Thursday, November 16, 2017

The Irrelevance of President Trump

Popular Economics Weekly

It’s sad for America that the President of the United States has become irrelevant to most of the problems facing Americans and the world. But it’s heartening as well, because in choosing to return to a 1950’s that never was—the brief emergence of a white middle class—Trump can’t do much damage to future growth by choosing to isolate himself and his constituency from the real world. Do we need a better definition of President Trump’s irrelevance?

Let’s start with his fiasco of an Asian trip, where he fawned over foreign leaders who gave him massive pageants, but no trade concessions, while abandoning the Trans- Pacific Partnership.

The remaining 11 countries, including Japan, Australia, Mexico and Malaysia, said they had revived the Trans-Pacific Partnership (TPP) deal, a multilateral agreement championed under the Obama administration.

The Guardian reported Ministers meeting in Danang, Vietnam agreed on the “core elements” of what was now called the comprehensive and progressive agreement for Trans-Pacific Partnership, a joint statement read.

And “American leaders from state capitals, city halls and businesses across the country have shown up in force” in Bonn, Germany, to discuss carrying out the 2015 Paris climate agreement,” said California Governor Jerry Brown and Michael Bloomberg in yesterday’s New York Times.

This is when President Trump announced at the beginning of his Presidency that he was abandoning the Paris Accord in favor of supporting a return to coal and oil energy. But that isn’t happening for the rest of America, as some 50 percent of U.S. states and cities are represented in Bonn.

“California just extended its cap-and-trade emission program through 2030 and has adopted incentives that will help put 1.5 million electric vehicles on the road by 2025,’ said Jerry Brown, Governor of the sixth largest economy in the world.


And the U.S. just released its latest congressionally mandated Climate Science Special Report that says 2017 wreaked the most catastrophic destruction in 90 years with an estimated $175 billion in property damage. Only the San Francisco Earthquake (1906), Chicago Fire (1871), and Great Flood (1927) caused more destruction.

What is Trump afraid of, that he fawns over Chinese and Russian leaders, while extracting no concessions from them? He was seen to spend more time with Vladimir Putin at the Asia-Pacific Economic Cooperation summit in Vietnam than any other leader.

Even his support of Republicans’ so-call tax reform bills is irrelevant, as he wants Republicans once again to attempt to repeal the Obamacare mandate, when more than 50 percent of Americans now support Obamacare, according to the latest Kaiser Family Foundations Health Tracking Poll.
“When asked whether it was good or bad that the Senate GOP had failed to repeal ObamaCare, answers were more direct. Six out of 10 Americans say that Senate Republicans' failure to repeal the law was a "good thing," said the KFF poll, “compared to just 35 percent who disapproved and wanted the law repealed.”
That is irrelevance of the highest order, and as many pundits have noted, it is also the definition of insanity: attempting to repeal Obamacare more than 50 times, and expecting a different result.

Another feature of the tax reform bill is that it requires taking away approximately $1.5 trillion in Medicare and Medicaid benefits to give the wealthiest an unnecessary tax cut. Therefore, it won’t help the shrinking middle class, or any income class, except the top one percent.
Harold Myerson voiced recently in The American Prospect, “The United States now has the highest percentage of low-wage workers – that is workers who make less than two-thirds of the median wage- of any developed nation. Fully 25 percent of all American workers make no more than $17, 576 a year.”
The irrelevance of this President is therefore a real danger to our health and standard of living in so many ways.

Harlan Green © 2017

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Tuesday, November 14, 2017

Who Really Needs Tax Reform?

Financial FAQs

Firstly, we know this isn’t real tax reform when the respective Senate and House bills allow an additional $1.5 trillion in debt added to the existing $20 trillion of national debt. Why, when during prosperous times such as these with two consecutive quarters of 3 percent GDP growth, good economics tells us it is time to pay down the debt?

It gets worse. Some spending is cut—up to $1.5 trillion in Medicare and Medicaid benefits for the poorest and elderly. And the House bill proposes cutting out the exemptions for property taxes, state and local taxes, as wellas abolishing the estate tax.  The Senate bill cuts the $1 million mortgage interest deduction in half to make up for the loss in tax revenue.

So, instead of a tax cut, the middle and lower income earners actually have an income cut--both in benefits and loss of homeowners' tax deductions.  Real tax reform would mean higher taxes for the wealthiest and the close out of the tax loopholes that enable them to conceal their wealth overseas; rather than pay down the huge federal debt.

And all this is to be done without any input from Democrats. Why would Republicans even try to ram this through with only Republican votes in the first place? Instead of spending the increased tax revenues on reducing our national debt, they want to give it to their wealthiest donors and corporations—that are already making record profits.

It also happened in 2001, when President GW Bush and VP Dick Cheney blithely erased President Clinton’s preceding four years of actual federal budget surpluses with tax cuts for these same people. What was their rationale?

Their actions were based on the thesis of a then unknown economics graduate student, Arthur Laffer, who drew what came to be known as the Laffer Curve on a napkin in a 1974 meeting with Dick Cheney, then President Gerald Ford’s deputy chief of staff. It was a rationalization never confirmed or evidenced by either history or validated by economic theory.
“The conventional wisdom was: You want more revenue, you raise taxes,” Cheney recalled 30 years later, in a Bloomberg interview reenacting that landmark 1974 meeting. “What Art brought to the table with these curves is that if you wanted more revenue, you were better off if you lowered taxes, to stimulate economic growth and economic activity.”
But that didn’t happen. In 2013 the Center for Budget and Policy Priorities estimated that, when the associated interest costs are taken into account, the Bush tax cuts (including those that policymakers made permanent) would add $5.6 trillion to deficits from 2001 to 2018.  This means that the Bush tax cuts will be responsible for roughly one-third of the federal debt owed by 2018.

In other words, the Clinton surpluses were squandered, instead of bolstering the social security and Medicare funds. Brookings Institution economist William Gale and Dartmouth professor Andrew Samwick, former chief economist on George W. Bush’s Council of Economic Advisers, found that “a cursory look at growth between 2001 and 2007 (before the onset of the Great Recession) suggests that overall growth rate was … mediocre” and that “there is, in short, no first-order evidence in the aggregate data that these tax cuts generated growth.”
When will this foolishness stop, and rational economic thinking return to congress? New York Times’ Paul Krugman says: “..anyone who has paid attention to U.S. politics knows the answer. First, they will lie, unashamedly, about what their bill actually does. Second, they will try to distract working-class voters by stoking racial animosity. That didn’t work too well in Tuesday’s elections, but they’ll keep on trying.”
Harlan Green © 2017

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Thursday, November 9, 2017

New Home Sales-Ownership Rate Rising

The Mortgage Corner

New home sales shot up 19 percent in September to a consensus crushing annualized rate of 667,000. This is the largest percentage gain in 28 years and the highest level of the cycle, since October 2007. In stark contrast, existing home sales, the green line, haven't shown any kind of bounce.

Homeownership is also rising. The Census Bureau last week reported that ownership increased to 63.9 percent in the third quarter, the highest level since 2014. The rate was up from 63.7 percent in the second quarter and 63.5 percent a year earlier. It is creeping up to the 65 percent historical ownership rate, but it remains below the 69 percent clocked at the peak of the housing bubble a decade ago.

What does this mean? Firstly, the housing supply is catching up with demand, and it will take some pressure over rising rents. The rise in homeownership comes as other forces weaken the rental market, including a surge in supply from developers hoping to cash in on rising rents. In September, the seasonally adjusted rate of apartments under construction was 596,000, nearly twice the long-term average of 300,000 units, according to U.S. Census data.

The new housing supply boosted the national vacancy rate to 4.5 percent in the third quarter of this year, compared with 3.5 percent a year earlier, according to John Chang, head of research for real-estate services firm Marcus & Millichap. Nationally, rents were up 3.5 percent between the third quarters of 2016 and ’17, compared with 4.5 percent the previous years, he said.

And it is the millennial generation, children of the baby boomers and the largest generation ever, that are boosting homeownership rates as they begin to marry and raise families. Their marriage rate over the next five years will likely play an important role in demand for apartments and houses, according to Dr. Chang.

The market is not so good for existing-home sales. Econoday reports the red line of pending sales shows the pending index flat at 106.0 and existing homes likely to hold near 5.400 million. Resale prices ($245,100 median) are far lower than new homes ($319,700), but it's not helping sales. It peaked in January and has been trending down ever since.

But if construction and new-home sales continue to pick up, it will move more millennials out of their rentals. They are taking their time to nest, and the oldest of those born from approximately 1980 to 1996 will soon be approaching 40 years of age.

Sales haven’t declined more because mortgage rates are holding @ 3.50 percent for a 30-year fixed conforming loan with 1 origination point, and 3.625 percent for the so-called Hi-balance 30-year conforming rate in high-expense states and regions.

This is actually an incredible number, as interest rates this low in the eighth year of the recovery from the Great Recession attests to the severity of the recession, and fact that household incomes are only beginning to recover.

Harlan Green © 2017

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Monday, November 6, 2017

A Gangbusters Employment Report

Popular Economics Weekly

Payrolls rose 261,000 in October following an 18,000 rise in September, easily weathering the season's hurricane disruptions, the government said Friday. But 765,000 dropped out of the labor force, which is why the unemployment rate fell to 4.1 percent.

The swing factor between the two months is restaurants where payrolls jumped 89,000 after plunging 98,000 during September's storms, said Econoday. Professional business services underscore how urgent demand for labor is, rising 50,000 in October with the temporary help component up 18,000 for the strongest rise of the year.

Where are the new workers to come from with so many discouraged workers, if economic growth is to continue? Tax cuts won’t do it, when there aren’t enough workers willing to work. Wages have to rise faster to bring back those workers.

Wages fell a penny to an average of $26.53 an hour. The year-over-year increase in hourly pay slowed to 2.4 percent from 2.8 percent, though wage figures for the past two months were distorted by the storms. But most of the wage increase was in low-paying restaurant work, which means corporations still aren’t boosting wages enough to bring back discouraged workers.

And those actively looking for work fell nearly 300,000 to 6.520 million for an unemployment rate of 4.1 percent, the lowest in 17 years, reports Econoday. When also including those not actively looking but wanting a job, the number moves to only 11.750 million which is a 10-year low.

It will take more generous wages to bring back those workers now sitting on the sidelines. In other words, the return of discouraged workers may have run its course, unless corporations decide to pay more for their workers, rather than continuing to boost the pay of their executives (up more than 4 percent). The labor participation rate fell a steep 4 tenths to 62.7 percent, which is 4 percent below the longer term average, and really a reflection of the fact that wages still aren’t rising faster than inflation.

So why not boost wages, corporate executives? Tax cuts won’t do much to boost the wages of those in the 60 percent middle-income brackets—from $32,000 to $140,000 per year—since they already pay just an average 2.5 percent in income taxes.

Harlan Green © 2017

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Wednesday, November 1, 2017

Increased Growth Ahead, But Watch for Bubbles!

Financial FAQs

Maybe it’s the natural disasters plaguing U.S. Or the fact businesses haven’t been investing in future growth until now. But the times they are a’changing, as GDP grew 3 percent in Q3 for the second quarter in a row.

It’s mainly due to higher consumer spending and higher inventories as businesses see better times ahead. The higher capital investments have boosted manufacturing, and exports have also increased.

Graph: Econoday

What to make of all this in the eighth year of this recovery, and full employment? More automation, for one thing, as businesses have to depend more on robotics and other aids to productivity with the dearth of new workers entering the labor market. Jobs and income are the keys to October's report, says Econoday.
“ The assessment of October's jobs market is unusually favorable with only 17.5 percent of the sample saying jobs are hard to get, which is very low and down 1/2 percentage point from September.”
Graph: Econoday

Consumer confidence is also soaring, with the Conference Board’s index jumping 5.3 points in the headline index to 125.9 which is a 17-year high. Of course that was just before the dot-com bubble burst in 2000, so is it a sign of irrational exuberance?

Nobel economist Robert Shiller—first to coin the term “irrational exuberance”—has lately been warning of a stock bubble.
“…the US stock market today looks a lot like it did at the peaks before most of the country’s 13 previous bear markets,” said Shiller in a recent Project Syndicate column. “This is not to say that a bear market is guaranteed: such episodes are difficult to anticipate, and the next one may still be a long way off. And even if a bear market does arrive, for anyone who does not buy at the market’s peak and sell at the trough, losses tend to be less than 20 percent.“
The Fed is also expected to raise short term rates another one-quarter percent in their December FOMC meeting, and it looks like President Trump is about to appoint another Fed Governor, Jerome Powell, as the next Fed Chairman to take over February 1, when Janet Yellen’s term is over.

The ‘take’ on Powell is that he is well-qualified and likes fewer regulations, which Trump will like.
He also wants to reduce outstanding Federal Reserve holdings of securities more substantially, and according to former Fed Chair Ben Bernanke did not like so much Quantitative Easing that kept interest rates so low for so long. That puts him in the budget deficit hawk camp.

But what really can be done about reducing the budget deficit with the current one-party tax reform debate? Republicans are attempting once again to get around the Democrats and a bipartisan tax bill, as they did with the attempted repeal of Obamacare.

That didn’t work, so why do they believe it will work this time, especially when some cherished tax breaks would have to be eliminated to cover the approximately $1.5 trillion in tax breaks; that might include reducing 401(k) retirement savings’ accounts and eliminating $1.5 trillion in Medicaid and Medicare spending over the next decade?

Stay tuned, but the U.S. can’t function with a one-party system.

Harlan Green © 2017

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Friday, October 27, 2017

Who Needs Tax Cuts?

Popular Economics Weekly

It turns out very few of us need a tax cut. Marketwatch economist Rex Nutting calculates that those in the 60 percent middle-income brackets—from $32,000 to $140,000 per year—pay just an average 2.5 percent in income taxes. It’s only the richest 0.1 to 1 percent income earners that pay more, and want the huge tax cuts congress and the Trump administration are proposing.
Graph: Marketwatch

Their rationale? That it will boost GDP growth to 3 percent from the current 2 percent average since the end of the Great Recession. But guess what? Q2 GDP growth was already 3 percent in Q2 and just revised to 3.1 percent, the highest growth rate in 2 years. Q3 GDP growth was just reported today at 3 percent, due to higher consumer spending and Durable Goods orders on hurricane replacement. 

Businesses are already investing in expansion, in other words—business investment in structures rose a stronger 7 percent instead of 6.2 percent in the revision. So, why not pay down the huge budget deficits accumulated since then, instead of cutting tax revenues?
“A bill that cuts federal income taxes for middle-class families makes absolutely no sense, except as a sad way of camouflaging the real intent of the bill: Giving millions of dollars to the very wealthy, who happen to be the only people who are really benefiting from our uneven economic growth,” said Nutting.
Because the budget deficit cannot be increased more then $1.5 trillion in ten years, due to prior budget agreements, spending has to be cut somewhere, and guess where. The just passed House and Senate budget resolution cuts $1trillion from Medicaid, and $500 billion from Medicare.

Guess who is hurt most by those benefit cuts? Trump's lower-income voters in the red states that depend most heavily on  health benefits. So, once again Repubs are attempting to disguise a tax cut for the wealthiest.

A corporate tax cut also benefit the wealthiest, since the top 10 percent of income earners own 80 percent of stocks, which is where most of the benefits from their increased profits will show up.

Top this off with another record for corporate profits, up 7.4 percent in a year, and there is no reason to be cutting their taxes. They haven’t been using their profits for productive purposes, so what’s needed is for them to pay higher taxes so government can use that money to invest productively in the $2 trillion plus in outmoded infrastructure that badly needs replacement.

As a bonus, any such investments in new airports, power grids, better water treatment facilities (such as Detroit’s), alternative energies, roads, bridges—you name it—will increase labor productivity that has been cut in half since 2000.

And increasing labor productivity is the only real ticket to higher economic growth, and increasing the take-home pay for those middle-income wage earners.

Harlan Green © 2017

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Wednesday, October 25, 2017

Boom Times for Manufacturing

Popular Economics Weekly

A measure used by economists to track investment, known as core capital orders (minus defense and aircraft), rose 4 percent in the 12 months ended in September. It has risen 1.3 percent for three consecutive months, according to the Commerce Department.

Core orders are spent domestically for the most part, so this is happening just when it’s needed—to rebuild the hurricane and wildfire damaged states of Florida, Texas, California, as well as U.S. Territories of Puerto Rico and the Virgin Islands.

Graph: FRED

It will also boost economic growth, since it boosts labor productivity, one of the two components that determine GDP growth. The other component is population growth, but the U.S. population is barely growing, as is immigration that supplies the majority of new workers.

The main beneficiary of higher capex spending will be manufacturing, which is already showing improvement with a cheaper dollar exchange rate that has boosted exports.

And today we have durable-goods orders that rose 2.2 percent in September, beating forecasts. Durable goods are all goods that last three or more years—including auto vehicles, defense and aircraft. These orders have climbed 7.8 percent in the past year, the fastest pace since early 2012.
“Strength in the manufacturing sample is centered in new orders and employment,” says Econoday. “Of special note are unusual delivery delays, which help lift the composite indexes and are the result of lingering disruptions and stretched workloads following Hurricanes Harvey and Irma.”
So we are seeing effects of the hurricanes in boosting economic activity. The role of capital expenditures is especially important, as it means the replacement of much of our aging infrastructure as well.

And don’t forget at least 1 million motor vehicles were destroyed by the hurricanes that will need to be replaced. But buyers shopping for used replacement vehicles should be aware of the pitfalls of those storm-damaged cars that are put back on the market.

Consumers should take precautions like getting a history of repairs and checking the VIN number in the National Insurance Crime Bureau and National Motor Vehicle Title Information System databases, reports Fortune Magazine. Even without a database, strange stains and smells can be a red flag that a car has weathered a flood. Consumers buy a used car should check for signs of water damage — mineral deposits, mildew and the smell of mold or overpowering scents of cleaning supplies that may be trying to mask it.

Harlan Green © 2017

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