With growth so uncertain, it is understandable that central banks would be wary of beginning to taper monthly bond purchases before it is clear that inflation has taken off. But they would do well to recognize that prolonging quantitative easing implies significant risks, too.
Inflation readings in the United States have shot up in recent months. Labor markets are extremely tight. In one recent survey, 46% of small-business owners said they could not find workers to fill open jobs, and a net 39% reported having increased their employees’ compensation. Yet, at the time of this writing, the yield on ten-year Treasury bonds is 1.24%, well below the ten-year breakeven inflation rate of 2.4%. At the same time, stock markets are flirting with all-time highs.
Something in all this does not add up. Perhaps the bond markets believe the US Federal Reserve when it suggests that current inflationary pressures are transitory and that the Fed can hold policy interest rates down for an extended period. If so, growth – bolstered by pent-up savings and the additional government spending currently being negotiated in Congress – should be reasonable, and inflation should remain around the Fed’s target. The breakeven inflation rate also seems to be pointing to this scenario.
But that doesn’t explain why the ten-year Treasury rate is so low, suggesting negative real rates over the next decade. What if it is right? Perhaps the spread of the COVID-19 Delta variant will prompt fresh lockdowns in developed countries and damage emerging markets even more. Perhaps more nasty variants will emerge. And perhaps the negotiations in Congress will break down, with even the bipartisan infrastructure bill failing to pass. In this scenario, however, it would be hard to justify the stock-market buoyancy and breakeven inflation rate.
One common factor driving up both stock and bond prices (thus lowering bond yields) could be asset managers’ search for yield, owing to the conditions created by extremely accommodative monetary policies. This would explain why the prices of stocks (including “meme stocks”), bonds, cryptocurrencies, and housing are all a little frothy at the same time.
To those who care about sound asset prices, Fed Chair Jerome Powell’s announcement last week that the economy had made progress toward the point where the Fed might end its $120 billion monthly bond-buying program was good news. Phasing out quantitative easing (QE) is the first step toward monetary-policy normalization, which itself is necessary to alleviate the pressure on asset managers to produce impossible returns in a low-yield environment.
The beginning of the end of QE would not please everyone, though. Some economists see a significant downside to withdrawing monetary accommodation before it is clear that inflation has taken off. Gone is the old received wisdom that if you are staring inflation in the eyeballs, it is already too late to beat it down without a costly fight. Two decades of persistently low inflation have convinced many central bankers that they can wait.
And yet, even if monetary policymakers are not overly concerned about high asset prices or inflation, they should be worried about another risk that prolonged QE intensifies: the government’s fiscal exposure to future interest-rate hikes.
While government debt has soared, government interest payments remain low, and have even shrunk as a share of GDP in some countries over the last two decades. As such, many economists are not worried that government debt in advanced economies is approaching its post-World War II high. But what if interest rates start moving up as inflation takes hold? If government debt is around 125% of GDP, every percentage-point increase in interest rates translates into a 1.25 percentage-point increase in the annual fiscal deficit as a share of GDP. That is nothing to shrug at. With interest rates normally rising by a few percentage points over the course of a business cycle, government debt can quickly become stressful.
To this, thoughtful economists might respond, “Wait a minute! Not all the debt has to be rolled over quickly. Just look at the United Kingdom, where the average term to maturity is about 15 years.” True, if debt maturities were evenly spread out, only around one-fifteenth of the UK debt would have to be refinanced each year, giving the authorities plenty of time to react to rising interest rates.
But that is no reason for complacency. The average maturity for government debt is much lower in other countries, not least the US, where it is only 5.8 years. Moreover, what matters is not the average debt maturity (which can be skewed by a few long-dated bonds), but rather the amount of debt that will mature quickly and must be rolled over at a higher rate. Median debt maturity (the length of time by which half the existing debt will mature) is therefore a better measure of exposure to interest-rate-rollover risk. Sign up for our weekly newsletter, PS on Sunday
More to the point, one also must account for a major source of effective maturity shortening: QE. When the central bank hoovers up five-year government debt from the market in its monthly bond-buying program, it finances those purchases by borrowing overnight reserves from commercial banks on which it pays interest (also termed “interest on excess reserves”). From the perspective of the consolidated balance sheet of the government and the central bank (which, remember, is a wholly owned subsidiary of the government in many countries), the government has essentially swapped five-year debt for overnight debt. QE thus drives a continuous shortening of effective government debt maturity and a corresponding increase in (consolidated) government and central-bank exposure to rising interest rates.
Does this matter? Consider the 15-year average maturity of UK government debt. The median maturity is shorter, at 11 years, and falls to just four years when one accounts for the QE-driven shortening. A one-percentage-point increase in interest rates would therefore boost the UK government’s debt interest payments by about 0.8% of GDP – which, the UK Office for Budget Responsibility notes, is about two-thirds of the medium-term fiscal tightening proposed over the same period. And, of course, rates could increase much more than one percentage point.
As for the US, not only is the outstanding government debt much shorter in maturity than that of the UK, but the Fed already owns one-quarter of it. Clearly, prolonging QE is not without risks.
Today is one hell of a hump day already: New government figures show that the Biden administration is getting it wrong on the border, getting it wrong on the economy and job creation, and getting it wrong on inflation.
No, Mr. President, This Is Not the Usual Seasonal Migration
I told you, back on April 19, that this month’s immigration numbers were going to be high, and represent a blinking red light. On May 4, I reminded Jen Rubin that no, nothing “happened” to the border crisis, the media just stopped discussing it. On Monday, I pointed out that the federal government’s official statistics were undermining Biden’s argument that what Americans were seeing on the border was just a routine seasonal pattern.
“The truth of the matter is, nothing has changed,” President Biden insisted in his press conference on March 25. “It happens every single, solitary year: There is a significant increase in the number of people coming to the border in the winter months of January, February, March. That happens every year.”
I’m sorry, Mr. President, but that is a load of bull. It is not a regular seasonal pattern to break a two-decade-old record two months in a row. In the month of April, U.S. Customs and Border Protection caught 178,622 individuals attempting to cross the U.S.–Mexico border, one month after they had caught an eye-popping 173,348 individuals.
The Biden administration is going to try to take a victory lap over the fact that the number of unaccompanied minors dropped from 159 in March to 134 in April. (That’s what NBC News chose to spotlight in this headline.)
(Over at the Center for Immigration Studies, Andrew Arthur wondered why it took until May 11 to release the numbers for April. No doubt it takes time to check and collate all of the data, and as of now, there’s no indication of any deliberate delay from CBP. But any time that new information that makes the administration look bad takes a while to get released, some people will fairly wonder if someone in the chain of command was dragging his feet.)
On April 30, when asked about March’s numbers, Biden insisted in an interview with NBC News, “Look, it’s way down now. We’ve now gotten control.” But the April numbers are not way down; they’re up a bit over the previous month’s record. At the time of that interview, did Biden genuinely believe that CBP encounters at the border had dramatically declined? (The other day a commenter on our site had a good observation: Biden’s usual reflexive denial of making a mistake and his habitual fuzziness with the facts make it very tough to tell when he’s lying, when he’s misinformed, and when he’s having any memory issues.)
Biden told NBC News that he “inherited a Godawful mess” from Trump at the border, but in January, CBP had only 78,443 encounters at the southern border. The first big jump came in February when it rose to 101,120, and then it continued rising into March. Hey, what happened in late January?
These are cold, hard numbers which prove that Biden’s assessment of the situation in late March was completely wrong. Whether or not Biden wanted to tell Central America that the border is open, his first moves on immigration — halting construction of border fencing, new guidelines to ICE agents to sharply curb arrests and deportations, an attempted moratorium on deportations, proposing a path to citizenship — all sent a signal to migrants and human traffickers that the door was wide open and everyone was welcome.
Recall this anecdote at the border, reported in the New York Times in mid March:
Jenny Contreras, a 19-year-old Guatemalan mother of a 3-year-old girl, collapsed in a seat as Mr. Valenzuela handed out hand sanitizer.
“I did not make it,” she sobbed into the phone as she spoke with her husband, a butcher in Chicago.
“Biden promised us!” wailed another woman.
Many of the migrants said they had spent their life savings and gone into debt to pay coyotes — human smugglers — who had falsely promised them that the border was open after President Biden’s election. [Emphasis added]
There is only one way that people in the poorest and most isolated communities in Central America will disbelieve the false promises of human smugglers and coyotes and understand that the border is not open. It requires the U.S. president to send a clear signal, loudly, frequently, and publicly, that U.S. immigration laws are still enforced, and that those caught crossing the border illegally will be criminally charged and quickly deported. I suspect that deep down, Biden and many other Democrats think those actions are inherently mean and unjust. This is why half the Democratic presidential field supported a repeal of the criminal statute for entering the country without permission. Additionally, almost all Democrats believe illegal immigrants should be covered by a government-run health-care plan, and they’re iffy at best on the use of E-Verify.
Many Biden supporters will insist that a continuing wave of migrants wasn’t the intended consequence of his early actions on immigration, and many Biden foes will insist this was precisely the intended consequence of his early actions on immigration. But that argument is almost moot; the waves of migrants are coming — and still coming.
Usually, a Record Number of Job Openings Would Be Good News
Yesterday, the U.S. Bureau of Labor Statistics reported that the number of job openings across the country had reached 8.1 million, the highest that the agency had ever recorded.
On Monday, President Biden said, “Families — families who are just trying to put food on the table, keep a roof over their head — they aren’t the problem. We need to stay focused on the real problems in front of us: beating this pandemic and creating jobs.”
But the BLS numbers show we’re already doing pretty darn well at creating jobs, or at least creating job openings. An economy in which there are a record number of job openings is not one that is sluggish, or struggling, or that desperately needs another round of stimulus spending. What it needs are the currently nonworking job applicants to walk through the door. Right now, in Massachusetts, the maximum weekly unemployment-benefit amount is $855 per week. In a 40-hour work week, that comes out to $21.37 per hour.
Meanwhile, Prices Keep Going Up . . .
The updated unfilled-jobs numbers released Tuesday morning were bad. The updated immigration numbers released Tuesday evening were bad. Guess how the updated inflation numbers released Wednesday morning look?
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in April on a seasonally adjusted basis after rising 0.6 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.2 percent before seasonal adjustment. This is the largest 12-month increase since a 4.9-percent increase for the period ending September 2008.
The index for used cars and trucks rose 10.0 percent in April. This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase. The food index increased in April, rising 0.4 percent as the indexes for food at home and food away from home both increased. The energy index decreased slightly, as a decline in the index for gasoline in April more than offset increases in the indexes for electricity and natural gas.
The index for all items less food and energy rose 0.9 percent in April, its largest monthly increase since April 1982. Nearly all major component indexes increased in April. Along with the index for used cars and trucks, the indexes for shelter, airline fares, recreation, motor vehicle insurance, and household furnishings and operations were among the indexes with a large impact on the overall increase.
The all-items index rose 4.2 percent for the 12 months ending April, a larger increase than the 2.6- percent increase for the period ending March.
In other news: Jennifer Granholm, during a press conference yesterday about the hack of the Colonial Pipeline, said, “We have doubled down on ensuring that there’s an ability to truck oil in — gas in. But it’s — the pipe is the best way to go. And so that’s why, hopefully, this company, Colonial, will, in fact, be able to restore operations by the end of the week as they have said.”
Oh, pipe is the best way to go, huh? Safer, more secure, more efficient, less risk of accidents? Then maybe this administration shouldn’t be canceling pipeline projects!
They didn’t call Ronald Reagan “The Great Communicator” just because he knew how to deliver a speech. The fact is, he—more than any president in recent memory—knew how to bring a complex idea to life in ways the public wouldn’t just understand but would embrace.
Sometimes this required some simplifications the media—which continually tried to prove Reagan a dunce—used to distort what he was saying. That’s not to say he didn’t get a few things wrong; every president does. On the big things, however, like the importance of economic growth and how to get it, he was very, very right.
Growth matters. The Republicans who followed Reagan into the White House either didn’t get it or couldn’t explain it. That left the door open for the media and progressives to slander and then dismiss pro-growth measures as deficit-enhancing tax cuts for the wealthy that produced greater income inequality.
The Republicans who tried but failed to follow Reagan into the White House—Bob Dole, John McCain, Mitt Romney—didn’t make it in part because they didn’t understand the need to explain how growth happens. They never communicated how the right kinds of tax cuts and deregulatory measures would cause economic expansion, leading to rising wages, more jobs and new businesses, making everyone better off while eventually bringing into the U.S. treasury as much revenue or more as the liberals claimed the tax cuts “cost.”
Reagan honed his ability to explain the politics and economics of growth to working Americans over years. As a spokesman for General Electric, he went around the country to the company’s various plants and facilities to talk to employees about the virtues of the free market system. More recent Republicans’ comparative inarticulateness may in part explain why the country appears to be embracing the soft socialism Joe Biden and his congressional colleagues are offering.
Pollster Scott Rasmussen just released a national survey of 1,200 registered voters that found 35 percent of them saying economic fairness was more important than economic growth. The fact that just over a third of the country thinks equality of outcomes deserves more focus than equality of opportunity—a key component of any pro-growth policy—should alarm Republican leaders and growth hawks.
Even when the numbers are broken down by party, the results are disheartening. According to Rasmussen, a third of Republicans now believe fairness is more important than growth. In the Reagan years and throughout the Gingrich era, which saw the first balanced budget in decades alongside a period of continued growth, a number that high would have been inconceivable.
It’s not that the GOP doesn’t believe in fairness. The free market is the fairest system ever conceived for the exchange of goods and services between willing sellers and willing buyers. It’s that they reject—or ought to, anyway—the idea that no matter where anyone starts, we all need to end up in the same place.
It’s really that kind of outcome that’s the most unfair. It presumes that no matter how creative a person is, how hard they work, how good their innovation might be or even how lucky they are, no one should do any better than their neighbor. Identical per capita income for every family—that’s the ticket.
Except it’s not. The progressive politicians’ response to the COVID crisis—shutting down the marketplace state by state while the federal government borrows trillions, inflating the debt while doing nothing to stimulate the economy—leads to disaster. It won’t take too much more of this before the United States starts to resemble Greece, and not in a good way. We’ll be comparatively lucky if it stops there, without the U.S. sliding all the way down into the same space as Venezuela.
There is a bright spot in Rasmussen’s data. “Those respondents who believe focusing on economic growth is the most important rated cutting spending and taxes as the best prescriptions” for doing so, as did those “who would rather focus on economic fairness.” Both sides agree on what needs to be done and, at least by implication, reject the Biden White House’s tax-and-spend plans. This means the growth wing of the GOP has a chance to carry the day—if it’s smart and can find leaders who can explain what is going on in ways the public can understand, even through the filter of the elite media and the opposition’s critique.
In two Defining Ideas articles in 2009, “Who’s Afraid of Budget Deficits? I Am” and “Furman, Summers, and Taxes,” I criticized Lawrence Summers and Jason Furman, two prominent economists who worked in the Obama administration, for their dovish views on federal debt and deficits. They had argued that we shouldn’t worry much about high federal budget deficits and growing federal debt. Of course, that was before the record budget deficit of 2020. Now even Summers is worried. In two February op-eds in the Washington Post, Summers argues against the size and composition of the Biden “stimulus” bill.
Summers makes a solid argument, on Keynesian grounds alone, that the proposed $1.9 trillion spending bill is much too large. He also, to his credit, digs into some of the details of the bill, pointing out how absurd they are. Had Summers looked at more details, he could have made an even stronger case against the measure. For instance, one major provision of the bill, the added unemployment benefits through August, will actually slow the recovery. And other provisions of the bill, like the bailout of state and local governments, are bad on other grounds. The fact is that this is not your father’s or your grandmother’s run-of-the-mill recession. It was brought about by two things: (1) people’s individual reactions to the threat of Covid-19 and (2) politicians’ reactions, in the form of lockdowns, to the same threat.
First, though, let’s consider Summers’s big-picture case. A standard way that Keynesian economists, including Summers, evaluate a spending program to stimulate the economy is to consider the difference between the actual output (gross domestic product) of the economy and the potential output, that is, the GDP that would exist at full employment. They then advocate an increase in federal spending to close this gap. The typical increase they favor is less than the gap because of the so-called multiplier effect, the idea that when the feds spend a dollar the increase in spending in the economy is more than a dollar. Such multipliers, you might or might not be surprised to know, are difficult to estimate in advance, a fact that many Keynesians readily admit. But whatever the multiplier is, we know that if the difference between potential and actual output is $x billion, the stimulus spending, in the Keynesian view, should be less than $x billion.
Now comes the shocker. The stimulus spending in the Biden bill is a multiple of x. Summers quotes an estimate from the Congressional Budget Office that with the $900 billion measure Congress enacted and President Trump signed in December, the gap between actual output and potential output will fall from about $50 billion a month at the beginning of 2021 to only $20 billion a month at the end. He then notes that the Biden measure would spend about $150 billion per month over many months. So the spending is three times the current shortfall and over seven times the expected shortfall in December.
A major problem with the Keynesian model is that in its simplified form, which, amazingly, is still the one that Keynesian economists use to decide on the amount of spending needed, a dollar that the feds spend on item A is the same as a dollar they spend on item B. Summers, disappointingly but not surprisingly, does not challenge that view directly. He regards the $150 billion per month as overly stimulative whatever it is spent on.
However, Summers does grant the basic fact that one dollar spent on one item could be better or worse than one dollar spent on another item. And he finds much that is bad or, at least, inappropriate. In his February 7 op-ed in which he replies to critics and questioners, Summers notes, “Proposed expenditure levels for school support exceed $2,000 per student.” To put that in perspective, per-pupil spending in K–12 schools in academic year 2017, the most recent year for which we have data, was $13,094. So $2,000 is a huge increase in federal spending on something that, in the government sector at least, has been largely the preserve of state and local governments.
Summers also points out in his February 4 op-ed that the ratio of proposed spending to income loss is even greater for low-income families. He writes:
In normal times, a family of four with a pretax income of $1,000 a week would take home about $22,000 over the next six months. Under the Biden proposal, if the breadwinner were laid off, the family’s income over the next six months would likely exceed $30,000 as a result of regular unemployment insurance, the $400-a-week special unemployment insurance benefit, and tax credits.
Disappointingly, though, Summers doesn’t point out that if the purpose of a stimulus program is to stimulate, paying people an extra $400 a week as long they’re unemployed is a bad idea. This omission is all the more striking given that Summers, in the late 1980s and early 1990s, was prominent in arguing that paying people to be unemployed will cause many of the unemployed to stay out of work longer. Indeed, in his article “Unemployment” in my 1993 Fortune Encyclopedia of Economics,later renamed The Concise Encyclopedia of Economics, Summers wrote:
The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.
Economists since then have done a number of studies of the effect of extending unemployment benefits beyond the traditional twenty-six weeks, and the bottom line is that the effect is large. For example, Rob Valletta and Katherine Kuang, two economists at the San Francisco Federal Reserve Bank, wrote in November 2010:
By easing the financial burden of long-term unemployment, extended benefits reduce the incentives of eligible workers to search for jobs and fill vacancies. Research by Valletta and Kuang (2010) suggests that the impact of extended insurance benefits on the unemployment rate in late 2009 was only about 0.4 percentage point. Updated estimates for all of 2009 and the first half of 2010 suggest a larger impact of about 0.8 percentage point.
More recently, economists Marcus Hagedorn of the University of Oslo, Iourii Manovskii of the University of Pennsylvania, and Kurt Mitman of Stockholm University, in a 2016 study published by the National Bureau of Economic Research (“The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?”), found that 2.1 million people got jobs in 2014 due to the ending of the extended unemployment benefits.
Of course, what we would really like to know is the effect of the double whammy of extending unemployment benefits through August and increasing them by $400 per week. The latter measure would cause millions of unemployed people to make more money by being unemployed than by being unemployed. My own admittedly intuitive guess is that if the bill passes with those benefits, at least two million workers who would have been working will be out of work. That one provision of the “stimulus” bill, in short, would create a drag on the economy.
The other major absence from Summers’s critique is any mention of the huge bailout for state and local governments. Last June, in “Just Say No to State and Local Bailouts,” I noted the Federation of Tax Administrators’ estimate that the combined effect of the pandemic and the state government lockdowns would be a loss of $152 billion in state government revenues through the end of their fiscal years. I also pointed out that the state governments’ rainy-day funds plus their year-end balances totaled $90 billion. So the needed cuts in spending to stay within the states’ balanced-budget requirements would have been $62 billion, which was only 7 percent of the prior estimated tax revenues.
These numbers, it turns out, were overly pessimistic. The Committee for a Responsible Federal Budget estimates that state and local government tax collections by the end of 2020 were over 2 percent higher than in the fourth quarter of 2019. It should be even easier for Congress to “just say no” to state and local bailouts. Unfortunately, the $1.9 trillion bill contains $350 billion for state and local governments, territories, and tribes.
Why doesn’t Summers mention the state and local government bailout? I don’t know, but here’s a hypothesis. He wants to get Democrats to listen to him but he knows they’ll turn off if he is too critical. Thus Summers softens his criticism of the bill by writing, “Its ambition, its rejection of austerity orthodoxy, and its commitment to reducing economic inequality are all admirable.” Senator Elizabeth Warren, in her book A Fighting Chance, recalled the advice that Summers had given her in a dinner conversation early in her time as a US senator:
Larry’s tone was in the friendly-advice category. He teed it up this way: I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People—powerful people—listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders. (Italics in original.)
I don’t know if this is true, but it fits. Larry Summers has been an insider for a long time and it’s probably hard for him to criticize his allies. That makes his criticism of this bill all the more credible.
I’m an outsider and so it’s easier for me to call them the way I see them. Here are the two major things I see, both of which undercut the case for any stimulus bill.
First, the economy is recovering. In January, the International Monetary Fund predicted that real GDP will grow by 5.1 percent in 2021. Possibly that’s because the IMF understands that this is not a typical recession. The slump we’re in was due initially to people’s fear of the virus, a fear whipped up by Dr. Anthony Fauci and others. But now it’s due mainly to lockdowns. As the percent of the US population that has had COVID-19 rises and the number of people vaccinated rises, we are getting closer to herd immunity. Then people will feel even safer going out and governments will have fewer excuses to keep their economies locked down. We can all become Florida or Florida-Plus. That will all happen without any stimulus bill.
Second, the $1.9 trillion bill represents government taxing us or our children in the future to spend money in places where we the people have chosen not to spend it now. The bill is, in essence, a huge instance of central planning with government officials’ preferences overriding ours. The bill, for example, contains $28 billion for transit agencies, $11 billion in grants to airports and airplane manufacturers, and $2 billion in grants to Amtrak and other transportation. How does the government know that those are the right amounts? What if, as I predict, when the pandemic and lockdowns end we will still have fewer people wanting to ride transit because they and their employers will opt for a hybrid model of some at-home work and some in-office work? The effect of this misallocation of resources won’t necessarily show up in GDP because GDP measures government spending at cost rather than at value. But this spending will make us somewhat worse off. It’s far better to rely on people having the freedom to make their own allocations.
If the government gets out of the way, the economy will recover. Maybe it takes an outsider to see that and to say that. I just did.
At their peak, unions represented more than a third of American workers. Now, after several decades of continuing decline, less than 10% of workers in the private sector are part of organized labor. And with so much of American manufacturing having moved offshore to escape the less-than-friendly business climate the politicians created, that’s not really news.
What some people don’t know is how union leadership has continued to cozy up to progressive politicians pushing policies that are antithetical to the interests of the rank and file.
On his first day in office, President Joe Biden – who campaigned as a moderate — signed an executive order killing the Keystone XL pipeline and, with it, more than 10,000 good-paying union jobs. Among Democrats, that’s par for the course. The vocal progressives dominating the Democratic Party these days are in command of the agenda.
In another case, the United Food and Commercial Workers’ Union has been pushing for at least ten months for “hazard pay” that doesn’t mesh with the interests of its members. UFCW International President Marc Perrone is demanding some of the nation’s largest grocery chains commit to the pay bump because of COIVD.
Initially, he wanted $2 an hour. Now he wants $4, even $5 an hour in several West Coast cities. For this, he’s finding support from city and county politicians whose campaigns are union-funded.
Shortages caused by the lockdowns have made it challenging for grocers and their frontline employees. The UFCW’s on them, after they’ve already invested billions to improve safety measures ignores the facts and smacks of ingratitude. Some grocery chains, like Kroger, are already offering $100 bonuses to employees who get a COVID vaccine.
But what of what the union wants? A letter to the editor recently appearing in the Los Angeles Times said it well: “I fully agree that the grocery store workers are heroes. However, how does requiring them to be paid more solve the problem here? Are we saying to workers that it’s OK if you get sick, so long as you are paid more?”
Whatever the companies agree to give, it will probably never be enough for the union leadership The UFCW and Marc Perrone care more about proving they’ve got muscles to flex than the effect these demands will have on working families. In Long Beach, California – which has already mandated hazard pay for grocery workers – Kroger was forced to announce it would close two underperforming stores because the move increased labor costs by more than 20%.
How does that play out? A California Grocers Association study recently found the state’s hazard pay ordinances could raise grocery costs for the average family of four by $400 a year while hundreds of workers, most of them UFCW members, will lose their jobs. It’s a pyrrhic victory that may be repeated regardless of the impact on workers because it generates good headlines for the unions.
Ironically, Perrone and other UFCW leaders won’t suspend the collection of weekly dues payments during the pandemic, a move that would help an awful lot of households stretch their budgets and increase purchasing power.
Perrone seems to think more of non-union chains like Trader Joe’s, which he has praised for boosting so-called “hero pay” to $4 during the pandemic but that may be because of the pressure it puts on chains like Kroger and Albertson’s.
What he doesn’t mention is that Trader Joe’s CEO admitted the pay bump takes midyear raises off the table and that it might not last if cities “continue to increase the hourly rate above $4 or have the premium remain after the pandemic.”
There are grocery chains like Kroger, Albertson’s, and Ahold that recently made multi-billion-dollar investments to secure and stabilize the pensions of more than 50,000 unionized grocery workers. It was a pro-worker move that not only put people over profits but was made necessary because the UFCW plan was significantly underfunded. Most grocers provide their employees fair wages, industry-leading benefits in pensions and healthcare, and COVID-19 vaccines. What does the union do? It’s time for the workers to start asking.
“The Right Minimum Wage: $0.00.” That was the title of a 1987 editorial in a major American newspaper. The editorial stated: “There’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage would price working poor people out of the job market.” You might expect the Wall Street Journal editors to write something like that. But the editorial wasn’t in the Wall Street Journal. It did appear, though, in a prominent New York newspaper. Which one? The New York Times.
In a 1970 economics textbook, a famous Nobel Prize–winning economist wrote of 1970’s minimum wage rate of $1.60, “What good does it do a black youth to know that an employer must pay him $1.60 per hour if the fact that he must be paid that amount is what keeps him from getting the job?” Who wrote that? It must have been free-marketer Milton Friedman, right? Wrong. The author of that statement was liberal economist Paul Samuelson.
Among non-economists and politicians, the minimum wage is one of the most misunderstood issues in economic policy. President Biden and almost all Democrats and some Republicans in the US Congress advocate increasing the federal minimum wage from its current level of $7.25 an hour to $15 an hour over four years. They argue that many of the workers earning between $7.25 and $15 will get a raise in hourly wage. That’s true. But what they don’t tell you, and what many of them probably don’t know, is that many workers in that wage range will suffer a huge drop in wages—from whatever they’re earning down to zero. Other low-wage workers will stay employed but will work fewer hours a week. Many low-wage workers will find that their non-wage benefits will fall and that employers will work them harder. Why all those effects? Because an increase in the minimum wage doesn’t magically make workers more productive. A minimum wage of $15 an hour will exceed the productivity of many low-wage workers.
The reason some workers earn low wages is not that employers are greedy exploiters. If exploitation were enough to explain low wages, then why would employers ever pay anyone over $7.25 an hour? Wages are what they are because they reflect two things: (1) workers’ productivity and (2) competition among employers.
Employers don’t hire workers as a favor. Instead, employers hire workers to make money. They hire people only if the wage and other components of compensation they pay are less than or equal to the value of the worker’s productivity. If an employer pays $10 an hour to someone whose productivity is $15 an hour, that situation won’t last long. A competing employer will offer, say $12 an hour to lure the worker away from his current job. And then another employer will compete by offering $13 an hour. Competition among employers, not government wage-setting, is what protects workers from exploitation.
We all understand that fact when we see discussions on ESPN about why one football player makes $20 million a year and another makes “only” $10 million a year. Everyone recognizes the twin facts of player productivity and competition among NFL teams. The same principles, but with much lower wages, apply to competition among employers for relatively low-skilled employees.
Open up almost any economics textbook that discusses the minimum wage and you’ll likely see a demand and supply graph showing that the minimum wage prices some low-wage workers out of the market. For textbooks published in the past twenty years, though, you might also find a statement that although some workers will lose their jobs, there’s controversy among economists about how many jobs will be lost. According to the textbook writers, some economists think the number will be large and others think it will be small or even imperceptible. You could easily conclude that there’s no longer a consensus among economists that an increase in the minimum wage would cause much job loss.
But that conclusion would be wrong. UC-Irvine economist David Neumark and Peter Shirley, an economist with the West Virginia Legislature’s Joint Committee on Government and Finance, showed that in a January 2021 study published by the National Bureau of Economic Research. Neumark is one of the leading scholars on the economic effects of minimum wages.
Neumark and Shirley chose a clever methodology. They read every published study of the effects of the minimum wage on employment in the United States that was done between 1992 and the present. They identified for each study the core estimates of the effect of minimum wages on employment. When that was difficult to do, they contacted the studies’ authors to ask them what they regarded as their bottom-line estimates. Sixty-six studies met their criteria and these criteria had nothing to do with the size or direction of the estimates.
Here’s what they found. The vast majority of studies, 79.3 percent, found that a higher minimum wage led to less employment. A majority of the studies, 55.4 percent, found that the negative effect of a higher minimum wage on employment was significant at the 10 percent level. Translation: for those studies, the probability that there was a negative effect on jobs was 90 percent. Almost half the studies, 47.9 percent, found a negative effect on jobs at the 5 percent confidence level. For those studies, in other words, the probability that there was a negative effect on jobs was 95 percent.
Moreover, found Neumark and Shirley, the evidence “of negative employment effects is stronger for teens and young adults, and more so for the less-educated.” They concluded that the commonly heard refrain that minimum wages don’t destroy jobs “requires discarding or ignoring most of the evidence.”
Moreover, virtually all the studies of the effects of minimum wages in the United States have considered increases in the minimum wage of between 10 and 20 percent. The US government has never raised the minimum wage by anything close to the 107 percent envisioned in the increase from $7.25 to $15.
Why does that matter? Because the higher is the increase as a percent of the existing minimum wage, the more certain we economists are that it will hurt job opportunities for unskilled workers. We are sure of that because of the law of demand, which says that for any good or service, the higher the price, the less is demanded. That applies whether we’re talking about iPhones, skateboards, or labor. So raise that price a lot, and the amount demanded falls more than it would fall if you raised it a little. And what employers don’t demand, willing workers can’t supply.
The effect of the $15 minimum wage would vary a lot from state to state. In New York in 2019, the median hourly wage was $22.44 and the average hourly wage was $30.76. So a $15 minimum would affect a fairly small percent of New York’s labor force. In Alabama, by contrast, the median hourly wage in 2019 was only $16.73 and the average was only $21.60. So the $15 minimum in Alabama could hurt a much greater percent of the labor force.
The University of Chicago’s Booth School has an Initiative on Global Markets (IGM) that occasionally surveys US economists on policy issues. Possibly because of the surveyors’ understanding that the $15 minimum wage would hurt some states more than others, the IGM recently made the following statement and asked forty-three economists to agree or disagree: “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.” Unfortunately, the question did not specify what is meant by “many.” Is it ten, twenty, thirty? Some economists surveyed pointed out that ambiguity. That ambiguity could explain why a number of the economists answered that they were uncertain. But of those who agreed or disagreed, nineteen agreed that it would cause job loss in many states and only six disagreed.
One economist who disagreed, Richard Thaler of the University of Chicago, gave as his explanation this sentence: “The literature suggests minimal effects on employment.” No, it doesn’t. As noted earlier, the federal government has never tried to raise the minimum wage by such a large amount and so there is no scholarly literature on such an increase. Would Thaler say that if putting a cat in the oven at a temperature of 72.5 degrees Fahrenheit doesn’t hurt the cat, then putting a cat in the oven at 150 degrees wouldn’t hurt the cat either?
While few economists have actually estimated the effects of such a large increase in the minimum wage, the US Congressional Budget Office (CBO) presented its economists’ estimate earlier this month. According to the CBO, the increase would reduce US employment by 0.9 percent. That might not sound like much, but 0.9 percent translates into 1.4 million workers put out of work.
But wouldn’t the increase in the minimum wage also increase wages for a lot of workers who keep their jobs? Yes, it would, and the CBO estimates that although the workers who lose their jobs would lose income, their loss over the years from 2021 to 2031 would be “only” 34 percent of the gain to the workers who gained wages.
But the gain in wages is not an unalloyed benefit to those who gain. The reason is that, as noted above, an increase in wage rates doesn’t automatically make workers more productive. So employers, looking for ways to avoid paying more to workers than their productivity is worth, would search out other ways of compensating. They might cut non-wage benefits, work the employees harder, or reduce training, to name three. Interestingly, on its website in 2006, when Congress was considering an increase in the federal minimum wage, the Economic Policy Institute (EPI), an organization funded partly by labor unions, admitted the last two of these three. It stated, “employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.” How would an employer make his workers more productive and reduce absenteeism? Probably by working the employees harder and firing those who miss work. How would he reduce training costs? By providing less training. In an article in the winter 2021 issue of the Journal of Economic Perspectives, UC-San Diego economist Jeffrey Clemens noted a negative correlation between minimum wages and employer-provided health insurance. In the workplace as in the rest of the world, there’s no free lunch.
The late economist Walter Williams has written about how, as a teenager, he learned many skills on the job that made him more productive and ultimately higher paid. I wrote recently that he could get those early jobs because the minimum wage was so low. Low-paid jobs are often crucial for black youths and other youths who need to build their work skills and work histories. These skills might be as simple as learning to show up on time. In 1967, when I was sixteen, I worked in a kitchen at a summer resort in Minaki, Ontario. The minimum wage at the time was $1 an hour and I was paid, if I recall correctly, $1.25 an hour. For the first three days of the job, I showed up about twenty minutes late. On the third day, the chef told me that if I was late the fourth day, I shouldn’t bother showing up because I would be fired. I was never late again. I learned the “skill” of punctuality. We adults take such things for granted. Kids don’t. Raise the minimum wage enough and a whole lot of young people won’t learn the basics, or won’t learn them until later in life. That would be tragic.
Some people, even some very prominent economists like Nobel Prize winner Paul Krugman simply cannot get their heads around the idea that letting people keep more of what they earn is the best kind of economic stimulus there is. Instead, despite years of hard data proving otherwise, they still maintain more spending by the government is what greases the wheels and keeps the economy running.
This is nonsense. The tax cuts of the 1920s, the 1960s, and the 1980s were all followed by periods of remarkable growth in the U.S. economy. The spending binges pushed by FDR, by Richard Nixon, and among others, Barack Obama did little to fuel the engine of productivity or raise living standards.
The latest experiment, if it need be called that, was the Tax Cuts and Jobs Act proposed by a Republican-led Congress and signed into law three years ago by President Donald Trump. Progressives derided the legislation as “welfare for the rich” that would see the “poor get poorer.”
The progressives were wrong. After the TCJA became law, optimism among Main Street business leaders reached an all-time high in the third quarter of 2018 while the unemployment rate reached a generational low. Before the implementation of lockdowns as a mostly Blue Strategy for combating the novel coronavirus, the economy added 5 million jobs while unemployment among women, people of color, and workers without high school degrees reached record lows.
Thanks to the reworking of the tax code by the TCJA, American business started to put money into itself again. Core investments in equipment and other business necessities reversed its five-year downward Obama-era trend, shooting back up, adding to productivity, and raising workers’ wages. And, most distasteful of all to liberals whose economic policies are all about spending your money like it was theirs, federal revenues reached an all-time high because more Americans were working for bigger paychecks in businesses that were expanding.
This is what Joe Biden has promised America he’s going to undo. That’s the practical effect of his promise to “repeal the Trump tax cuts” which, in his mind only benefited the ultra-rich like him. He and his party win votes by exploiting the resentments that exist in America between those who are well off and who work hard and those who don’t. House Speaker Nancy Pelosi, D-Calif., may think the $600 per person being doled out in the latest COVID-19 relief bill will stimulate the economy – but that will be hard to do while other benefits provide a disincentive for people to go back to work in the places they can. Believe it or not, there was a hiring crisis in the Red States once their economies got moving again during the pandemic because some folks decided, rationally enough, they’d rather stay home and collect unemployment plus rather than go back to work.
They – and Biden and his incoming team of economic advisers – don’t know what they missed. Figures released by the Federal Reserve show low- and middle-class families saw large gains in wealth growth in 2018 and 2019. Low-income families saw their net worth increase 37 percent while middle-class families saw their net worth increase 40 percent.
Figures supplied by the House Ways and Means Committee show household income reached new highs as real median U.S. household income in 2019 rose nearly 50 percent more than during the eight years Barack Obama was president. Median household incomes increased 7.1 percent for Hispanics, 7.9 percent for Blacks, 10.6 percent for Asian Americans, and 8.5 percent for foreign-born workers while wages for minorities and women and young people grew at a faster pace than they did over Obama’s second term.
The Tax Cuts and Jobs Act worked, so well in fact it established the foundation for what should be – and looked like it was going to be a rapid recovery from the pandemic lockdowns. Instead, we have Joe Biden hinting that higher taxes, new taxes, carbon taxes, and other taxes are coming even if – as he unbelievably promises – families making less than $400,000 a year won’t pay a single dime more.
It’s sad really. With all the evidence showing Jack Kemp and Ronald Reagan were right, that a rising tide does lift all boats, Biden would rather pursue policies that play to the rhetoric of classically socialist class envy while ignoring the need to create an environment in which opportunities exist for those who most need them
After seven months, California’s one-hundred-plus-member economic recovery task force has finished its recovery recommendation report. What could have been a game-changing opportunity to reduce the state’s high cost of living, increase efficiency in bureaucracies, and reform tax and regulatory policies never got off the ground.
Just 23 pages long, you will be hard-pressed to find substantive economic recommendations, much less any major new ideas, in a report that somehow took seven months to write. The COVID recovery task force was ingenious political theater to show that the state’s major business leaders, including Apple CEO Tim Cook and Disney CEO Bob Iger, were professing buy-in to Governor Gavin Newsom’s economic shutdown. This was never about reforming state economic policies that are among the worst in the country. It was about providing broad-based political cover.
With more than one hundred members appointed by Newsom, you knew that nothing important would ever be accomplished. Granted, the unique problems of COVID meant the task force would include representation from several economic sectors, but creating a committee of over one hundred could have been straight out of the CIA’s 1944 “Simple Sabotage Field Manual,”which recommends creating as large of a committee as possible to ensure that nothing happens.
Labor unions garnered the most task force representation, with 14 members, including two from the politically important Service Employees International Union. And even though the pandemic is a public health problem, the task force included only a handful of members from the health care industry, broadly defined.
The report opens with a discussion of the importance of viral testing and the state’s new, expensive purchases of protective equipment and medical supplies. I wonder how task force member Arnold Schwarzenegger felt, as the substantial investments he made in these important supplies several years ago when he was governor—for just such a pandemic—were given away by the state because they were considered to be too expensive to maintain. Oh well.
After reading the report, you get the uneasy feeling that you were indeed snookered. It reads like a “what I did this summer” back-to-school report. There was much listening to others. Hand-wringing about the impact of COVID, but not too much, lest there be any hint that the report is at all critical of state policies. There are roughly 30 references to diversity, equity, and racism in the report, but only one reference to efficiency. There is much admiration for the governor’s leadership, and considerable self-congratulation, including advocating for the use of electronic signatures on government documents and refurbishing used school computers. Tim Cook and Bob Iger were needed for this?
Not surprisingly, you get the feeling that the task force members ultimately hit their breaking points as they tried to navigate what amounted to a ship without a sail. With California COVID cases rising rapidly, it is strange the task force would disband now, when presumably their input is more important than ever. But after seven months of accomplishing little, task force members probably were done in. Iger resigned even earlier, when the state would not come up with a plan for theme park reopenings.
If something important were to have been accomplished, then problems would first have to be identified and prioritized. But this was never going to happen, because Newsom appointed his chief of staff, Ann O’Leary, as one co-chair, who could be the de facto gatekeeper. The other co-chair was Tom Steyer, the former Democratic presidential candidate who spent $250 million to run for president earlier this year, and who failed to receive any delegates.
Steyer previously made a fortune investing in coal, one of the dirtiest of energy sources. Now a born-again activist for climate and progressive causes, Steyer is willing to spend his and other people’s money to create a carbon-free California as soon as possible, even if the most optimistic assessments of its benefits do not come close to offsetting the costs.
Newsom got what he wanted in Steyer as a well-heeled partner who would support all climate initiatives, including Newsom’s executive order banning the sale of gasoline-powered cars by 2035. Because California accounts for less than one percent of global carbon emissions, the state could probably move the climate needle more by paying China to stop using soft coal than by mandating that all new California homes require solar panels, extra insulation, and highly energy-efficient windows and appliances, all of which increase new home construction costs by $30,000 or more.
The O’Leary-Steyer task force report is about as different as it possibly could be from a recovery task force report written in 1992 for then governor Pete Wilson. Chaired by Peter Uberroth, a 17-person committee took just four months to write “California’s Jobs and Future.” This was produced when the California economy had lost 500,000 jobs, about four percent of the state’s employment.
The Uberroth report pulled no punches in identifying the state’s key economic policy shortcomings. In 128 densely written pages, the report described a “government that is no longer working” and a state on “its way to fiscal disaster.” The report describes unaffordable housing. An underperforming school system. A shift to low-wage service-sector jobs. Losing businesses to states and countries with lower costs. Inadequate entrepreneurship. Environmental restrictions that do not pass a sensible cost-benefit assessment. All of this written in 1992.
The report provided plenty of sensible solutions, built around the ideas of redesigning government so that it was no longer in an adversarial position with businesses and taxpayers, an overhaul of the workers’ compensation system to root out widespread fraud, incentivizing school performance, and streamlining regulations and implementing tax incentives for business investment.
For schools, recommendations included stricter cost accountability; a statewide open-enrollment plan, meaning school choice; an extra hour per school day and a two-hundred-day school year; English comprehension requirements for third graders; and expanded career training for 11th and 12th graders. This would have made a significant difference in the effectiveness of California schools, but little was implemented, largely for political reasons.
Perhaps the most striking difference between the two reports, written nearly 30 years apart, is the tenor of the conclusions. Steyer stated, “We will come back stronger and better than we have ever been.” In sharp contrast, the Uberroth report warned that the state was risking bankruptcy if their policy recommendations were not implemented. For the most part, the recommendations weren’t adopted, and bankruptcy has been averted only by a series of large tax increases that place California among the highest-taxing states in the country.
Viewed over the last 28 years, the Uberroth report has been chillingly accurate. Sadly, its prescience will continue.
The American economy is roaring back according to numbers released Thursday showing a record-breaking increase in U.S. gross domestic product of just over 33 percent on an annualized basis for the third quarter of 2020. The numbers are the highest ever recorded, more than double the previous record set back in 1950 while Harry Truman was president.
The surge, which is attributable to the end of lockdowns in the typically referred to “red states” is leading to what appears very much like the V-shaped recovery President Donald J. Trump promised would occur once businesses reopened and people were allowed to go back to work.
The top Republicans on the House Ways and Means Committee, U.S. Rep. Kevin Brady of Texas, described the news as ratification of Trump and GOP economic policies. “After Covid-19 devastated America’s strong economy almost overnight, the Trump economy did the impossible – it battled back with the largest single quarter of economic growth in America’s history. This smashes expectations, beating economists’ original growth estimates by a stunning 400 percent.”
The news is especially bright given that all the growth came in the private sector, with private spending increasing by 40 percent and private investment up by an astounding 83 percent. Growth in the government sector, meanwhile, was slightly down in the third quarter, suggesting the need for additional federal stimulus dollars may be abating.
According to the Bureau of Economic Analysis, real GDP in the third quarter grew by 7.4 percent, a figure that considerably exceeds even the most favorable market expectations. This follows the sharpest single quarter economic contraction on record in the second quarter of 2020 due to pandemic-induced lockdowns.
The numbers should calm those who fear the economy is on the edge of a recession thanks to the considerable increase in the numbers of people testing positive for the COVID-19 virus. The United States has now, in a single quarter, recovered two-thirds of the economic output lost due to the pandemic-imposed lockdowns imposed by many of the nation’s governors from march onward. By comparison, it took four times as long to regain the same share of lost economic output during the anemic Obama recovery that followed the implosion of the U.S. housing market.
Real consumer spending rose 8.9 percent — 40.7 percent at an annualized rate — in the third quarter, which is also the largest increase on record. Goods and services both experienced steep increases, suggesting consumer and business confidence is on the rebound and explaining, perhaps, the recent Gallup numbers showing 56 percent of Americans believe they are better off now than they were four years ago. Greater spending on recreation, food, and accommodation services – sectors acutely impacted by lockdowns – alone accounted for one-fifth of total GDP growth in the third quarter.
The government also reports residential investment rose by 12.3 percent – 59.3 percent at an annualized rate – with most of the increase due to real estate commissions generated by rebounding home sales.
The increase in residential investment, the largest since 1983, was echoed somewhat less rosily by an increase in business investment, which rose 4.7 percent — 20.3 percent at an annualized rate — with a steep increase in equipment more than offsetting declines in structures and intellectual property products.
In President Trump’s first three years in office, the economy grew by $310 billion more than what was expected before the 2016 election. In contrast, in Obama-Biden’s second term, the economy grew by $640 billion less than what was expected prior to the 2012 election. “We still have a way to go in our recovery,” Brady said, adding “there is no question Speaker Pelosi is working to sabotage America’s economy ahead of the election. But look at the contrast — the worst economic recovery in our lifetimes under Obama-Biden, the strongest labor market recovery from an economic crisis under President Trump.
The California Legislature is back from its summer recess and has frantically resumed its quest for new revenue sources.
One of the latest ideas is Assembly Bill 1253. This proposed legislation would add new income tax brackets for high earners on top of the existing ones.
Income between $1 million and $2 million would receive a one percentage point surcharge, bringing the marginal rate to 14.3 percent. Those earning between $2 million and $5 million would pay an additional three percentage points, and those earning over $5 million would pay an additional 3.5 percentage points, bringing their marginal rates to 16.3 percent and 16.8 percent respectively.
This plan constitutes a continuation of California’s soak-the-rich approach to raising revenues.
While some seem to believe that high earners can provide unlimited resources, the evidence from prior tax hikes suggests that the introduction of these tax rates is not even likely to raise revenue for the state. At the same time, it will hammer job creation.
The problem is that high earners do not simply sit there and take it when the state goes after their income.
In a detailed study of the 2012 California ballot measure that raised the top state rate to 13.3 percent, Ryan Shyu and I found that just two years later, the state was only collecting 40 cents of every dollar that it had hoped to raise from the tax increase.
High income taxpayers affected by the 2012 tax increase suddenly began to flee the state at higher rates, especially to zero tax states like Nevada, Texas, and Florida.
Even more importantly for the state budget, those that stayed began declaring considerably less taxable income than they would have otherwise, apparently either scaling back their productive activities or engaging in tax avoidance.
The economist Arthur Laffer has famously argued that there is a tax rate beyond which a government’s revenue will decline if it raises taxes further, due to the disincentive effects of high taxes.
While the federal government may be helped by limits on what American citizens can do to escape federal taxation, state governments tread on much thinner ice when faced with the ability of taxpayers to move their residences and their earnings generation to other states.
In 2012, California was at least still at the point where raising top income tax rates led to some increase in near-term revenue, albeit with grave long-term consequences.
Today, however, the state is starting from a 13.3 percent tax rate that is the highest in the nation.
Furthermore, Congress has since moved to protect federal taxpayers against bloated state spending by placing a $10,000 cap on state and local tax deductions as part of the 2017 Tax Cut and Jobs Act.
So while the blow of a 3 percentage point tax increase in 2012 was strongly cushioned by deductibility against top-bracket federal rates, California taxpayers today would feel the full force of this proposed round of increases.
Once taxpayers have responded by voting with their feet, reducing their business activities, and re-upping with their tax attorneys, the state will likely lose revenue if it attempts to increase rates.
To make matters worse, Sacramento’s narrow focus on tax revenues ignores that fact that this tax avoidance behavior will lead to job losses. These rates also apply to business income to non-corporate entities (such as partnerships and LLCs) which account for over half of all employment in the US.
In another study, Xavier Giroud and I found that each percentage point increase in individual tax rates that the average state implements leads to losses of up to 0.4 percent of all non-corporate jobs in the state.
Starting from California’s already astronomical top rate, the impact would be expected to be even larger.
These job losses will negatively impact the well-being of Californians and further reduce state tax revenues.
California’s approach to relying on the taxation of top earners has sown the seeds of its own destruction. The top 0.5 percent of taxpayers pay over 40 percent of individual income taxes in the state.
Officials are blaming COVID-19 for the budgetary havoc, but this structure means that in any downturn, California revenues will tank due to the excessive reliance on both the ordinary income and capital gains of top earners.
If the Legislature is interested in promoting economic growth and prosperity in the California, and securing the state’s own fiscal future, it should reject further top income tax rate increases.
Instead, it should work towards putting the state back on a path towards being a competitive place for high-income individuals and businesses to locate their economic activity.
Project chairman: 'We have certainly hit a snag with all the difficulties of the coronavirus.'
By D Magazine•
Construction for a high-speed train that will zip between Dallas and Houston at more than 200 miles per hour is still in the works. But with costs estimating almost $20 billion more than initially planned, Texas Central might need the help of stimulus money.
In a recent letter to Texas State Sen. Robert Nichols, Texas Central’s Chairman (and an investor), Drayton McLane, Jr. said the project is seeking funds outside of private equity, saying, “we have certainly hit a snag with all the difficulties of the coronavirus.” The letter was obtained by the Dallas Business Journal.
The company laid off 28 employees in March, and the Global Financial Markets hit a low, too, leaving its upcoming recovery—or lack thereof— to determine the verdict: Will the train need a stimulus fund?
Aside from exploring funding from government loan vehicles—including Railroad Rehabilitation & Improvement Financing and Transportation Infrastructure Finance and Innovation Act—Texas Central may tap into government loans. According to Texas Central CEO Carlos Aguilar, the company has not applied for funding through the CARES Act.
“We feel that between Japanese government funding and the monies we hope to receive from President Trump’s infrastructure stimulus through the Department of Transportation, along with private equity that the project still has a great opportunity, is viable and can be construction-ready this year,” McLane added in his letter.
The project will create an estimated $36 billion in economic benefits statewide over the next 25 years, according to a news release. Texas Central anticipated it also would create 10,000 direct jobs per year during peak construction and 1,500 permanent jobs when fully operational.
Early on, Texas Central said the bullet train would be privately funded—an idea that has drawn skepticism since inception, along with its ability to be profitable.
In 2017, Peter Simek wrote a D Magazine article titled Has the Texas Central Bullet Train Gone Off the Rails? In it, he points to Travis Korson, a senior fellow with Frontiers of Freedom, a conservative Washington think tank, who didn’t believe then that the numbers made sense and that its growing budget and inflated ridership projects suggest the privately funded rail project may not be profitable. (Click here to read it)
At the time, proposed construction costs had ballooned from $10 billion to $16 billion. Currently, on Texas Central’s website, it says the system will cost more than $12 billion to construct.
In response to recent news about the potential need for stimulus money, State Representative Ben Leman, District 13, issued the following statement:
“We also were told the project would be privately financed, yet now it is revealed Texas Central is seeking taxpayer stimulus money to build it. To publicly promote to the media, to elected officials, and worst of all to the citizens of Texas the cost of the project as $20 billion when they know it to be more than $30 billion and that the project would be privately financed while they ‘hope to receive from President Trump’s infrastructure stimulus through the Department of Transportation’ to build it just reveals their true character and intentions about this project”
Aguilar told the DBJ that the $30 billion figure was “a conservative estimate of ‘all in’ numbers.”
The train’s still on the tracks toward its construction, though, as the company hit a breakthrough in an essential legal ruling just one month ago: The Thirteenth Court of Appeals ruled Texas Central and its subsidiary Integrated Texas Logistics as legal railroads.
The decision reversed a previous one made in the 87th district of Leon County. Designating the project as a legal railroad is almost as powerful as what happens next. All railroads have the right of eminent domain, which means that Texas Central can acquire all the land it needs. Project opponents are appealing the decision to the Texas Supreme Court.
In response, Aquilar said the “decision confirms our status as an operating railroad and allows us to continue moving forward with our permitting process and all of our other design, engineering, and land acquisition efforts.”
By Havasu News•
The coronavirus crisis has likely changed American business forever, as politicians use the deadly pandemic to push for changes that will have a major impact on how corporations operate.
How business respond will determine the future of American commerce for years. Important business leaders like Black Rock’s Larry Fink are pushing companies to expand their mission beyond maximizing value for shareholders into things that are on progressives’ political wish list.
What Fink and others are advocating for drifts harmfully towards what progressives promote as they seek to control the business sector and move to a centrally planned economy.
If the American economy is to survive, let alone thrive, we need corporate leaders to step up in defense of the free market. They need to eschew the insider deals and crony capitalism that have caused many Americans, especially the young, to lose faith in what, as Churchill might have quipped, is the worst of all possible economic systems except for all the others.
There are heroes out there like Tesla’s Elon Musk, who recently stood up to Gov. Gavin Newsome and other officials who would not permit his California manufacturing plant to reopen and get people back to work. To Musk’s credit, even though his empire is built on questionable tax breaks, credits, and subsidies, he pushed back where other business leaders have sheepishly complied. He announced he’d be taking his company and the jobs he created to Texas or Nevada, where they would be welcomed. Faced with that, Newsome and company seem to have backed down.
For every hero, there are goats like Alan Armstrong, the CEO of Williams Co., an energy pipeline company. According to recent allegations made in a Delaware court, he secretly worked to undermine a 2016 board-approved merger between his firm and Energy Transfer, a Texas-based pipeline company, that would have paid shareholders a significant premium over the then-market value of their shares.
Nearly four years since it fell through, Williams continues to seek more than a billion dollars in breakup fees, despite Armstrong’s recently alleged involvement in the deal’s demise. According to court documents, he even worked behind the scenes with a former Williams senior vice president by using a personal account and leaking inside information to assist a lawsuit filed to block the proposed and ultimately unconsummated merger. As a result, half of his board of directors resigned days after the deal was called off, citing a lack of confidence in his ability to lead the company.
The reason he acted as he did, the court was told, was out of a desire to maintain his position as CEO even if his continued leadership of the company was detrimental to shareholder interests.
Actions like these in the corporate community have regular Americans – more and more of whom join the investor class every day through their 401Ks, Roth IRAs, and by trading stocks online – wondering if their money is safe, or if they’re just feeding corporate cats growing fat off their investments.
Warren Buffet, one of the country’s most respected financial leaders, argued in a recent interview that not enough attention is paid to corporate leadership and governance. “Almost all of the directors I have met over the years have been decent, likable and intelligent,” he said. “Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game.”
If the CEOs and boards of America’s companies don’t step up to restore public confidence in who they are and what they do, then the politicians will – as House Speaker Nancy Pelosi tried to do in the first coronavirus relief bill. Other than the privileged few that would have been picked to serve on boards if her proposed amendment requiring diversity on corporate boards had been adopted, it would have been bad for business and everyone else.
The clock is running.
There are free market solutions for these issues waiting for GOP support
On most of the issues highlighting the 2020 campaign, the Republicans have a great story, especially the economy, law enforcement, foreign policy (including trade), national security, energy, and job creation. The Democrats have concentrated on three critical issues, however, which are nearly ignored by most Republicans: the wealth gap, health care, and climate change
These issues are currently owned by the Democrat candidates; they have not even been addressed directly by the Republicans. This silence is a tragic mistake because current polls show that these three issues are of critical importance to significant numbers of the American electorate. If Republican candidates continue to ignore these two issues, they will suffer in the only polls that really count – the votes in November.
Today’s topic is the wealth gap, with discussions of health care and climate change to follow in succeeding columns. I use the term, “wealth gap” in preference to “wage gap” and “income inequality” because “wealth” includes assets which are relatively long range as opposed to “wages” or “income” which may fluctuate from time to time.
The Republican response to the wealth gap is the “trickle-down” economic theory: prosperity for the wealthy means incremental income to the entire workforce because the wealthy will of necessity invest in an expanding economy thus benefiting the workers who actually produce new goods and services by which the economy is actually expanded. This is the argument prominently featured by President Trump in his famous rallies.
And, measured by present and past metrics, it is true. A flourishing economy does indeed raise wages and job opportunities. When applied to a stagnant employment environment, the chief beneficiaries on a percentage basis are the lower wage workers – i.e. when a person goes from unemployed to employed, the percentage of improvement is 100%. This is, of course, a valuable trend.
The next step, however, poses an altogether different problem: in a tight labor market – which America is rapidly approaching – how does an employer retain an experienced worker? And an ancillary problem: how does the country avoid a steady inflation, as wages rise, and senior employees can seek and find ever higher wages?
There are free market solutions to both these questions. My answer may be considered by traditional economics a radical solution, namely profit-sharing. There are various ways to implement the concept of profit-sharing – e.g. stock grants or options, profit-based bonuses, or employee stock option plans (ESOP), among others.
The basic hedge against inflation is the fact that increases in income to the workers comes from profits rather than expenses, so prices do not have to increase. The operational result is that workers who have a stake in the performance of the company tend to work harder and more efficiently, and greater income leads to higher job satisfaction and loyalty.
There are other reasons to advocate profit-sharing, namely, redressing the imbalance in asset ownership in America, which currently shows that at least 80% of America’s wealth is controlled by 1% of the population. This is a frightening situation for a democracy which is founded on a prosperous middle class. Oligarchs are waiting to rule the nation (e.g. already three billionaires are running for president).
There is also a moral reason for profit-sharing which can be summarized as follows:
1) The increase in national wealth over the past 200 years is due primarily to increases in productivity, which in turn is due to new technologies.
2) The implementation of technological innovations involves a number of stakeholders – inventors, investors, managers, implementers and buyers.
3) The benefits of the new technologies are currently heavily weighted toward all the stakeholders expect the implementers – the workers who bring into actual being the ideas of the inventor – i.e. they design and build the machinery which produces the product, fabricate it, market and sell it, repair it and teach users. Without the implementors, there would be no technology – only ideas on paper.
4) All of the stakeholders should be rewarded when the product is sold; it is only fair, therefore, that each be rewarded in proportion to the value of their contribution to the success (or failure) of the product. This is called “profit-sharing”.
This idea is not as novel nor as radical as it may seem to traditionalists. In the first place, the entire history of free-market capitalism shows it ever evolving towards more and more recognition of the value of labor in the forward march of progress.
It is also true that the chief proponents of this march have historically been the organized labor movement – at least until the 1970’s. Since then American unions have shifted from ever advancing workers’ rights in the marketplace to attempting to achieve progress through government intervention, which has meant in practice an alliance with the Democrat Party and a slippery slope toward socialism.
The results have not been encouraging. We have seen the denuding of America’s manufacturing base, the disheartening imbalance of income between management and labor, and the gradual slipping of much of America’s middle class into poverty and desperation. The bureaucracy of American Labor has failed miserably in protecting and advancing the cause of America’s workers.
The most impressive advocacy for profit-sharing in today’s marketplace is called “Conscious Capitalism”. This is a rapidly growing group of companies who represent a new generation of free market businesses. It is both a movement and an organization.
As an organization, Conscious Capitalism, Inc. now numbers thousands of companies, millions of employees, with chapters in 41 countries, and a number of large firms including Federal Express, Southwest Airlines and Costco among others. (For more information, see www.ConsciousCapitalism.org).
As a movement, it counts Amazon as one of its colleagues along with many other companies, both large and small. While this group is not particularly fond of organized labor, I believe there is a place for Labor in this movement, unions which work with and not against management and represent workers who are both employees and recipients of prorated profits from their work.
The time for advancing workers’ rights is now – in the 2020 election campaign. To win back the workers of America, the GOP must move “Onward and Upward!”