Green Incomes

 

March 10, 2019

by Steve Stofka

Many Americans cross the street if they think a socialist program is walking toward them. We believe that the U.S.A. is the heart of capitalism, but recent history reveals that our financial and legal systems are based on socialism for the very, very rich.

In the past two weeks, I reviewed the infrastructure goals as well as the justice and education goals of the Green New Deal (Note #1). In Part Three this week, I’ll look at the income supports included in the resolution’s economic agenda.

“Guaranteeing a job with a family-sustaining wage.” This is yet another example of clumsy language used to state a goal that some might read as utopian. Some can group the first phrase as ” Guaranteeing a job with a family sustaining wage” meaning that all wages should have a certain minimum. That sounds like the language of Minimum Wage 2.0, but does that mean that each job should be able to support a family of four, or six, or eight?

Others might group the first phrase as “Guaranteeing a job blah, blah, blah” and read the intent as a platform point of a Socialist Manifesto. Is the government going to hand out jobs to everyone that wants one? Only if the government takes over some of the means of production and becomes the nation’s chief employer can it hand out jobs to anyone who wants one. That is the textbook definition of socialism. It is not enough to have good intentions. Clarity of language matters.

Why the clamor for more income redistribution? The real (after inflation) income of poor and working families has lost more than half since 1980. That might not surprise some readers. The trend is even broader and more insidious. Income data from the Congressional Budget Office (CBO) shows that even the top 5% of real incomes have dropped 30%. The real income of a ¼ million families – the very, very rich – have grown in that time. Here are some highlights from the data.

In 2015 and 1980, the number of poor households, or bottom 20%, equaled the number of rich households, or top 20%. In 2015, the government took money from each rich household and gave it to 5-1/4 poor households to raise their income by 65% (Note #2). In 1980, the government took money from each rich household and gave it to 10-1/4 households to raise their income by only 25% (Note #3).

Why did poor households need so much more support in 2015 than they did in 1980? Because their real incomes before transfers and taxes (BTT) lost more than 50% (Note #4). The real BTT incomes of the top 5%, the very rich, have lost more than 30% . It is only the very, very rich, the top 1%, that have fared well in this fight against inflation. Their BTT income has grown 15% in the past 35 years. The bulk of those gains have probably come from the top .1%, or less than ¼ million families.

Why? Where has the money gone? The high interest rates of the 1980s made the dollar so strong that manufacturers began to move their operations to lower cost markets in Asia. Japan kept the value of the yen low relative to the dollar and attracted much of this investment. The Japanese economy and real estate boomed. American exports of manufactured goods declined, and commodity prices crashed, destroying a lot of income producing wealth, particularly in rural areas (Note #5). Bankruptcies during this decade far exceeded those filed during the Financial Crisis ten years ago (Note #6). Older readers may remember the charity concerts to raise money for farmers (Note #7). Today, many commercial buildings in small towns throughout the country stand empty. As rural clinics and nursing homes close, people must move to urban areas where medical services are available (Note #8).

As real incomes declined in the late 1980s, households and governments borrowed to make up for the loss of income. Who did they borrow from? Financial institutions who managed the assets of the very, very rich. As the financial sector grew in proportion to the size of the entire economy, the top managers of financial firms became very, very rich themselves (Note #9).

In the past twenty years, lobbying by the financial sector has quadrupled (Note #10). It paid big dividends during the latest crisis. After the initial bailout by the Bush administration in the fall of 2008, the Obama administration brought in a team led by Robert Rubin, Larry Summers, and Timothy Geithner. The first two helped dismantle the safeguards between deposit banks and investment institutions during the Clinton administration. Geithner was a protégé of Rubin. All were deeply embedded in the interests of the banks, not the creditors and governments who had trusted the judgment of financial managers.

The lack of separation between deposit banks and investment banks helped spread a cancer from the investment banks to banking institutions throughout the world. As Obama’s Treasury Secretary, Geithner continued to protect the bonuses of top managers despite massive losses. To preserve the wealth of the very, very rich, the Federal Reserve loaded up their own balance sheet with toxic bonds bought at full value.

After a 35-year period of rising real incomes and wealth because of favorable fiscal and monetary policy in Washington –
after Washington protected their wealth and income during the financial crisis at the expense of middle-class families who lost their savings and houses –
it is time for the very, very rich to pay taxpayers back.
You have eaten well. Here is the check.

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Notes:

1. Politifact article
2. In 2015, the bottom 20% of households (24.3 million) averaged $20,000 in income before taxes and transfer payments. The top 20% (25 million) earned almost $300,000. After taxes and transfer payments, the incomes of the bottom 20% rose 65% to $33,000. CBO report on household income in 2015, updated Nov. 2018
3. Number of households underlying CBO report is in Sheet “1. Demographics” of Supplemental Data spreadsheet linked on last page of report. Dollar amounts are in Sheet “3. Avg HH Income”, of same spreadsheet.
4. The impact of high interest rates on investment and commodities during the 1980s Secrets of the Temple pp.590-604
5. Using BLS calculator to compare CPI January 1980 to January 2016 prices, $1 in 1980 = $3.05 at the end of 2015. Average income amounts from Sheet 3. See Note #3 above.
6. Four decades of bankruptcies chart at Trading Economics
7. Farm aid timeline
8. Nursing centers in rural areas are closing NYT
9. The financial industry’s increasing share of GDP
10. Increase in financial lobbying since 1998

Our Legacies

April 29, 2018

by Steve Stofka

Each generation bequeaths the benefits and costs of legislative programs to the following generations.  In the past one hundred years, Democrats have secured a dominant majority in the Congress three times. A dominant majority is one where one party controls the Presidency and both houses of Congress with a filibuster proof majority of sixty in the Senate (History of Shifting Political Power).

Each time, the Democrats have created an entitlement program, a legacy structured so that it would be difficult to undo when Democrats were out of power.  Under FDR in the 1930s, the Democrats created Social Security. Like all entitlement programs, coverage and benefits were expanded in the first ten years after creation of the program.

In the 1960s, LBJ and the Democrats created Medicare and Medicaid. Before these programs, the Federal government paid 11 cents of every health care dollar. In 2013, that 11 cents had grown to 26 cents (CMS history PDF).  As with Social Security, coverage and benefits were greatly expanded the first decade after creation. In 1960, the U.S. spent 5.1 cents for every $1 of GDP. OECD countries spent only 3.7 cents. By 2013, Americans spent 16.4 cents of each $1 of GDP, twice as much as the 8.7 cents spent by OECD countries.

For fifty years, the annual growth of health care spending was 50% more than the growth rate of the economy.  With a dominant majority after 45 years, Obama and the Democrats tried to pass single payer health care in 2009. Democratic politicians in conservative leaning districts balked at the idea. Obamacare was a compromise solution that has been compared by opponents and advocates alike to a Frankenstein contraption of legislation that needs to be fixed. Expansion was embedded in the legislation from the start through the Medicaid program.

When the BLS and Census Bureau compute the Consumer Price Index (CPI), a measure of inflation, they consider the shifting patterns of consumer spending. Since 2000, the Medical spending component of the CPI has doubled its share of the index to about 17%. Increased medical spending is affecting most American families. Regardless of one’s opinion of the solution, Obamacare was a compromised attempt to deal with this trend.

The American health care system is like the 50-year old cars in Cuba that have been patched together with duct tape and ingenuity. The system runs on policy payoffs to stakeholder groups and it will fail most of us because it cannot adapt to the extraordinary advancements in medical care. As technological changes accelerate in the coming decades, this cobbled together system born of World War 2 wage and price controls will grow ever more unwieldy.

Entitlement programs invariably cost a lot more than the designers calculate. Program benefits are easier to sell to voters than raising the funds to pay for them. Following December’s tax reform bill, the non-partisan Congressional Budget Office revised their ten year budget and deficit estimates.

For the past fifty years, the Federal government has collected an average of $17.40 for every $100 of GDP.  The CBO projects Fed revenue will be over $18.00. Here’s the problem: the Federal government has been spending $20.30, almost $3 more than it collects. That’s how the country has run up a debt of $20 trillion. It’s about to get worse. Because of increased Medicare and Medicaid spending, the CBO projects spending will increase to $22.40 for every $100 of GDP. A $3 shortage will soon turn to a $4 shortage. The interest on that steadily increasing debt? By 2023, almost $3, a sixth of what the government collects and more than the defense budget.

Nations can not declare bankruptcy.  Instead, they become failed states and descend into anarchy.  Venezuela has become a failed state and its people are fleeing the country.  Most of the institutions have failed.  Most of the daily necessities of life are in short supply. The government claims that it doesn’t even have the paper to print exit Visas.  Under the Maduro government, truth was the first to abandon the country.

The economy is strong yet Chapter 11 bankruptcy filings have reached the same level as April 2011 when there was talk of another recession. That year, the unemployment rate was still above 9% and housing starts remained at all-time lows. Then-President Obama and Republican House Majority Leader John Boehner battled over a budget compromise and the stock market dropped nearly 20%. In a strong economy like today, we should have lower levels of bankruptcy.

 

An Interest-ing Debt

February 12, 2017

Republicans used to talk about the country’s debt load but such talk is so inconvenient now that they control the House, Senate and Presidency. Perhaps it was never more than a political ploy, a rhetorical fencing. Now there is talk of tax cuts and more defense spending, and a $1 trillion dollar infrastructure spending bill. 48 states have submitted a list of over 900 “shovel-ready” projects.

House Speaker Paul Ryan used to be concerned about the country’s debt. Perhaps he has been reading that deficits don’t matter in Paul Krugman’s N.Y. Times op-ed column. For those of us burdened with common sense, debts of all kinds – even those of a strong sovereign government like the U.S. – do matter. The publicly held debt of the U.S. is now more than the country’s GDP.

debt2016q3

In 2016, the Federal interest expense on the $20 trillion publicly held debt was $432 billion, an imputed interest rate of 2.1%. Central banks in the developed world have kept interest rates low, but even that artificially low amount represents 11% of total federal spending. (Treasury)  It represents almost all the money spent on Medicaid, and more than 6 times the cost of the food stamp program. (SNAP)

The latest projection from the CBO estimates that the interest expense will double in eight years, an annual increase of about 9%. The “cut spending” crowd in Washington will face off against the “raise taxes” faction at a time when a growing number of seniors are retiring and wanting the Social Security checks they have paid toward during their working years.

In the past twenty years the big shifts in federal spending as a percent of GDP are Social Security and the health care programs Medicare and Medicaid. These are not projections but historical data; a shift that the CBO anticipates will accelerate as the Boomer generation enters their senior years. Ten years ago, 6700 (see end of section)  people were reaching 65 each day. This year, over 9800 (originally 11,000, which is a projection for the year 2026) per day will cross that age threshold.

cbospendcomp1996-2016
CBO Source

A graph of annual deficits and federal revenue shows the parallel paths that each take. The trend of the past two years is down, promising to accelerate the accumulation of debt.

fedreceiptsdeficit1998-2016

More borrowing and higher interest expense each year will crowd out discretionary spending programs or force the scaling back of benefits under mandatory programs like Social Security, Medicare and Medicaid. President Trump can promise but it is up to Congress to do the hard shoveling.  They will have to bury the bodies of some special interests in order to get some reform done.

[And now for a bit of cheer.  Insert kitten video here.]

We already collect the 4th highest revenue in income taxes as a percent of GDP. Canada and Italy head the list at 14.5%.
South Africa 13.9%,
U.S. 12.0%,
Germany 11.3,
and France 10.9 all collect more than 10%. (WSJ) Those who already pay a high percentage in income taxes will lobby for a VAT tax to increase revenues. Income taxes are progressive and impact higher income households to a greater degree. Poorer households are more affected by a VAT tax.  Cue up more debate on what is a  “fair share.” Many European countries have a VAT tax and the list of exclusions to the tax are bitterly debated.

Adding even more social and financial pressure is the lower than projected returns earned by major pension funds like CALPERS. For decades, the funds assumed an 8% annual return to pay retirees benefits in the future. In the past ten years many have made 6% or less. Several years ago, CALPERS lowered the expected return to 7.5% and has recently announced that they will be gradually lowering that figure to 7%.

Each percentage point lower return equals more money that must be taken from state and local taxes and put into the pension fund to make up the difference. Afraid to call for higher taxes and lose their jobs, local politicians employ some creative accounting to avoid the expense of properly funding the pension obligations. In a 2010 report, Pew Charitable Trust analyzed the underfunding of many public pension funds like CALPERS and found a $1 trillion gap as of 2008. (Pew Report) The slow but steady recovery since then may have helped annual returns but the inevitable crisis is coming.

In December 2009, I first noted a Financial Times Future of Finance article which quoted Raymond Baer, chairman of Swiss private bank Julius Baer. He warned: “The world is creating the final big bubble. In five years’ time, we will pay the true price of this crisis.”
That warning is two years overdue. Sure hope he’s wrong but … here’s the global government debt clock. The total is approaching $70 trillion, $20 trillion of which belongs to the U.S.  We have less than 5% of the world’s population and almost 30% of the world’s government debt.  As Homer Simpson would exclaim, “Doh!”

Correction:  Posted figure for 10 years ago was originally 9000.  Current figure was originally posted at 11,000.  Projected for the year 2026 is 11,000.)

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Market Valuation

Comments by President Trump indicating a “sooner than later” schedule for tax cuts helped lift the stock market by 1% for the week. The Shiller CAPE ratio currently stands at 28.7, just shy of the 30 reading on Black Tuesday 1929. (Graph) Since the average of this ratio is about 16, earnings have some catching up to do. Today’s reading is still a bargain compared to the 44 ratio at the height of the dot com boom. Still, the current ratio is the third highest valuation in the past century.

The Shiller Cyclically Adjusted Price Earnings (CAPE) ratio
1) averages the past ten years of inflation adjusted earnings, then
2) divides that figure into the current price of the SP500 to
3) get a P/E ratio that is a broader time sample than the conventional P/E ratio based on the last 12 months of earnings.

The prices of long-dated Treasury bonds usually move opposite to the SP500.  In the month after the election, stocks rose and bond prices went lower.  Since mid-December an ETF composite of long-dated Treasury bonds (TLT) has risen slightly.  A number of investors are wary of the expectations that underlie current stock valuations.

The casual investor might be tempted to chase those expectations.  The more prudent course is to stick with an allocation of various investments that manages the risk appropriate for one’s circumstances and goals.

 

Budget Buster

In his weekly WSJ Capital column of 4/9/09, David Wessel reviews the CBO projections for President Obama’s proposed budget.

“The issue isn’t today’s deficit. Deficits are supposed to widen at times like this. The issue is the size of the deficit .. when the recession is past.” A CBO graph of U.S. debt, the deficit, is not pretty going forward. In 2007, the deficit was a little over a third of GDP. It is projected to go to 54% of GDP.

Rising health care cost have become the primary concern of budget projections, as the Director of the CBO notes. “Over the past 30 years, total national spending on health care has more than doubled as a share of GDP.” That doubling is not double the cost, but double the percentage of GDP. GDP has grown six-fold, meaning that health care costs have risen by a factor of 12.

This CBO graph from January 2009 of Debt Held by the Public as a Percentage of GDP from 1968 to 2010 is interesting. (Scroll down a few graphs to get to this one) Now look at a comparison of the January projection and the revised projection based on Obama’s budget. By 2012, projected Federal revenues will be about 18% of GDP and continue at that level for 7 years, till 2019. Spending will be 23% of GDP and climb to almost 25% of GDP.

Wessel notes that “Republicans, such as Wisconsin Rep. Paul Ryan, counter with proposals that combine tax cuts with spending cuts so severe that even a Republican Congress probably wouldn’t pass them – and still show significant deficits through 2019. So either taxes as a share of GDP rise or spending on those popular benefit programs (or everything else) is throttled back.” Wessel concludes his article with a sobering summary: “For 15 years, the Americans people have been told they could have it all. They deserve to be told that they can’t have it all in the future.”

For a historical perspective, take a look at CBO projections in 2003, forecasting an approx $16B GDP in 2009 and an unemployment rate of 5.2%. Recent, and more accurate, projections for 2009 are $14.2B in GDP with an unemployment rate of 8.3%.

As we can see, projected deficits for the coming years look bad and those projections do not take into account unpredictable events like another attack on the U.S., an escalation of violence in Iraq, a continuing cascade of business failure leading to unemployment above 10%.

Every year the Social Security Administration sends each of us a statement of projected monthly benefits when we retire. Don’t count on getting all of that.