offs to the employer are the same; it is a cost of producing business income.

What can we do about it?  Press your elected representatives for individual ratings for these insurances.  An employee who has never filed for unemployment insurance pays the same as a person who has collected six months of unemployment insurance last year.  Does that seem fair?  Why have an employee half and an employer half of the Social Security and Medicare tax?  It all comes out of the employee’s pocket in the long run.  Why the game of hiding the costs?

Imagine a world where an employer can have a bit more sales volume, hire an employee and let them go if sales subsequently fall off.  An employee who is let go would then make the choice of whether to collect unemployment.  They might absolutely need the unemployment insurance and that would affect their individual unemployment rating the same as it does when we file an auto insurance claim.  They might try harder to get another job or switch to a different job in order to keep their individual unemployment rating pristine.  It would be the employee’s choice.

Imagine a world where the employee controls what they put away for retirement.  If you want to put away $6,000 a year tax free into a 401K retirement plan, why shouldn’t you?  Why have the charade of the employer matching your contribution by some percentage?  How did we get to the point where employee compensation is a haunted house of smoke and mirrors?  

Imagine a world where an employee is not bound to an employer for insurances and benefits and tax benefits.  Imagine a world where the employee has choices.  Imagine a world where the employer pays the total of the employee cost to the  employee and the employee then sees the true scope of deductions.  In fact, we do have that world now.  Employers are increasingly using subcontractors and temporary agencies as a way to sidestep the burdens of employment.  From the BLS July Labor Report: “Temporary help services has recovered 98 percent of the jobs lost during the most recent downturn.” (Source).  Tell your state and federal representatives that you would like a different world – one in which you are treated like an adult.

Labor Report – July

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Skipping into the Oval Office Friday morning, President Obama’s campaign manager called out with glee, “Mr. President, 163,000 jobs!”
“Buy, buy, buy!” traders shouted on the floor of the N.Y. Stock Exchange.
“Let’s take a six week vacation!” John Boehner, the House Speaker, cried out.
Concentrating on the .1% uptick in the unemployment rate, Presidential contender Mitt Romney said, “the president’s policies are to blame for not having gotten the economy back on track.”

What to make of these conflicting numbers?  Economists and market watchers were anticipating a gain of 100,000 jobs.  Economists guesstimate that a growth of 150,000 jobs per month is needed to absorb the increase in the working population.  163,000 is above 150,000; so how did the unemployment rate tick up from 8.2% to 8.3%?

The headline job gain number comes from the Current Employment Statistics program, a monthly survey of 141,000 businesses and government agencies that represent almost a half million worksites.  This “Establishment Survey”, as it is sometimes called, counts jobs, not people.  The addition of two part time jobs will count as two jobs even if only one person is working those two part time jobs.  Not all businesses return their survey forms to meet the monthly deadline so the Bureau of Labor Statistics (BLS) estimates the results and this first estimate becomes the headline number that gets so much attention from the market and political pundits.  The following month the BLS issues a 2nd estimate, followed by a 3rd estimate a month later.  The chart below shows the differences between the 3rd estimate and the first estimate (BLS source ).  As you can see, the revisions can be substantial. (Click on graphs to open in a separate tab)

On September 2nd, 2011, the BLS released their August report showing a gain of 0 (zero!) jobs.  The stock market sank 2.6%.  The 3rd estimate, released in November, showed job gains of 104,000, not 0!  The BLS will further revise the job gains for a particular month as state unemployment reports and other data becomes available to the BLS.

These job gains are seasonally adjusted.  One of the seasonal adjustments for July is the customary shut down of auto factories in July.  This year, in response to demand, auto manufacturers did not shut down their factories but the BLS makes the adjustment regardless.  Several analysts reason that this seasonal adjustment accounted for about 25,000 of the 163,000 jobs gained.  Despite all these shortcomings, the CES is regarded as the more accurate count of jobs.

The unemployment number comes from a separate monthly survey of 60,000 households conducted by the BLS.  While the Establishment Survey does survey small businesses, it misses a good chunk of the really small businesses, the mom and pop operations, that form an important backbone of the economy.  The Household Survey is often thought to overestimate the total number of jobs in the economy but it gives a detailed picture of the workforce and the unemployed.  From this survey we learn of the age, racial, and education characteristics of the employed.  Each month I look at two aspects of this survey: the growth or decline in what I call the core work force, those aged 25 – 54 years old, and the larger workforce aged 25 and older.  The actual number doesn’t matter as much as the increase or decrease in the adult work force – the trend in job growth.

The graph below charts the year over year percent gain or loss in the core work force.  It is still positive, leveling off after climbing up from negative territory a year ago.

For a bit more perspective, let’s zoom out and look at the past 20 years.

A graph of the year over year percentage gains in the larger work force aged 25+ shows that we have just about reached the high point of job growth during the 2000s.  We would need to at least maintain this level of growth to make up for the job losses during this past recession.  We would like to see job growth more like those we experienced during the high tech boom of the 1990s but the investment in new technology during the 1990s was particularly strong.  A catalyst for such a fundamental growth in the economy is not on the horizon.

The market experienced what I think is a relief rally on Friday.  Persistent troubles in Europe, a slowdown in the growth of China and other Asian emerging economies, lackluster employment reports for May and June, and a tepid 1.5% GDP growth in the second quarter had spread fears of a coming double dip recession. Had the BLS issued a job gains estimate of 50,000, for example, the market would have probably declined 2+%.  Back in April of this year, I wrote about an employment indicator that has been a reliable predictor of recessions.  When the percent change in the unemployment level crosses above zero percent, it’s time to get into the storm cellar and batten down the hatches!

-1% is an indicator of a rebounding labor force midway in a recovery from a recession.  I’ve marked up a thirty year chart of the year on year (y-o-y) percent increase/decrease in the unemployment rate to show the trend.  Had we not shipped so many jobs to China after they joined the World Trade Organization in 2001, we might have had the spurt of job growth recovery that we experienced in the early eighties. 

As the chart below shows, that kind of strong post-recession job growth is not the norm.

Larry Kudlow, a CNBC host, and other “supply sider” pundits are presently making the case that Presidential contender Mitt Romney will usher in a new era of the same kind of unusual job growth we experienced in the 1980s.  Anything is possible, of course, and hosts of financial shows make their money by making headline predictions.  Those of us without a TV show must pay more diligent attention to the law of averages, to the probable, not the possible. That law of averages makes it unlikely that either a President Obama or a President Romney will achieve historically unusual declines in unemployment.  In Britain the slow news months of summer are called the “silly season”.  In these few months before the election, Americans will experience a truly silly season, not for the slowness of news but for the sheer deluge of outlandish and annoying political ads making accusations and far-fetched claims. After that silly season will come another silly season, the Christmas shopping tournament! 

Taxes – Not In My Backyard!

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There is a lot of discussion about the renewal of the Bush tax cuts enacted in 2003.  This past week the Senate passed a bill to renew the tax rates for all those with less than $250K taxable (not gross) income – $200K if filing single.  The measure is unlikely to pass the Republican dominated House which wants the cuts extended for all taxpayers, including the wealthiest.

For many of us, the tax rate cuts started in 1987, not 2003, after the Tax Reform Act of 1986.  Below is a 100 year chart of historical tax rates for a married couple with two children with a gross income of $66,000 in inflation adjusted dollars (thanks to the Tax Foundation)  After the standard deduction and exemption allowances, this is approximately $40,000 in taxable income.  This is middle class income, slightly below the median for married couples.

As you can see, we have enjoyed comparatively low income tax rates for the past twenty-five years.  For the past ten years, we have been conducting two wars without paying for them.  The rich are not paying.  The middle are not paying.  When our parents and grandparents ran up huge debts fighting WW2 and recovering from the 1930s Depression, they increased taxes on the middle class and the rich to pay down the debt.  This generation, the children and grandchildren of that WW2 generation, decided they had a better idea – charge it!  After all, we have expenses that previous generations didn’t have – like our cable TV bill and internet bill and cell phone bill.  The WW2 generation also had bills that previous generations didn’t have – car, electrical and phone bills for services and products that their parents and grandparents didn’t have.  Did they use that as an excuse to reduce their taxes?  No.

We continue to argue over how much government services and programs we want.  We argue over how much to spend on defense.  We argue whether we want somebody (but not us, God forbid) to pay more in taxes.  While we argue, the Federal debt continues to climb.

GDP and Elections

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“Bummer, dude!” may be what President Obama’s election campaign manager thought when the quarterly GDP figures were released this past Friday.  Second quarter growth clocked an anemic 1.5% annualized growth rate – a tepid pace – but one which was slightly above the market consensus of 1.2%.   This first estimate of quarterly GDP growth is often revised up or down 1/2% as more data comes in (BEA Source).  Second and third revisions to the GDP growth rate will follow in August and September, but pose a challenge for any re-election campaign.  What is the pace of this recovery?  It has been three years, or 12 quarters, since the official end of the recession in the 2nd quarter of 2009.  In that time, real or inflation adjusted GDP has grown 6.7%.  What has the been the real GDP growth rate of past recoveries?  Below is a comparison of the total GDP growth of past recoveries and the Administrations in office at the 3 year mark after a recession (Click to enlarge in separate tab)

At the 3 year milestone after the 1960-61 recession, President Johnson had been in office for just two months after the assassination of Kennedy in November 1963.    At mid recovery after the long recession of 1973 – 75, Carter took over the reins from President Ford, who had taken office after Nixon resigned over the Watergate scandal.  Likewise, President Clinton took office from the first President Bush near the middle of an ongoing recovery from the recession of 1990 – 91.  In addition to the disgrace of resignation, President Nixon never enjoyed three years without a recession and so does not make it on this chart.  President Johnson has the distinction of never having a recession during his tenure in office.

Although the media and the public like to pin the economic tail on the President, the House and Senate have much more to do with the economy than the President.  Bills originate in the House (primarily) and Senate. Presidents do not initiate legislation.  Below is that same chart showing the mix of House and Senate during each recovery since WW2.

We can’t say that the strongest recoveries are when the House and Senate are the same party as the President.  We might be able to say that recoveries are strongest when Democrats are in the House, but Democrats ruled the house, except for four years in the late forties and early fifties, from 1933 through 1994 – a period of almost sixty years! (Metric Mash)  This doesn’t leave much for comparison.  We can’t say that a mixed Congress of Democrats and Republicans produces a weak recovery.  What makes this recovery unique is that, for the first time since at least 1900, the House switched parties during an economic recovery (Congressional Research Service, NBER and Metric Mash).  In the 2010 elections, anger over the health care act helped fuel a newly established Tea Party which worked within, not outside, the Republican Party and helped that party gain a large number of seats to take the majority in the house.  If history is any guide, the American public can change direction in the House during a recession, after a recovery, but not during a recovery.  The recovery plans set in place by either party need a chance to work themselves out.  To interrupt those plans in midstream produces a stalling effect.

Do the weak economic figures doom Obama’s re-election?  Not so, according to 538.  Whoa!  What’s 538?  The answer is who’s 538. And the answer to that who? is Nate Silver, a statistician who developed a system for predicting the performance of baseball players.  His methods for analyzing baseball proved to be suprisingly accurate in predicting the 2008 and 2010 elections.  After his almost perfect predictions for the 2008 electoral races and the recipient of a few awards, the NY Times licensed Mr. Silver’s blog in 2010. 

You can find Mr. Silver’s take on what the latest GDP figures mean for the election here.  Mr. Silver also has an interesting article on the primary economic indicators he thinks have the most influence on voter’s choices.  You can bookmark his blog here.  

Health Care and the Supremes, Part 1

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Sorry, no pictures or graphs this week 😉

A few weeks ago, the Supreme Court ruled on the constitutionality of the health care act.  26 states brought suit against the government, asserting that the Government had no constitutional authority to impose a penalty on people for not buying health insurance.  Regardless of the arguments for and against, many of us have a gut level aversion to the Federal Government, or a State Government, for that matter, forcing us to do something.  While living in Brooklyn in the early 70s, I knew two people who had left good jobs to take sporadic cash only jobs because they did not want to be forced to have their taxes pay for the Vietnam War, a war they – and many others – believed was immoral.  In my state, Colorado, there have been many who think that the state government has no right to force drivers to wear seat belts.  For those of you in the more crowded coastal states with better public transportation systems, driving in the western states is as much a necessity of living as eating. 

The Government argued that Congress had the power to impose an individual mandate to buy health insurance under the following authorities: 1) the power to regulate Commerce as found in Article 1, Section 8, Clause 3 of the Constitution; 2) the Necessary and Proper Clause (clause 18 of the same section); and 3) the taxing power in the Constitution.

Writing for a 5-4 majority, Chief Justice Roberts rejected the first argument, writing “Congress has never attempted to rely on that power [the constitutional power to regulate Commerce] to compel individuals not engaged in commerce to purchase an unwanted product.” (pg. 18 majority opinion) He asserts that the Constitutional grant of power to the Congress to regulate Commerce does not imply that the Congress can create Commerce.  On page 20, he writes “The individual mandate … does not regulate existing commercial activity.”  On pg. 24, Roberts writes “The Framers [of the Constitution] gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress’s actions have reflected this understanding.”  In short, “regulate” does not mean “create” nor does it mean “compel.”

During oral arguments, Justices Roberts and Kennedy had repeatedly asked the government advocate for a limiting principle to Congress’ authority to regulate Commerce.  On page 21, Roberts makes an important distinction in the Wickard v Filburn case regarding a 1942 law that had the effect of regulating a farmer, Roscoe Filburn, growing wheat for his own consumption.  The Wickard decision, Roberts summarized,  upheld Congress’ authority to regulate the production of something, not the consumption of a product.  The individual mandate regulates the consumption of a product.  “Accepting the Government’s theory would give Congress the same license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal Government.” (pg. 23) 

On page 25, Roberts rejects the Government’s oft repeated argument that individuals are inherently “active in the market for health care,” writing that any inactivity can be said to be participating in some arbitrary market; without any limiting distinction, the phrase has no constitutional significance. He writes “Our precedents recognize Congress’s power to regulate ‘class[es] of activities’…not classes of individuals, apart from any activity in which they are engaged.”  He finds that the individual mandate breaks precedent: “The individual mandate’s regulation of the uninsured as a class is, in fact, particularly divorced from any link to existing commercial activity.”  Who can regulate individuals?  The states alone have that power: “Any police power to regulate individuals as such, as opposed to their activities, remains vested in the States.”

Roberts rejected the government’s second argument that Congress has the authority to impose the individual mandate under the Necessary and Proper Clause as a regulatory mechanism associated with the existing economic activity of healthcare.  The Government argued that the mandate is an “integral part of a comprehensive scheme of economic regulation.”  Roberts reasserts previous precedents that the intention of this clause of the Constitution is to unequivocally grant Congress power which is incidental or instrumental in enacting the powers enumerated in the previous clauses of that section of the Constitution.  It does not give Congress new powers or enable Congress the ability to expand its power.

The Government’s third argument, a fallback position, was that the mandate was not “ordering individuals to buy insurance, but rather as imposing a tax on those who do not buy that product.”  Roberts cites previous precedents that “if a statute has two possible meanings, one of which violates the Constitution, courts should adopt the means that does not do so.”  On page 31, Roberts writes that “The most straightforward reading of the mandate is that it commands individuals to purchase insurance.”  However, he acknowledges the merits of the Government’s contention that the mandate “can be regarded as establishing a condition – not owning health insurance – that triggers a tax” and that the mandate “makes going without insurance just another thing the Government taxes, like buying gasoline or earning income.” (pg. 32) Roberts acknowledges that this interpretation of the mandate is not the most natural one, but cites previous precedent that “The question is not whether that is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.”

For the purposes of the Constitution, is the individual mandate a tax or an “assessable penalty?”  Roberts cites several previous laws in which Congress has shown that it regards a tax and a penalty as two separate entities. He quotes a previous decision, that of Drexel Furniture, which ruled that what distinguishes a penalty from a tax is whether an exaction or payment is punitive.  If so, then it is a penalty.  The tax imposed by the individual mandate is less than what it would cost someone to buy a policy, indicating that Congress had no intent to impose a punitive penalty. The individual mandate does not have a scienter requirement typically associated with a penalty; that an individual must have intent or knowledge that their action or inaction is against the law.  In addition, there is no criminal prosecution if someone does not pay the tax, another indication of Congress’ intention that the mandate is a tax.  In the law, there is no requirement to buy an insurance policy; there is only the imposition of a tax if you don’t buy a policy.  Roberts also cites an older precedent regarding the child labor law tax.  Even though the law called it a tax, the court held that, because it was very punitive, it was a penalty, regardless of what Congress called it.  Roberts is continuing to build on previous court decisions to reinforce the court’s policy that, although the court should regard the use of a particular word by Congress as intentional, Congress can not obfuscate the stated intentions of the entirety of a law by attaching a label to a piece of it.  On page 12 of the majority opinion, he writes “Congress cannot change whether an exaction is a tax or a penalty for constitutional purposes by describing it as one or the other.”

Did the Supreme Court even have the authority to hear this case at this time?  Did the 1867 Anti-Injunction Act prevent the court from hearing the case till someone actually paid the tax?  In finding that the individual mandate can be construed as a tax, Roberts distinguishes between a present tax and a future tax, justifying the Court’s authority to hear the case at this time. The Anti-Injunction Act was designed to prevent a state or any party from “restraining the assessment or collection of tax” (pg. 12 of majority opinion).  The tax will not go into effect for two years and no one will actually pay the tax for three years.  The suit that the 26 states have brought before the Supreme Court is not intended to delay the collection of this tax; therefore, Roberts rules that the Supreme Court can hear the case.

Although Justice Ginsburg was in the majority, she strongly dissented with Roberts arguments that the individual mandate was unconstitutional under the Commerce clause.  Hopefully, I’ll get some time to go into Ginsburg’s arguments as well as the dissenting opinions of Justices Scalia, Kennedy, Thomas and Alito.

June Labor Report and Plaques

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On a recent vacation road trip, I enjoyed a number of tourist sites.  At Carlsbad Caverns in New Mexico, I learned that 2000 men with the CCC (Civilian Conservation Corp) built most of the visitor walkways and accomodations in the caverns between 1938 and 1942. Not only did the Caverns project provide enjoyment and a learning experience for me seventy years later, it provided work for a country still suffering through a long depression.  In Corpus Christi, I learned that, in the early 1970s, the sand dunes had been reclaimed by a joint effort of Texas and the Federal Government.  Stopping at a scenic site in west Texas, I read that visitor accommodations had been built as part of the Federal Highway project in the 1950s. At Big Bend National Park, I learned that Texas had turned these deep canyonlands into a state park in 1935, providing work for many in the process. 

What tourist sites will our children and grandchildren visit?  Will they read any signs that herald the hard work of those who lived through this Great Recession?  Why not?  Politicians argued about the budget and the national debt in the 1930s, in the 1950s, in the 1970s, just as they do today.  Then they got to work and made something happen.  Democrats and Republicans have sat on opposite sides of the fence and pointed fingers at each other in those past decades – then grudgingly came to a compromise and got something done, putting thousands to work on enduring projects.  Fifty to a hundred years from now, will there be any projects built by this generation that will have visitor plaques that our great grandchildren can read while on vacation?

With that, I’ll turn to the June employment report.  The headline number was a disappointment to many.  Although the number of jobs increased by about 75,000, it was less than the 120,000 hoped for.  The good news is that the year over year percent increase in jobs for most of the working population continued to increase.

The core working force – as I call it – those aged 25 – 54 continued to show modest positive increases as well.

The problem is that it is still not enough.  In the larger work force, aged 25+, we would like to see sustained 1.5% to 2% year on year growth to pull the economy up and out of the quicksand.  Despite all the rhetoric from the politicians who claim they know how to create jobs, those of us who actually create jobs know that the chief reason for the lack of stronger hiring is the politicians themselves.  The June survey of the National Federation of Independent Business (NFIB) a small business organization, reported that about 25% of business owners “who say it is a bad time to expand blame the current political mess.”  Another quarter of respondents blame weak sales, a fifth blame taxes and another fifth blame “unreasonable regulation and red tape.”  The number of firms planning to hire in the next six months offset approximately the same number of firms planning on reducing jobs.  In short, a lackluster preview of the second half of the year.

Over the past two years, business loans are continuing to grow, indicating increasing investment.

Businesses are preparing – cautiously – for increased consumer spending.  But consumer loan growth has stalled after a severe decline at the onset of the recession several years ago.  The spike in the first quarter of 2010 was an accounting change (explanation)

A bright spot – or dark spot – is the increase in overall consumer credit, approaching the levels of 2007.  Are consumers more confident?  Recent surveys don’t show that.  Are consumers more desperate and charging more to make up for  a lack of income growth?  Probably.

Disregard the rants and promises of blowhard politicians.  Consumer demand initiates most of the job creation in this country.  Businesses respond to that consumer demand by hiring more employees.  Without the demand, business owners create few jobs.  The only jobs created are sales and advertising jobs as business owners try to increase demand or take sales away from competitors.

In the coming months before this election, I encourage all of you to ask two questions of your representatives, senators, president and presidential contender:
1.  If consumers are still cautious, what policy can you implement that will encourage consumers to spend more? 
2.  If businesses are still cautious in their outlook, what policy can you implement that will encourage them to invest more in new jobs and equipment?

If the politician is a Republican, he or she will say that reducing regulations and taxes for businesses will help them create more jobs.  Ask them how that will help create jobs if the business has only tepid sales growth.  Should businesses hire more people just to sit around and fiddle their thumbs?

If the politician is a Democrat, they will talk about “investment” but what they mean is government spending to take the place of the lack of consumer spending.  How are they going to encourage consumers to spend more?  Silence.

Neither party has an answer to the problem of deleveraging, which is what consumers have been doing for the past several years.  They borrowed against their homes and their homes went down in value.  They charged more on their credit cards to make up for the lack of growth in their real incomes.  They had to pay down or default on that credit before charging more.  Deleveraging is a process that must be endured.

Unlike the individual states, the federal government has the constitutional capability of borrowing money.  While the federal government can not solve the problem of consumer deleveraging, it can soften the impact by borrowing to initiate the same kind of projects that the federal government, together with the states, did in previous decades: build and improve stuff that we can put a plaque on!  I do not like increasing government debt but I do like visitor plaques and informational signs at scenic and tourist sites.  Fifty years from now, will the Boomers be known as the Stumble Bum Generation or the Plaque Generation?

Income Tax and the Constitution

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The Constitution of the United States was designed to protect the individual states who feared the power of a large central government.  In keeping with that design, the Constitution enumerates the various powers of the Federal Government. This past week a majority of the Supreme Court decided that the health care law known as Obamacare was constitutional, basing its decision on the taxing power granted by the Constitution and the 16th Amendment.

A fundamental presumption of writing the Constitution is the self-preservation of the new nation as such.  Various powers of defense, the ability to make war and treaties with foreign countries are some of the enumerated powers granted to the Federal Government to ensure the country’s continued existence.  What is not enumerated but assumed is the right, the duty of the Federal Government to protect the country as a whole.  At a time of armed conflict within a fractured nation, President Lincoln understood this point more clearly than most – that the utmost responsibility of a President is not spelled out in the Constitution that he had sworn to uphold.

There are two common faults that have caused the downfall of all nations, particularly nation empires: 1) the internal struggle for power by factions; and 2) the inexorable concentration of wealth and property.  The second leads to the first.

In the Federalist Paper No. 9, Alexander Hamilton wrote “It is impossible to read the history of the petty Republics of Greece and Italy, without feeling sensations of horror and disgust at the distractions with which they were continually agitated, and at the rapid succession of revolutions, by which they were kept in a state of perpetual vibration, between the extremes of tyranny and anarchy.”  Periods of calm within those empires were short-lived, “soon to be overwhelmed by the tempestuous waves of sedition and party-rage.”  As we look at and listen to the debates regarding health care, what do we see?  Party-rage.  Day after day, proponents on both sides of the issue make claims that are either blatantly untrue or a tortured stretching of fact.  There are so many dubious claims that reporters at Politifact.org  can only examine the more widely spread claims.

In Federalist Paper No. 10, James Madison, the chief constructor of the Constitution, wrote: “Among the numerous advantages promised by a well constructed Union, none deserves to be more accurately developed than its tendency to break and control the violence of faction.”  Further, he writes “Complaints are every where heard … that the public good is disregarded in the conflicts of rival parties.”  He explained what he meant by the word faction: “By a faction, I understand a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.” 

What is to be done?  Madison wrote “There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controling [sic] its effects.  There are again two methods of removing the causes of faction:  the one by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.”  The first of these methods is undesireable; the second is impractical. Madison concluded “The latent causes of faction are thus sown in the nature of man.”  He does not condemn people for this tendency to form factions; a well constructed government must deal with this part of man’s nature.

Madison saw “A zeal for different opinions concerning religion, concerning Government, …an attachment to different leaders ambitiously contending for pre-eminence and power [who] have in turn divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other, than to co-operate for their common good.  So strong is this propensity of mankind to fall into mutual animosities, that where no substantial occasion presents itself, the most frivolous and fanciful distinctions have been sufficient to kindle their unfriendly passions, and excite their most violent conflicts.  But the most common and durable source of factions, has been the various and unequal distribution of property.  Those who hold and those who are without property, have ever formed distinct interests in society. [Many different interests] grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views.  The regulation of these various and interfering interests forms the principal task of modern Legislation, and involves the spirit of party and faction in the necessary and ordinary operations of Government.” [emphasis added]  These astute observations by Madison are true today just as they were two hundred years ago.

In its own self-preservation, a government must ameliorate the “unequal distribution of property” which Madison considers to be the chief cause of factions.  How is a government to do that and preserve the respect for property rights that Madison and the framers deemed essential to a free people?  Madison wrote “From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results: and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.”  As with factions, this contradiction is an essential process of being a free people.  To use the same sentence construction as Madison: there are two methods for removing the causes of the concentration of wealth and property:  the one, by abolishing individual property rights which are essential to a nation of free people; the other, by giving every citizen the same amount of property.  The first is undesireable; the second invalidates the first principle and impractical, as Communist societies discovered.

A well constructed government uses its taxing authority to fund its operation and control the inevitable concentration of wealth and property. Many conservatives of today argue on principle that government’s role is not to transfer wealth from one person to the next.  They ignore the history of the decline of many nations whose wealth concentration reached a critical mass that ignited revolution.  They forget that the first principle of a nation is its own preservation; that a nation MUST transfer enough wealth to slow its concentration among a small portion of its citizens.  By its very nature, a property or income tax takes, by threat of force, the property of a person.  The principle of respect for individual private property rights can not be sustained in the ideal if a nation is to survive.

The income tax, or 16th, amendment was “sold” to the state legislatures as a way to tax corporations and very wealthy individuals.  For corporations, the income tax was to be an excise tax or a fee for the exemption from liability that a corporate structure afforded its stockholders.  Today many conservatives advocate a flat tax or a less progressive tax rate structure, citing the uneven distribution of the tax burden on the rich.  When the legislatures voted on this amendment, they did so on the premise that almost all people would not be subject to the income tax.   Corporations and those with extremely large incomes were to shoulder the entire burden of the income tax.  Those state house members who voted for ratification would be shocked that the top 1% of income earners paid only 38% of the personal income tax collected in 2008 (National Taxpayers Union).  They would be indignant that corporations paid only 22.1% of the combined total of personal and corporate income taxes collected in 2008 (IRS Statistics  Table 1).  When the 16th Amendment was sold to the American people in 1910 through 1913, these two groups combined were to shoulder most, if not the entire, burden of the income tax.  In 2008, they paid a little less than 52%.

In the coming months billions of dollars will be spent to sway or negate our vote.  The people and corporations who spend these vast amounts of money will try to convince us that we should vote a certain way on principle, out of loyalty to a particular ideal, party or policy.  Those who spend this money are not evil – they are simply promoting their own interests, hoping that they will convince each of us that we share an interest with theirs.  Given a choice of two competing parties, some voters will be undecided, feeling lukewarm or conflicted about the interests of either faction.  We may wish for some alternative to these dominant factions, or a menu where we could pick and choose the narrow interests that most closely align with ours.  It is the nature of mankind that we can not either live or vote in the ideal; that we must make compromises and choose the faction which most closely aligns with our interests.

From the beginnings of this nation, parties have arisen, trying to wrest control of the government, hoping to grab control of its power for their own self-interest.  For its own self-preservation, a well constructed government MUST constantly strive to distribute competing interests and power; since money and property form the core of power, a government must spread just enough money from the richest of its citizens and corporations to the rest of its citizens.   How well a government can do so determines whether the nation survives.

Health Care Republican Style

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This week the Supreme Court is scheduled to give their verdict on the constitutionality of 1) the individual mandate; 2) whether the Supreme Court can make a ruling at this time (are the penalties a tax or not a tax?); 3) if they rule against the individual mandate, is the mandate “separable” from the health care bill and can the Court let the rest of the bill stand; and 4) are changes to Medicaid eligibility rules an imposition on the states that effectively forces the states to accept the new rules or lose funding for their entire Medicaid program.

Jerry sent me a link to a 2009 set of Republican proposals  for health care reform.  here was my response:

Jer,

This is a Republican position paper from June 2009.  At that time Republicans were chiefly concerned about proposals for a single payer system.  If you read the paper, you will see that many of the Republican reforms were incorporated in the final health care bill.  So why the Republican push back against the health care law?

Dick Armey is a former Texas Congressman who was (and still is?) chairman of Freedom Works, which provided the financial and organizational resources for the formation of the Tea Party.  Armey fought against the individual mandate in 1993 under “Hilarycare” and prodded Tea Party members to protest against the individual mandate in “Obamacare” (why isn’t Medicare called “JohnsonCare”?).  While not a staunch conservative, he felt that the Republican Party had drifted too much to the left.  Armey retired after staunch conservatives continued to challenge him for his seat so he is not one of the wacko conservatives, despite what some Democratic pundits say.

The protest against Obamacare was a wedge issue used by Karl Rove and other Republican strategists as a way to take back the House in 2010 and it worked.

Republican reforms incorporated into the bill may not have been done exactly as Republicans wanted but they were included:

Affordable and accessible health care of all Americans with no refusal for pre-existing conditions.

Enable people to keep the current health care plan they have with their employer.

Give people a choice of health plans and allow small businesses access to affordable health plans (state insurance exchanges)

Prevention, wellness and disease management programs – emphasis on primary care (Bernie Sanders’ amendment that funded Community Health Clinics)

Tax fairness – credits for those buying individual plans so that they have the same tax benefits as people who have employer sponsored plans. (Republican Dan Issa’s committee now finds that this would help too many poor people)

Republican proposals that were not included in the health care bill:

Tort reform that some say causes doctors to order additional tests just to cover their liability.  Estimates of the savings under tort reform run from 1% – 10%.  My own personal experience with my parents’ doctors is that they order additional tests to confirm their diagnosis before starting a definitive treatment program.  The general idea of tort reform is good but the devil is in the details.  If your epileptic child becomes a vegetable after your doctor treats her for the epilepsy, do you want there to be a $100K cap on damages that you can get from the doctor?  Probably not.

Expansion of health savings accounts

I don’t know if these were included:

Additional oversight and authority to Medicare and Medicaid to stop waste and fraud.  One proposal was that Medicare should change its policy of paying bills received within 30 days.  Fraudulent clinics bill Medicare, take the money and have closed up shop by the time Medicare investigators discover the fraud (featured on 60 Minutes program).  The problem with this proposal is that this would also make it difficult for smaller clinics and individual physicians to manage their cash flows.

Financial help for family members who provide in-home care for a relative.

Republicans have successfully used the emotional issue of the individual mandate to decry the entire health care bill.  Should Republicans “repeal and replace”, many of the elements that are in the current health care bill will also be in the Republican bill.  But Republicans will claim that it is theirs and it is substantively different than the current bill.  That is how a party wins elections.  The health care debate is not primarily about health care – it is about elections and power.

GDP and Recession

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So you’re sitting at a picnic table in the park, having a barbecue with friends and family and one of your kids starts complaining about how life is so unfair because of something or other and you find your mind drifting off to the state of the economy.  You feel like telling your kid that, as they grow older, they are going to find that life is full of unfair and to just get over it.  But you don’t tell your kid that because they are not strong enough for it yet, which reminds you of Jack Nicholson’s line in the movie A Few Good Men: “You can’t handle the truth!”  But you don’t tell that to your kid because it would scare them so you act sympathetic and give your kid a little hug and pretty soon everything is OK again except that about eight feet away from the table Uncle Bob is having an argument with your friend about the money the government is spending.

Uncle Bob is saying that Obama and the Democrats are bringing down this country and your friend counters that it is Obama who trying to resurrect the country after Bush’s eight years as President.  You begin to turn your shoulders to them as though to insert yourself into the debate but notice that your wife is looking at you kinda funny from across the picnic table and, while you are not that good at mind reading, there is something in her look that raises a flag of caution in your mind.  Your father in law is busy at the barbecue and calls out that the burgers will be ready in five minutes – which gives you just enough time to whip out your iPad and check the Federal Reserve data site to answer a nagging question:  what is GDP per person in this country?

Gross Domestic Product accounts for most of the private and government economic activity in a country.  GDP doesn’t take into account the money that a government borrows to fund its spending;  GDP only includes the spending.  GDP doesn’t care what the money was spent for, whether it was to build a bridge in Iowa or destroy a bridge in Afghanistan.  Regardless of these and other faults,  GDP serves as a report card on a country’s economy.

Real GDP is an inflation adjusted GDP, a way of comparing apples to apples over the years.  Real GDP per capita is the inflation adjusted economic output per person.

You type in “Real GDP” into the search box  and the Federal Reserve database, or FRED to its many users, obliges you with a list of GDP reports and you select the first one. The full graph comes up showing the years 1947 to 2012.  You touch the Edit Graph button, then change the beginning date to 1960.

Both Uncle Bob and your buddy have had a few beers, a beverage which adds certainty to a man’s opinion.  You wonder how many of these political-economic debates have occurred this week at the dinner table, at the office, while taking a break on a construction site.

Your iPad screen shows the rise in real GDP with the “hook” starting in late 2007.  It is that hook that has got a lot of people arguing.  Its the hook that has pulled home values down and given a hard yank on the retirement dreams of  many people.  That hook tugged away the after school program your kid was in as the school district tightened its belt.  That hook took your wife’s job away; it almost took yours.

Now your buddy is talking loudly and pointedly about higher education cuts, but is barely able to finish his sentence as Uncle Bob interrupts him with the tale of the state university vice-president who is getting $300K a year in pension benefits.  Bob is sick of paying higher taxes for the fat cat retirements of the elite government employees.

Although the Bureau of Economic Analysis called an end to the recession in June of 2009, every adult with half a brain knows that the recesson didn’t end then. The billionaire investor Warren Buffett uses a rule of thumb that a recession ends when real GDP gets above the high point before the recession began.  You touch the “5 year” range button on the screen and see that real GDP has in fact surpassed that high point in 2007 so Buffett probably called and end to the recession in the fall of 2011.

 

FRED conveniently colors in the recessions, highlighting the periods in gray, but they are the “official” periods of recession, when GDP rises or falls for two consecutive quarters.  GDP could fall from $100, for example, to $60, signalling a recession, then increase to $65 over six months and the BEA would say it was the end of the recession, even though any sane person would say “Hey, we’re still down a third from the $100 high point.”

Has the GDP per person surpassed its 2007 high?  Your mother-in-law leans over and asks whether you want lettuce and tomato, glances down at the iPad screen with just a hint of disapproval in the set of her mouth and tells you that everyone will be eating soon.  OK, just a minute, you tell her.

Touching the screen, you click the “Add Data Series”, then touch line 1.  In the box you type “POPTHM”, the population census figures.  The other night, you couldn’t remember Bruce Willis’ name from the Die Hard movies but you can remember the label for the population series.  You’re not old yet but this is probably what happens to old people’s brains.  To get the GDP, which is in billions, per capita, which is in thousands, you need to multiply the GDP dollars by a million before dividing so you type into the formula box: “a * 1000000 / b” and touch the “Redraw Graph” button below it.

FRED redraws the graph, showing that the per capita GDP has still not risen above the 2007 high point.

 

For four and half years we have been in recession, you think.  No wonder we are arguing.

Was it as bad as the recession in the early eighties, you wonder.  That was a double dip recession.  You touch the starting date box and click on 1960 and a new expanded graph appears on the screen. “Hey, hon, why don’t you help me with the ice?” your wife asks.  “Ok, just a sec,” you reply, not looking up from the screen.

You see that this recession on a per capita basis is about the same as the early eighties, lasting about four and a half years, from late 1978 to mid 1983, with an upward hiccup during that period.  The period was the same but the decline in the late 70s and early 80s was much shallower than this current recession. 

You want to show both your friend and Uncle Bob why they are arguing, that the recession really hasn’t ended, the comparison of this recession and the 1980s but your wife needs help with the ice so you close the iPad cover.  Maybe you can show them the graph after the meal.  “Burgers are up!” your father-in-law shouts and the whole group sits down to chow down. 

After the meal, your friend hauls out an old croquet set. There are a few hoops missing and one mallet has a head but no handle, but the kids are delighted.  At some point in the game, Uncle Bob sends your friend’s ball far afield with a taunt “Out in left field where the liberals belong!” but your friend doesn’t take the bait.  On second thought, you muse, showing these guys the graphs would only reignite the debate.

“Daddy, it’s your turn.  You can use my mallet,” your kid says and you reach for the mallet, thinking  We try to teach our kids to be considerate and cooperative on the playground and in school.  So what happens to that sense of cooperation when we grow up?

The Personal Income Problem

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Last week, I looked at Obama’s GDP problem.  This week I’ll look at the Disposable Personal Income (DPI) problem.  DPI is after tax income, what’s left to spend and save.  The following chart (thanks to the FRED database at Federal Reserve) showd the real, or inflation adjusted, rise in per person disposable income since 1960.

Zooming in on the past thirty years shows just how severe this recession has been.  Real disposable income flattened out or declined only slightly in past recessions; in this recent recession, it fell sharply.

Looking closer at the last ten years shows the 2008 – 2009 decline more clearly and the stalling out of income growth over the past two years.

Now the bad news for the 99% of us.  Remember, this is inflation adjusted income, in 2005 constant dollars. When we look at the annual increase in income, we see a steady decline in the peaks.  The chart below shows a three year smoothed average of that yearly increase in real income.  We are working more and making less.  Higher paying manufacturing jobs have been lost to foreign countries and more of us are working in the service sector, whose average wages and productivity gains are below that of manufacturing workers.

Next, let’s look at Obama’s problem in this election year.  Below is that same chart with the results of re-elections over the past 40 years.

Voters cast their ballots with their guts and the level of personal income and financial security is both a dollar figure and a gut feeling.  President Obama can make a good case, as Ronald Reagan did, that the poor to middling economic performance of the past few years is due largely to the severity of the downturn he inherited.  The chart also shows the decline in personal income during Reagan’s second term and helps to explain why Reagan received poor poll numbers from the public on his management of the economy in the mid to late eighties.  Many are not old enough to remember those days and some who are old enough were not paying much attention at the time.  With a tripling of the nation’s debt and personal incomes falling during Reagan’s second term, Reagan’s vice-president, HW Bush, felt he had to run away from Reagan’s economic policies to get elected.  In a two decade effort to lift up Reagan’s legacy, the mainstream conservative media has consistently glossed over, rationalized or neglected much of the economic history of those times. 

Ross Perot, running as an Independent, kept the 1992 election focus on the economy.  HW Bush would have been re-elected had not Perot taken enough Republican votes that he cost Bush his re-election.  Obama can learn from HW Bush’s experience.  With no substantive third party challenger to take away votes, Obama will need to broaden the political conversation to include more than the economy.

Obama’s most ardent supporters have become lukewarm but Romney has not won much enthusiasm either.  This election will be one of trench warfare, each side carrying their banner, hoping to rally voters to the banner, not the man.