Thursday, December 17, 2020

Will Biden Forgive Student Loans? Why Not Automobile Loans?

 A kettle of progressive Democrats is demanding that President-Elect Biden issue an executive order extinguishing student debt in the first week of his reign. Past and present students currently owe $1,700 billion (yes that is $1.7 trillion). Since 2006, student debt has expanded by 253.4%, while income to pay the debt has advanced by one-third that pace, or 79.8%. But there are clear problems and benefits of such action.

Wrong Beneficiaries? It has been well documented that income inequality has soared over the past five decades as college educated incomes rose at a much faster pace than workers that did not earn a two-year, or four-year degree.

Except during the Trump Administration, the top 20% of income earners received a greater share of income than the bottom 80% of earners. Furthermore, higher education institutions have sucked up much of the rocketing student debt in the form of higher tuition and fees which, since 2006, expanded at 2.5 times the rate of growth in prices of other consumer goods and services.
Fairness? This month, 45 million of the U.S. population owed approximately $38,000 per individual. Thus, the remaining 284 million Americans either have paid off their student debt, or never received a student loan. How fair will the many view shifting $1.7 trillion to the favored few? Furthermore, any delay in making an executive decision, either yes, or no, will only incentivize student debtors to further delay payments, and even ramp up their borrowing.
Productivity? Economic theory postulates that higher productivity begets higher income. The latest Bureau of Labor Statistics data show that a college graduate earns 71.0% more than a high school graduate without any college experience. Thus, other factors unchanged, encouraging more individuals to earn their college degree will stimulate higher productivity and economic growth.
Economic Stimulus? It is argued that forgiving $1.7 trillion in student debt will help pull the economy out of the current recession. However, the multiplier of providing $1.7 trillion in direct payments to consumers that spend the funds on goods and services will be between 0.08 and 0.23, compared to 0.36 for small business aid, and 0.60 for unemployment benefits, according to the Committee for a Responsible Federal Budget.
The question for the Biden Administration is, will the stimulative productivity impact of debt forgiveness offset the many negatives of such a move?  This economist has serious doubts.
Ernie Goss

Tuesday, November 10, 2020

Thursday, October 15, 2020

Read Biden’s Lips: “More New Taxes” What Is a Fair Share of Taxes?


In an effort to bolster the likelihood of his election, presidential candidate, George H.W. Bush proclaimed “Read my lips, no new taxes” at the 1988 Republican National Convention. In sharp contrast, 2020 Democrat presidential hopeful, Joe Biden essentially shouted, “Read my lips, more new taxes.” Biden argues that the U.S. economy needs more spending, and requires more taxes.

He bases his tax hike plan on three factors or allegations: 1) the Trump 2017 tax cuts hurt the economy, 2) high income earners should pay a greater and a “fairer” share of taxes, and 3) the U.S. economy needs more than $5 trillion in additional federal spending over a decade to pay for his proposed new spending programs.

Are Biden’s assertions accurate?
1) Trump tax cuts hurt economy.  Biden and his team allege that the December 2017 tax cuts reduced tax collections to levels jeopardizing growth with consequent massive fiscal deficits. However, for the two years after the tax cuts, total federal government receipts climbed by 5.3% compared to a much slower 2.2% for the two years prior to the 2017 tax cuts.
As a result of the slashing of the corporate income tax rate, corporate tax collections fell by 11.4 in the two years after the 2017 cuts. However, this decline is smaller than the 25.4% fall for the two years prior to the 2017 cuts. Furthermore due at least in part to the corporate tax reductions, business investment soared by 11.9% for the subsequent two years in contrast to 4.7% for the two years preceding the 2017 tax cuts. 
Moreover, economic performance, as measured by GDP, accelerated after the tax cuts from 9.7% for 2017-19 compared to 5.9% for 2015-17. Furthermore, the Census Bureau reported in September that the median household income advanced by a massive 6.8% in 2019—the largest annual increase on record. Biden is clearly wrong on this count.
2) High income earners do not pay their fair share.  According to the National Taxpayers Union, the top 1% of income earners in 2017 netted 21% of the nation’s adjusted gross income, but paid 38% of U.S. personal income taxes. On the other hand, bottom half of income workers netted 11% of the nation’s wages, but they paid only 3% of personal income taxes. In fact, fully 32% of filers in 2017 paid no income tax. From the perspective of high income earners, Biden is likely wrong again. 
3) Biden's economy needs new tax collections. The Wall Street Journal reported that Biden’s spending proposal would “total $5.4 trillion in new spending over the next 10 years” based on an analysis by the Penn Wharton Budget Model, a nonpartisan group.  “This is the largest proposed spending increase by a presidential nominee since George McGovern,” says Kent Smetters, a Wharton economics professor who oversees the budget model project. Biden is correct here.

Ernie Goss

Thursday, September 17, 2020

High Tax States Lose Representation in Congress: 2017 Tax Law and Pandemic Reinforce Population Trends

Peter Rex, Founder and CEO of Rex Teams recently announced that, "I'm moving my business headquarters off the West Coast." We tried San Francisco and Seattle. "Both were wonderful in their own ways, especially in natural beauty and personal friendships. But both have become hostile to the principles and policies that enable people to live abundantly in the broadest sense."
Rex joins a parade of individuals and businesses that are relocating from high tax states to low tax states due to 1) 2017 Tax Law that eliminated the deductibility of state and local taxes, 2) Post Covid-19, companies allowing employees to work from locations of their choice, and 3) Individuals and businesses avoidance of large urban centers with higher crime rates and economic lockdowns.  
The accompanying table lists the 10 states experiencing the greatest population gains, and the 10 states suffering the largest population losses.
The global pandemic has further enhanced the economic prospects of the gaining states, which experienced an average increase in insured unemployment rates between mid-March, and the end of August of 7.4% compared to a much higher average of 9.9% for the ten losing states.  
Many of the unemployed in high tax states will seek the more job friendly employment prospects in low tax states. Furthermore, the data show that the population gainers' average state and local tax rate was 7.82%, and the population losers' average state and local tax burdens was 9.5`%.  
Importantly, 7 of the 10 gaining states voted Republican in the last presidential election, and 7 of 10 losing states voted Democrat in the same election. In addition to invigorating the economies of low tax states, this migration will have the bonus impact of increasing the representation in Congress of destinations with lower state and local tax rates.
The table below reflects reapportionment post-2020 Census:

  • The 10 states with the highest population gains collectively will add 7 congressional representatives.
  • The 10 states with the largest population losses will lose 5 congressional representatives.

Friday, July 17, 2020

COVID-19 Death Rates Fall as Infections Rise: State Shutdowns Hurt Economies, but Not COVID-19

The media and politicians are fixating on the rapid rise in COVID-19 infections. As a result, many medical experts, politicians and pundits are calling for shutdowns of state economies experiencing the greatest growth in infections. 

Before taking this drastic action, two questions should be examined: 1) will the latest infections generate the negative outcomes as in previous months and 2) will the negative economic impacts of shutdowns exceed the positive health outcomes from economic lockdowns?

The latest CDC data show that deaths per 10,000 infections have declined from 1,315 on March 7 to 8.9 on July 7. From this data, some assert (but it's not yet proven) that higher infection rates are due to:
  1. the opening up of state economies, which has encouraged young individuals, who are less likely to suffer negative health consequences from COVID-19, to continue with normal living, and 
  2. an increase in testing rates that now uncover individuals with the infection, but little or no negative health outcomes.  
  3. lower deaths are due to older individuals with other health issues to take greater precautions in daily living (e.g. social distancing), 
  4. improved treatment of COVID-19 illnesses.
Others argue a lag exists between infections and deaths with today's soaring infection rates leading to zooming death rates ahead. However, the accompanying chart shows that death rates are clearly trending lower even after controlling for the delay between infection and death declining from 267 April deaths per 10,000 March infections to 34 June deaths per 10,000 May infections.

Did State Lockdowns Work?  The 42 states and D.C. that implemented shelter-in-place directives experienced a 10.1% increase in their insured unemployment rates between the first week in March until the second week in June compared to a lower 6.6% increase during the same time period for the 9 states that did not shut down. Using simple linear regression, it is concluded that each 30 days of shutdown was associated with a one percentage point increase in the insured unemployment rate. In terms of infections and deaths per 10,000 for March - June, shelter-in-place states experienced median infection rates of 60.0 compared to a higher 73.6 for non-shelter-in-place states, while non-shelter-in-place states suffered a lower death rate of 1.2 compared to 2.4 for shelter-in-place states. None of the differences were statistically significant.

Summary  In the back-of-the-envelope calculations in this essay it was concluded that while COVID-19 infections are expanding dramatically yet COVID-19 death rates month ahead death rates per infection are in fact declining. 

Furthermore, it is concluded that shelter-in-place, while having a statistically significant impact on increasing insured unemployment rates, had no statistically significant impact on COVID-19 infection rates or death rates. (All analysis available on request

Tuesday, June 16, 2020

An Economic Recovery? If so, What Is the Shape? V, W, or Nike's Swoosh?

The May U.S. jobs report indicated the nation's economy added 2.5 million jobs, the highest monthly addition on record. This news emboldened the optimists who envisioned a V-shaped recovery, and dampened the pessimists who foresaw a W-shaped economic rebound. Other recent economic indicators support an economic recovery somewhere between the extremes, a Nike Swoosh, which would be a sharp downturn followed by a slow recovery.  
V-Shaped Recovery:
Record federal deficit spending via the CARES Act, and the Federal Reserve's support for ultra-low short and long-term interest rates, are punishing savers and rewarding spenders. Furthermore, the ending of the lockdown of most state economies is pushing consumers to spend a share of their pent-up demand. The biggest stimulus for the labor market will come at the end of July when the federal government's $600 weekly support for jobless workers receiving state unemployment benefits expire. U.S. equity markets are pricing in an economic revival with expanding business profits indicative of a "V."  
Nike's Swoosh-Shaped Rebound:
Even after adding 1.2 million jobs in May, the nation's leisure and hospitality industry has shed 7 million employees since Covid-19. Contrary to most recessions, this one was led by the consumer and there is little evidence from consumer spending data of a return to pre-Covid spending levels. State and local regulations have limited most businesses in this industry to approximately 50% of their pre-Covid-19 capacity.
Compared to pre-Covid-19 levels, U.S. bond yields at roughly half their yields, and gold prices up more than 7%, both safe-haven stashes for risk averse investors, continue to indicate that investors remain very, very cautious about the U.S. economy.
U.S. exports and imports both posted their largest monthly decreases on record as imports fell 13.7% between March and April and exports plummeted 20.5% during the same period of time. These are the largest declines since record-keeping began in 1992, and will continue to be a drag on U.S. economic growth.
W-Shaped Recovery & Recession Re-Visit:
Rising U.S. Covid-19 infection and death rates would put a dagger in the heart of any economic rebound. Growth based on federal government deficit spending and Federal Reserve's ultra-low interest rates is not sustainable. The U.S. and global consumers must return to work and spending. State economic lockdowns will guarantee a return to a recession as the economy reaches the top of the V.

Ernie Goss

Wednesday, April 15, 2020

COVID-19 and Modern Monetary Theory (MMT): MMT Assumes Debt No Longer Matters

In March, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act calls for $2 trillion in added federal spending aimed at combating the negative economic impacts of COVID-19.  
This package will add on to the already mammoth $1.25 trillion 2020 federal deficit. With 2020 forecasts of a 20% decline in GDP, total federal public debt for the year soars to 150.2% of GDP. This is an increase from 2019's record of 105.2%.  
But who ultimately pays for the interest and principal on this debt?
There are only three outcomes, all negative, from this unrestrained spending: 1) higher taxes, 2) elevated inflation, or 3) rising interest rates.  
Disagreeing, the so-called modern monetary theorists (MMT), as apologists for excessive government, argue that sovereign governments do not need to borrow or raise taxes since the sovereign can print more fiat money. That is the money is simply dollars the government put into the economy, and did not tax back. The Green New Dealers have embraced this vapid so-called model to support their proposed rapidly expanding federal spending programs.
The U.S. Federal Reserve appears to have embraced MMT by buying and holding more than $4 trillion in U.S. federal debt in the 2008-09 recession. In March and April of 2020 accompanying CARES, the Fed pledged to purchase as much government-backed debt as needed to bolster bond markets. That is, they will support whatever deficit spending is approved by Congress and the President.  
This action termed monetizing the debt, unless reversed after the downturn, results in large increases in the money supply with the ultimate outcome of higher inflation and elevated nominal interest rates. To quote Nobel prize winning economist Milton Friedman, "Inflation is always and everywhere a monetary phenomenon...."
After the last recession, the Fed maintained most of its recession purchased U.S. Treasury bonds only to add to them in 2020. Post-2020 Pandemic, the Fed must jettison a high share of these bonds. Otherwise, contrary to MMT, future generations will pick up the tab with rapid inflation ala Venezuela.

Ernie Goss