Low Growth the Normal Normal

November 3, 2016

Why Trump’s and Clinton’s Economic Plans Will Fail

Economic growth showed some signs of life last quarter.  But since the great depression of 2008, GDP growth has been below what is considered normal despite historical low-interest rates and continued deficit spending.

Some have suggested that low GDP growth is the new normal.  But two recent well-received books by economics professors ask if low growth is not the new normal but the normal normal.

In Thomas Piketty book Capital in the Twenty-first Century, the French professor takes a long view of economic history, mining data from before the France Revolution.  Mr. Piketty concluded that the GDP over the long term rises at what we would consider the low rate of 1 percent per capita.

Mr. Piketty’s thesis is that the higher growth that we see is a result of GDP growth pumped by population growth that does not increase per capita standard of living, the effects of booms and bust in markets and the catch-up effect.  This catch-up effect occurs after a major disruption in the economy; like World War I and II.  Note the high rates of growth in the US, Germany, and France in the post-war years.

Japan’s high rate of growth in the 70’s was a function of taking a long time to recover from the war.  In China, we have recently seen astonishing rates of growth as it recovers from the Cultural Revolution and failed economic policies of the Maoists.  But once these disruptions are overcome and over the longer reach of time, the GDP settles in and holds steady at 1 percent of per capita.

Professor Robert J. Gordon’s book; The Rise and Fall of American Growth puts forward a different theory on why growth is slowing down. In its simplest form, he states that you literally cannot reinvent the light bulb.  Gordon believes that the major driver of growth and increases in our quality of life (not always captured in the economic date) are the innovations that have occurred in the time period beginning just before the civil war and accelerating though World War II.  Mr. Gordon suggests that this unprecedented run of human advancement slows down dramatically in the 70’s and will not be repeated.

While Professor Piketty and Professor Gordon have differing views on why growth is slowing down they are not mutually exclusive.  They could, in fact, both be right. If they are right and low growth is the normal normal, this would have broad implications for policy makers in government and business.

First and foremost, Jack Kemp’s assertion that you can outgrow the national debt is no longer operable.  Outrunning debt in government and business is a time-honored strategy.  But in a long-term low-growth scenario continued deficit spending  will increase the interest payment on the national debt consume more and more of revenue.

Second; effects to prime growth put forward by both Presidential candidates could make matters worse.  Both candidates believe that increasing growth is the magic elixir to an ailing economy. Traditional policies of cutting taxes put forth by Trump and increases in government programs/spending by Clinton may not increase growth enough to generate the taxes needed to offset the cost, only increasing the national debt.

Any stimulus package designed to jump-start the U. S. economy needs to have an impact that lasts long after the initial investment is spent.  Otherwise, you will have only increased the national debt making it just that more difficult to cope with a long-term low growth economy.

Coming Soon: Part 2, What is to be done in a low growth environment.


Loss Carried Forward and Phony Outrage of the Left Explained in Five Minutes

October 2, 2016

Loss Carried Forward is a long standing provision in the US (and other countries) tax code and is really quite easy to understand.

Let’s say you invest a hundred thousand dollars in a new business that you start on January 1.  In the first 90 days or first quarter of business you lose 10 thousand dollars.  New businesses often lose money at start up.  So, in the second quarter you manage to break even.  You have no loss but also no profit.  For the 3rd and 4th you make 5 thousand dollars in each quarter.  This would mean you finish the year with zero net profit or loss and your taxable income for your first year in business would be zero; simple right?

To understand Loss Carried Forward simply change the time frame in the above story from quarters to years.  In the first year you lose 10 grand, in the second year you break even and in the third and fourth years you make 5 thousand dollars each.   For the total four years you have been in business you have managed to break even.  Yet, without the Loss Carried Forward provision in the tax code you would have a taxable income in years 3 and year 4 of five thousand dollars for each year.

The Loss Carried Forward provision of the tax code insures that a business pays income tax on the total profits of a business regardless of what year those profits were earned.

This provision of the tax code is available to businesses both large and small, including farms.

If the New York Times or the Clinton campaign would back up their outrage with a policy statement that the Loss Carried Forward provision in the tax code should be removed that would at least be intellectually and morally honest.  But neither the New York Times nor the Clinton campaign are going to do that because they know that the outcry from the business community would be loud and clear.

I am not defending Mr. Trump or his application of tax law to his businesses.  But to suggest that the use of a Loss Carried Forward in and of itself is exploiting the tax code or is somehow immoral is a blatant misrepresentation of the facts.  The New York Times failed in their journalistic responsibility to put some context to this story, like listing all the other companies that have used this provision of the tax code.  And the Clinton campaign is exploiting the public’s basic misunderstanding of tax policy and fairness in the tax code for a cheap political gain.  It is this type of fundamental misunderstanding and misrepresentation of real world policy that makes me ashamed to say I am a Democrat.


Latinos, Immigration and the Race Card

May 6, 2016

“….promising to round up millions of immigrants”: Hillary Clinton’s New York Primary victory speech April 19, 2016

Not all Latinos are illegal immigrants and not all illegal immigrants are Latinos; that simple and undeniable fact seems to get lost in the discussion of immigration.  Just as illegal immigrants are lumped together with legal immigrants (see statement above), this mix and match of these important distinctions seems to be lost much of the time and it is no accident.

It is a rhetorical tool used to justify large scale disregard of immigration laws of the United States. The press, policy makers, civil rights leaders, immigration reform advocates, and even the President conflate and confuse the terminology surrounding immigrants in order to manipulate public opinion.

Lumping together legal and illegal immigration is simply an effort to legitimize the violation of our immigration laws.  Immigrants are entitled to decide when the conditions are so bad in their home country that they have the moral right to enter the US and once here to begin the path to citizenship.  Any stigma impeding this path is an insult to our immigration history.  Deferred enforcement, sanctuary cities, driver’s licenses, in-state tuition, are all an effort to make a “not yet documented” immigrant feel welcome and protected while they take it upon themselves to begin the process of becoming a legal resident.

Illegal immigration is just the other path to becoming an American.

Immigration reform groups and activists are all too willing to let you believe that all illegal immigrants are Latinos and that the vast majority of Latinos are “not yet documented” immigrants.

While the numbers are fuzzy, counting illegal immigrants is difficult and counting people by their race is a tricky business.  The numbers are not as stark as we are being led to believe. The percentage Latinos in the illegal immigrant population in the US may be as high as 85%, so it is true immigration enforcement would disproportionately affect Latinos, as they are disproportionately violating our immigration laws. But even 100% deportation of all the illegal immigrants (which I did not support) would not wipeout the Latino population in the US, only 10 to 15% of the total number of Latinos living in the US illegally.

Making race synonymous with the immigration issue shuts down many who might question the current levels of immigration. Playing the race card fires up the liberal base, including the black community.  The irony is that high rates of low-skilled immigration has disproportionately affected the economic prospects of the black community.

Immigration reform advocates know that accusations of racism make people shy away from the immigration discussion giving them an outsized voice in policy and attracts support from groups and individuals who might otherwise not be as sympathetic to people who have broken the law.


OP/ED Published in the Detroit News

April 26, 2016

My op/ed on immigration was pubished in the Detroit News Tuesday, April 26.  For more of my thoughts on immigration and other issues facing our nation please see the blod articles below.

http://www.detroitnews.com/story/opinion/2016/04/26/disconnect-immigration/83516786/


The Immigration Reform American Workers Deserve

February 23, 2016

Democrats have wholeheartedly taken up the issue of income inequality and stagnant real wages of working class families.  Bernie Sanders has criticized our current trade policy; making it a centerpiece of his campaign. He does not support the purposed TPP (Trans-Pacific Partnership) trade agreement.

Here in Ohio, Sen. Sherrod Brown has been a longtime opponent of “free trade”.  Former Gov. Ted Strickland, who has a good chance of unsetting Sen. Rob Portland (r) in the upcoming election, is also campaigning against trade deals that put Ohio workers in direct competition with cheap foreign labor and sends Ohio jobs overseas.

What does it matter if we send American jobs overseas for foreign labor to fill or we bring foreign labor into the U.S.?  This is the disconnect of progressive economic labor policy.

In the relatively recent past, prominent liberals agreed that rapidly expanding the labor pool by bringing in millions of immigrants was not in the best interests of working Americans. Labor union leaders and civil rights luminaries, for a century right through President Bill Clinton, supported reducing the number of work permits for foreign laborers. They understood that such a move would spur wage growth and expand job opportunities for Americans.

A 1995 congressional commission, chaired by the charismatic civil rights leader and Democratic Texas congresswoman Barbara Jordan, recommended limiting immigration to 550,000 individuals a year. President Clinton praised the recommendation as a “balanced immigration policy that . . . protect[s] the American work force.”

There is no good reason to continue giving out one million new lifetime work permits every year, supporting guest worker programs and having a permissive attitude towards illegal immigration when over 15 million native and immigrant Americans already here are currently unable to find full-time jobs.

From 1924 to 1965, America sharply scaled back the number of immigrants it accepted. Without competition from a large pool of foreign-born laborers, American workers were better able to unionize and demand improved wages and benefits.

The share of income going to the wealthiest 1 percent of Americans dropped from 43 percent in 1924 — the year lower immigration quotas were implemented — to less than 32 percent in 1965 — the year the quotas were replaced with the current immigration system.

The post-1965 influx of workers helped freeze wages. In fact, inflation-adjusted wages have actually declined over the last forty years. The average worker in 1973 earned a higher real wage than the average worker does today.

Economists have concluded that high levels of immigration are partially responsible for wage stagnation. Harvard professor George Borjas, an immigrant himself, has shown that expanding the size of any working cohort — as defined by age or education — by 10 percent through immigration reduces the wages of all native-born folks in that group by 2.5 percent. The effect on native-born men is even greater — a decline in wages of 3.7 percent.

For Americans without a high school degree, the wage losses are even more pronounced — about $1,200 for the years between 1990 and 2010.

Immigrants themselves are not at fault. The overwhelming majority of immigrants are industrious people who work hard. It is just that in America, hard work often is not rewarded.  The strongest work ethic in the world cannot defeat the law of supply and demand. The more workers who need a job, the less employers have to pay to attract employees.

Our leaders have the power to stop this economic race to the bottom and boost wage growth. Scaling back the pace at which our nation admits new laborers from abroad would help disadvantaged immigrants who are already here. It would take job-market realities into account and give native and immigrant American workers the leverage to win back the wages and benefits they’ve lost over decades.

America has been and must continue to be a nation that does not discriminate on the basis of race, religion, or national origin, but there’s no need to bring in one million permanent immigrants every year, allow guest worker programs, on top of illegal immigration when current residents cannot find good-paying jobs.

If progressive candidates are serious about standing up for American workers, they must consider greatly reducing the number of foreign laborers who have access to the American labor market through trade policy and immigration policy.


The New York Times Supports Open Borders

December 11, 2015

Once again the NYT makes its same old tired argument for completely open borders to anyone unlucky enough to be born in a country where bad things happen. Do they understand they are talking about 2-3 billon people depending on where you draw the line?

All the moral dilemmas set forth in this article have their roots in the US government’s unwillingness to enforce our immigration laws.

The fact that this illegal immigrant went undetected in the US for 15 years is objective proof that our system of immigration enforcement is a joke. Yet the NYT is opposed to any practical and sensible enforcement measures like E-verify of employment status, but supports sanctuary cities, a policy that only makes sense if you stipulate to a large population of illegal immigrate living in that city. Again where is the enforcement?

The NYT put forward another compelling story of all the moral dilemmas and hardships that accumulate when we do not identify and deport illegal aliens in a timely manner.

I would love to see the NYT put forward a plan to effectively and legally enforce our immigration laws. Of course, if the NYT are not willing to deport anyone for any reason at any time, you have made it impossible to enforce our immigration laws, and that is their true moral dilemma.

Profile of an illegal immigrant from the New York Times: http://www.nytimes.com/2015/12/13/magazine/the-deported.html?_r=0


Representing One Side of the Labor Market

November 24, 2015

Mr. Tony Iriti – Economic Development Director for the Hancock County Alliance –  made a request for local government’s help to offset a local “Worker Shortage”.   I found this interesting on many levels.

I understand many in business feel that if government would only get out of way the economy would thrive.  In this case at least, Mr. Iriti is asking for a government solution and government funds to resolve a market problem.

This brings me to the function of a market.  Mr. Iriti seems to be representing only one side on the market.  Mr. Iriti fails to understand or acknowledge that when it is harder for companies to find workers that means on the other side of the equation workers are finding jobs more easily.

Whenever a business makes the statement that it is unable to find workers, in my mind , I always add the phrase “at the wages, benefits and worker conditions that I am providing.”

As a labor market  tightens, workers have more choice where to sell their labor. If the market forces business to raise wages and benefits to attract a workforce than this is a good thing.  Maybe the market is finally addressing the gross income inequality that this nation is facing.

As wages for low income workers rise they will become less dependent on government programs; like food stamps.  That is good for the whole community.

Our ultimate goal in managing our local economy should not be growth; it should be promoting broad-base middle-class prosperity.

If a business is having issues finding workers then they need to look at what they are offering in the market place.  To business I say; get out there and compete.  Have faith in the market, let the market work.


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