The Green Divide

March 24, 2019

by Steve Stofka

Half of the country’s voters live on 80% of the land, which the political analysts color red. Half of voters live on the remaining 20% of land, which is colored blue. The needs, values and outlooks of those in the red are not the same as those in the blue. As the country’s population continues to migrate from rural to metropolitan areas, the country becomes ever more divided. As economist Paul Krugman wrote this week, no one knows how to fix the continuing economic decline in rural areas (Note #1).

A person’s views on an issue may depend on the state they live in. In the past several decades, immigration has had much more impact on California and the southern states. In 1980, 15% of California’s population was foreign born, almost four times the national average of 4.3%. In 2015, that share had doubled for both California and the nation as a whole. However, the national average is only a third of California’s numbers (Note #2). How does the nation adopt a single policy toward immigration when there are such differences in circumstances?

Regardless of our different experiences and outlooks, we are dependent on each other. 20% of Americans are on the Social Security and Medicare programs (Note #3). 24% are on CHIP and Medicaid (Note #4). 40% of the two million farms in America receive subsidies (Note #5). The transfers of money between Americans has reached 14% of GDP.


In 1962, Ronald Reagan took a stridently conservative tone when he warned that the Medicare program being developed in the Democratic Congress would lead to socialism and the destruction of American democracy (Note #6). Having married into wealth, he could afford a dramatic interpretation of social policy. Few Americans hold such extreme views today (Note #7).

The reasonable arguments of today might look oppressive to future generations, and progressive ideas seem natural to our descendants. Our ancestors had different views toward slavery, racism, voting rights and social programs than we have today. What has not changed is our distrust of those we regard as “other,” and our desire to make our principles universal for our fellow Americans. We want everyone to play by our rules, or our interpretation of the rules.

In the debates on the ratification of the US Constitution, some asked what the terms “provide for the …general welfare” meant (Note #8). Was the new government to become a national charity? The Federalists argued for the inclusion of the term to give the government a degree of latitude in changing circumstances. The anti-Federalists argued that this new government would eventually become the home of beggars and lobbyists wanting to promote their own welfare as the “general welfare.” In the past century, the phrase has become a constitutional bedrock of Supreme Court precedent underlying social programs. A person could argue that the size of social welfare spending and the extraordinary power of lobbyists in Washington has proven the anti-Federalist’s case.

America is the land of debate because the Constitution was structured to promote debate. While Americans had a platform to argue with each other, it was hoped that there would be less bloodshed, rebellion, and dictatorship (Note #9). Some days we might be less sure of that premise. As the circumstances of urban and rural America diverge further, we will struggle ever more to reach consensus. Each side will feel the need to impose its will on the other.  As we debate these issues, we should be just as careful of our own instincts as we are about the instincts of those on the other side of the debate.



1. Krugman op-ed on lack of solutions for the economic decline in rural America
2. Four decades of immigration numbers – pdf page 6
3. 62 million Americans on Social Security and Medicare – numbers here
4. 74 million Americans on CHIP and Medicaid – numbers here
5. 39% of 2.1 million farms receive agricultural subsidies
6. Reagan warns against Medicare
7. During the debate before the passage of Obamacare, some Tea Party members advocated a return to the days when we just let old people die.
8. U.S. Constitution, Section 8.1 “provide for the common Defence [sic] and general Welfare of the United States”
9. Former colonies of Great Britain have struggled with free speech issues. South Africans has only had freedom of expression for twenty years . Canada still does not have complete freedom of speech


Post-Election Bounce

January 1, 2017

Happy New Year!  How many days will it take before we remember to write the year correctly as 2017, not 2016? It is going to be an interesting year, I bet.  But let’s do a year end review.


The home ownership rate has fallen near the lows set in 1985 and the mid-1960s at about less than 64%. (Graph)  In 2004, the rate hit a high of 69%.  For the U.S., the sweet spot is probably around 2/3 or 66%.  Most other countries have higher rates of home ownership, including Cuba with a rate of 90%. (Wikipedia article)  Rents in some cities have been growing rapidly.  In the country as a whole, rents have increased almost 4%, about twice the growth in the CPI, the general rate of inflation for all goods and services. (Graph)


Real, or inflation-adjusted, weekly earnings of full time workers spiked up during the recession as employers laid off lower paid and less productive workers.  By late 2013, weekly earnings had fallen to 2006 levels and have risen since, finally surpassing that 2009 peak this year.

Core Work Force

Almost every month I look at the changes in the core work force of those aged 25-54 who are in their prime working years, who buy homes for the first time and have families.  These are the formative years when people build their careers, and form product preferences, making them a prime target for advertisers.  The economy depends on this age group.  They fund the benefit systems of Social Security and Medicare by paying taxes without collecting a benefit.  In short, an economy dependent on intergenerational transfers of money needs this core work force to be employed.

For two decades, from 1988 to 2008, the labor participation rate of this age group remained steady at 82% – 83%. (BLS graph) By the summer of 2015, it had fallen to 80%.  A few percent might not seem like much but each percent is about a million workers.  For the past year it has climbed up from that trough, regaining about half of what was lost since the Great Recession.

Consumer Confidence

A post-election bounce in consumer confidence has put it near the levels of 2001, near the end of the dot-com boom and just before 9-11. (Conference Board)  In 2012, the confidence index was almost half what it is today.

Business Sentiment

Small business sentiment has improved significantly since the November election (NFIB Survey).  Almost a quarter of businesses surveyed expect to add more employees, a jump of 2-1/2 times the 9% of businesses who responded positively in the October survey.  In October, 4% of companies expected sales growth in the coming year.  After the election, 20% responded positively.  This jump in sentiment indicates the degree of hope – and expectation – that business owners have built on the election of Donald Trump.

Hope leads to investment and business investment growth has turned negative (Graph). Recession often, but not always, accompanies negative growth. Since 1960, investment growth has turned negative eleven times.  Eight downturns preceded or accompanied recessions.  Let’s hope this renewed hope and some policy changes reverses sentiment.

On the other hand, those expectations may present a challenge to the incoming administration, which has promised some tax reform and regulatory relief. Small business owners will lobby for different reforms than the executives of large businesses.  Regulations of all types hamper small business but large businesses may welcome some regulation which acts as a barrier to entry into a particular market by smaller firms.

Publicly held firms will continue to lobby for repeal or reform of Sarbane Oxley reporting provisions.  For six years, the Obama administration has wanted to roll back these regulations but has been unable to come up with a compromise between the SEC, which regulates publicly traded companies, and Congress.  A Trump administration may finally reform a law that was rushed into place by George Bush and a Republican Congress in response to the Enron scandal.  That scandal grew in part from the Bush administration’s push to deregulate the energy market.

Voters Veer From Side To Side

We have stumbled from an all Republican government in 2002 to an all Democratic government in 2008 and now come full circle again to an all Republican government. Once in power, neither party can resist using economic policy to pick winners and losers.  Every few years the voters throw out the guys in charge and bring the other guys in, hoping that the party that has been out of power will be chastened somewhat.  Within a few months of taking power, each party digs up their old bones and begins to gnaw on them again.  Tax reform, prison reform, justice and fairness for all, climate change, more regulation, less regulation – these bones are well chewed.

Still we keep trying.  The priests and prophets of long ago kingdoms could not govern.  Neither could the kings and queens of empires.  So we have tried government of the people, by the people and for the people and it has been the bloodiest two centuries in human history.  Still we keep hoping.

The Presidential Test

Most presidents are tested in their first year in office.  Kennedy had to grapple with the Soviet threat and Cuba almost as soon as he took office.   Johnson struggled with urban violence, social upheaval and the war in Vietnam.

Nixon confronted a newly resurgent Viet Cong army when he first took office.  His second term began with the Arab oil embargo.  Ford dealt with the aftermath of Watergate and Nixon’s resignation under the threat of impeachment.

Jimmy Carter began his term with the challenges of high inflation and unemployment, and an energy crisis to boot.  Ronald Reagan wrestled with sky-high interest rates and a back to back recession in his early years.  His successor, H.W. Bush, met a Soviet Union near the end of its 70 year history as Gorbachev loosened the reins of Soviet control of eastern European countries and the Berlin Wall collapsed.

After an unsuccessful attempt to reform health care in his first year of office, Clinton suffered in the off year election of 1994.  G. W. Bush had perhaps the worst first year of any modern President – the tragedy of 9-11.  Obama entered office under a full blown global financial crisis.

Despite Putin’s bargaining rhetoric regarding President-elect Donald Trump, every President has to learn the lesson anew – Russia is not our friend.  Trump will have to learn  the same lesson.  China’s territorial claims in the South China sea may prompt an international incident.  N. Korea could launch a missle at S. Korea and start a small war.  Iran, Afghanistan, Iraq and Syria, Israel’s settlements, Palestinian independence – the crises may come from any of these tinderboxes.  We wish the new President well as he hops into the fire.

Recession and the Presidency

On Tuesday, President Obama will give his annual State of the Union address to Congress and the nation.  This past Saturday, South Carolina chose Newt Gingrich, the former Speaker of the House, as the front runner in their Republican primary.  In three grassroots states, Iowa, New Hampshire and South Carolina, primary voters have chosen three different Republican contenders who are vying for the Chief Executive Office.

For the past 150 years, every President except Lyndon Johnson, Jack Kennedy and Bill Clinton has had to contend with recession during their tenure. (NBER Source)  Every Presidential contender promises that they are going to stop the vicious business cycle that inevitably leads to recession.  With the advent of “JIT” – Just In Time Inventory – increasingly adopted by businesses and their suppliers in the mid to late 90s, recessions were pronounced a thing of the past.  No more would there be an excess build of supply by the nation’s businesses, leading to a sagging economy when product demand inevitably fell.  Advances and investments in technology enabled businesses to respond quickly to fluctuations in demand.  As the milennium approached, it was truly the dawning of a new age.

What was dawning was the advent of a secular bear market, a long period of time when the market falls for a few years, struggles up again, then falls, then rises again as fear and hope compete against one another.

A few weeks ago, I noted that in the middle of 2011, we had finally come out of an almost four year  recession.  This was not the official National Bureau of Economic Research end of the recession.  That happened in the middle of 2009.  This mid-2011 recession end was the “How It Feels” variety as real GDP finally gets back and surpasses the level it was at before GDP started its decline.

Below is a graph comparing the official lengths of recession and the “how it feels” recession length and a comparison of the two during each President’s tenure in the past sixty years.  This comparison helps explain the mood of the country when Presidents Ford, Carter and HW Bush lost re-election bids (Ford was actually not up for re-election since he had taken over the Presidency when Nixon resigned in August 1974).  The chart also gives an insight into the success of re-election bids by Eisenhower, Nixon, Reagan, and GW Bush. The economic pain was either less than or about equal to the official figures of economic distress during their presidencies.

As he prepares for his third State of the Union address, the lesson for President Obama is stark.  History unfortunately repeats itself.  It is also a lesson for any Republican Presidential hopeful; the odds are that he will have to contend with a recession during his tenure if he wins election.  On the campaign trail, how many Presidential hopefuls of either party ever broach the subject of what their administration will do during the eventual recession while they are in office?  Better to promise that it won’t happen on their watch.  It will.

Reagan and Obama

As the 1982 elections approached, Ronald Reagan’s Presidency was unpopular. The unemployment rate was 9.7%, about the same as it is now. Interest rates were high: a 6 month CD paid about 13% interest, which was good for those who had savings but terrible for small business owners who had to work extra hard to pay the 20% interest rate banks were charging for business loans. The dead carcasses of 17,000 businesses littered the economic and social landscape, one of the highest failure rates since the 1930s depression. The stock market was in the doldrums – why bother investing in stocks when bonds and CDs paid such generous interest rates?  GDP had grown an anemic 2.2% the past year.  The national debt had gone up by 14% that year.  In short, the Reagan Presidency was promising to be one of the worst in American history. 

In 1982, the voters realized that they had traded in a bumbling governor from Georgia, Jimmy Carter, for a bumbling governor from California, Ronald Reagan. After the election, Democrats, already in control of the House of Representatives, were given another 25 seats and a commanding majority.  The Republicans continued to hold a slim majority in the Senate.

Shortly after the election, Reagan launched his “Star Wars” or Strategic Defense Initiative (SDI), long on imagination and his willingness to further bankrupt this nation, but rather short on any actual ability to employ such a grandiose scheme.  In the first year of Reagan’s reign, tax rates had been cut but the Social Security tax had been raised so, for most of us working for a living, it was pretty much of a wash.  Inflation was killing us.

If you are an older Republican, you may have forgotten those years.  They have been conveniently hidden under the party mattress by the Republican campaign machine and the retelling of the “Reagan legacy.”  In the seventies and early eighties, there was so much distrust in the judgment and morality of elected representatives that it was a strategy by some disaffected voters to pull alternate levers in the voting booth, voting Democrat on one row, then Republican on the next row, in order to gridlock the government.

Reagan kept on borrowing on the taxpayer’s credit card.  By the time he left office, the national debt had tripled. 

Midterm elections often are a vote on the Presidency and the dominant party. The Democrats may have to give up most of the 30+ Congressional seats they won in 2008, making it even more difficult for President Obama to get his agenda enacted.  In 30 years, how will the story of the Obama presidency be told?  Will it be altered or swept under the table by the Democratic campaign machine just as the Republican machine has retold the Reagan years?  Probably.

Both Reagan and Obama had monumental tasks in their first few years, burdens so great that neither of them could achieve their goals in a short two years.  However, voters focus on the present, throwing hindsight, history and perspective out the window as they drive down the rutted road of the present.  The political machines of both parties know this and play to that short attention span. Unemployment is high, just as it was in Reagan’s 2nd year.  Obama can only hope that, by 2012, the unemployment rate gets down to the 7.4% rate it was in 1984, when Reagan came up for re-election. 

Traditionally, the political campaigns get into gear after the Labor Day holiday.  There is one thing we know for certain:  we will be entertained by a lot of lies and half truths for the next few months.  If you listen to talk radio, both conservative and liberal, you are accustomed to this kind of entertainment year round.

(Side note 9/8) Here is a CNN  review of some of the tax policies and their effects during the Reagan administration.

Household Debt

David Greenberg, author of Nixon’s Shadow in WSJ 3/21/09: “Reagan was struggling to pass his tax cuts when John Hinckley’s bullets landed him in the hospital. The outpouring of sympathy, aided by Reagan’s winning bedside humor, buoyed his popularity and helped him win a big victory. But that success didn’t foreshadow any continued mastery of Congress; his relations with the Democratic House, and later, the Senate, would deteriorate.”

For the first 6 years of the two term Reagan presidency, the Republicans controlled the Senate while the Democrats controlled the House. The last two years of his presidency, the Democrats controlled both houses.

In 1980, total Federal receipts, including Social Security taxes of almost $120B, were $517B. In 1988, total receipts were $909B, including SS taxes of almost $264B (U.S. Dept of Treasury).

In 1980 the Federal Debt was $907.7B; in 1988 it was $2602.3B. The deficit had almost tripled.

At the end of 1980, the CPI-U index was 86. It was 120 when Reagan left office.

In 1988, the top marginal tax rate was 28%. In 1980, it was 70%. Some argue that lowering tax rates dramatically raises tax revenues. The data above shows that tax revenues did increase, although the increase was not dramatic. Excluding Social Security tax receipts and adjusting for inflation, net tax revenues increased 16% in 8 years. Will lowering marginal income tax rates always produce increased tax revenues? Is there some optimal income tax rate? I’ll look at different theories on that subject in a future blog.

How much of this tax revenue increase came from capital gains taxes? The Dow Jones index stood at 930 when Reagan took office. It was 2239 when he left. I will take a look at that in a later blog but here is a 1997 congressional committee discussion of capital gains tax rates.

The data does show one very clear point. Increasing tax revenues can not offset runaway spending.

Pay As You Go

For some historical perspective, here are some notes I made January 20th, 2009.

As of early October, Obama’s plan was still pay as you go. Pelosi and the blue dog (economic moderates) Democrats were convinced this was a doable plan even with a recession. However, the economic malaise has since proved to be so systemic both in this country and around the world, that revenues will probably fall short.

WSJ reported today (1/20/09) that, after the increase in the AIG bailout last night, there was talk among Democrats over the weekend that the bailouts are probably going to cost more than $700B even before Obama takes office. Secondly, the promised return of some of the money to the taxpayers from AIG is going to take longer than Paulson and Bernanke predicted.

Lastly, there was a cute little move that Paulson announced in September that went under most people’s radar – a change in Sec 382 of the tax code. It voids the tax that banks pay when they merge. The only ones who did notice this change were the mergers and acquisitions guys at US banks. It may mean as much as $140B in tax revenue gone this year and next. It sweetens the after tax bottom line for banks who want to merge.

I’m sure Paulson did this to encourage banks to buy failing assets and banks instead of the Treasury bailing them out but he made no announcement and the CBO was not notified to change their tax revenue projections because of the change. Corporations pay about $350-$400B in taxes each year so a $140B tax break to merging corporations is huge.

Barney Frank is questioning whether Paulson’s move was even legal, given a law that was passed in 1986. At any rate, tax revenues will be far less than even recently revised projections.

Obama can probably get some savings by drawing down troops in Iraq, which is costing us over $10B a month. General Petraeus is calling for more troops in Afghanistan so it is doubtful that there will be any savings in that combined military theater in the next 6 – 12 months. Iraq currently has a $70+ billion surplus and the U.S. may be able to get a down payment on the amount of money we have put into that country.

There is always cleanup to be done when Presidents like Reagan and Bush champion low taxes and high security. Reagan tripled the U.S. debt in his eight years, Bush has doubled it in his 8 years. Neither of them were very analytical, preferring to trust their guts and “shoot from the hip”. Each of them talked small government but delivered bloated government. Now we have a president who talks big government. Maybe we are living in a “bizarro” backwards universe where events turn out the opposite of presidential promises and projections.