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.
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.
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.
The Tax Cuts and Jobs Act of 2017 passed in December 2017 limited the federal deductibility of state and local taxes to $10,000. Prior to its passage, states were able to raise state and local taxes and transfer a portion of the burden to residents of other states via federal deductibility.
In effect, the 2017 tax law made living in a high tax jurisdiction less economically desirable. That is, the 2017 tax law made it more expensive to live in high tax states and incentivized workers, particularly high-income workers, to move from high tax states to low tax states. Has this happened?
Data in the accompanying table shows net interstate population migration for the period 2017-19 by state and local tax burdens: States are ranked from the highest tax state (Vermont) to the lowest tax state (Alaska). States are also categorized as Red, Blue or Purple depending on voting records over the past four presidential elections. States that voted Republican in all four presidential elections are labeled Red "R", states that voted Democrat in all four elections are branded Blue "B", and states that split their electoral votes in the four elections are identified as Purple "P."
Table 1: 2017 state tax burden ranking; 2017-19 net population migration
The 10 states with the highest tax burdens in 2017 suffered a loss of 181,056 residents via migration, or 2.9 residents for each 1,000 in population.
80% of these high tax states were Blue states, and 20% were Red states.
The 10 states with the lowest tax burdens in 2017 experienced a net gain of 425,339 residents via migration, or 2.8 residents per 1,000 in population between 2017 and 2019.
90% of these migration gainers were Red states, and 10.0% were Blue states.
Passage of the 2017 tax law reduced the ability of high tax states to transfer a portion of their taxes to residents of low tax states. While not conclusive, data presented in Table 1 supports the proposition that passage of the 2017 federal tax law incentivized migration from high tax to low tax states.
Just last month, U.S. citizens witnessed consensus among Democrats, Republicans, and the Trump Administration as they approved $1.43 trillion in additional fiscal 2020 federal spending. As a result, the Congressional Budget Office (CBO) estimates the federal budget deficit will top $1 trillion for the current fiscal year. Democrats blame the federal deficit on the 2017 tax cuts, while the Republicans attack spending as the culprit. Does the fault lie in too much spending or too little in tax collections?
In December 2017, Congress passed and the President signed a major tax cut for businesses and individuals. Since then, the U.S. economy has, as measured by gross domestic product (GDP), expanded by 8.2%, but federal spending advanced by 9.3%, and tax collections actually grew by 3.4% despite the tax cut. Had spending increased at the same rate as tax collections, the current deficit would be $387 billion lower.
Since 1966, federal spending has soared at a rate 10 times that of the U.S. economic growth. During this same period of time, federal tax collections grew at 2.5 times that of the U.S. economy. Primarily as a result of this excess in federal spending, the federal debt advanced by 3.4 times that of the overall U.S. economy.
The current U.S. total debt now stands at 106% of GDP, up from 40% in 1966.
Someone must pay the price for this financial gluttony. As Herb Stein, Chairman of the Council of Economic Advisors under Presidents Nixon and Ford once stated, "If something cannot go on forever, it will stop." But when will it stop? As economic bookends, Congressional Representative Alexandria Ocasio-Cortez and former Vice-President Cheney recently stated, "Deficits and debt do not matter."
But higher federal debt will ultimately be paid for by those currently under 50 years of age via either plummeting federal spending, soaring higher taxes, higher inflation, or higher interest rates.
Before the 2008-09 recession, the federal debt of $20.5 trillion deficit resulted in interest payments of $609 billion, or 6.9%. Due to lower interest rates, current interest payments are only 3.8% on the debt.
Should interest rates rise to pre-recession levels? U.S. taxpayers would have to cough up an additional $706 billion annually. Thus, in this economist's judgment, the debt "house of cards" will come tumbling down when rising inflation pushes interest rates back to their historical average. When will this happen? No mortal economist on this earth knows.
Candidates for the Democrat presidential nomination have almost uniformly argued for reducing income inequality by raising taxes on businesses, and on, yet to be defined, high income earners.
What is the evidence that such a shift would in fact produce positive outcomes? In this essay, I combine an a widely accepted measure of income inequality, the Gini Coefficient, and gross domestic product (GDP) to arrive at a Misery Index.
Those states with high income inequality (high Gini Coefficients) and low GDP growth are awarded a high Misery Index. States with low income inequality (low Gini Coefficients) and high GDP growth are awarded a low Misery Index. I then calculate state and local tax burdens to gauge whether higher taxes are likely to lead to a lower, or higher Misery Index.
Inequality Misery: The 10 states with greatest 2018 income inequality were: DC (#50, last in nation), New York, Connecticut, Louisiana, California, New Mexico, Florida, Massachusetts, Alabama, and Illinois (#41). The 10 states with the least income inequality for 2018 were: Utah (top state), Alaska, Iowa, North Dakota, South Dakota, Hawaii, Idaho, Vermont, Wisconsin, and Nebraska (#10).
Economic Growth Misery: The 10 states with the poorest 2015-18 GDP growth were: Delaware (#50, last in nation), Wyoming, North Dakota, Alaska, Oklahoma, Connecticut, Rhode Island, Iowa, Louisiana, and South Dakota (#41). The 10 states with the highest 2015-18 GDP growth were: Washington (top state), Oregon, California, Utah, Idaho, Arizona, Nevada, Colorado, Florida, and Georgia (#10).
Overall Misery Index: In terms of the overall Misery Index, from most Misery to least Misery: 51. (Highest Misery Index) Connecticut, 50. Louisiana, 49. New Mexico, 48. Mississippi, 47. New York, 46. Arkansas, 45. Illinois, 44. Oklahoma, 43. Rhode Island, 42. District of Columbia, 41. Delaware, 40. West Virginia, 39. New Jersey, 38. Kentucky, 37. Alabama, 36. Wyoming, 35. Missouri, 34. Pennsylvania, 33. Virginia, 32. North Carolina, 31. Massachusetts, 30. Ohio, 29. Florida, 28. North Dakota, 27. Texas, 26. Alaska, 25. Montana, 24. California, 23. Georgia, 22. Iowa, 21. South Dakota, 20. Tennessee, 19. Vermont, 18. Kansas, 17. Michigan, 16. South Carolina, 15. Nebraska, 14. Indiana, 13. Nevada, 12. Wisconsin, 11. New Hampshire, 10. Minnesota, 9. Maryland, 8. Maine, 7. Arizona, 6. Colorado, 5. Oregon, 4. Hawaii, 3.Washington, 2. Idaho, 1. Utah (Lowest Misery Index).
State and Local Tax Burdens: States with the highest Misery Index had the highest average per capita state and local taxes of $5,092 compared to states with the lowest Misery Index with the lower per capita state and local taxes of $4.580. In terms of states' business tax climate ranking, the highest Misery Index states had a worse business tax climate ranking of 28 compared to 23 for the low Misery Index states (lower ranking connotes a superior business tax climate).
Data support the hypothesis that Misery Indices were higher for high tax states, and lower for lower tax states, underpinning the contention that raising taxes will not reduce economic misery, but may in fact produce more economic misery, or slower economic growth, and higher income inequality Ernie Goss
Senator Elizabeth Warren, Democrat presidential contender, has found what she considers to be a pot of gold to fund her "Medicare for All" and other assorted largess. Warren is proposing $20.5 trillion in new federal spending under the "Medicare for All"
proposal -- an amount greater than the size of the total federal debt accumulated over the last 80 years.
The Senator plans to introduce a wealth tax on the ultra-rich to pay for this program expansion. Since Warren promises to levy this tax on 1% of the population, this plan has resonated among the 99% who would pay nothing, at least in the beginning.
Playwright George Bernard Shaw once said: "The Government that robs Peter to pay Paul can always count on the support of Paul."
There are a multitude of reasons that 9 of 12 European nations that adopted a wealth tax have since dropped it. Here are four:
First, is the high cost of administration. How can administrators accurately measure wealth and collect the tax without incurring excessive costs?
Second, since initially introducing the tax at 3% of all wealth over $50 million, Warren has raised the rate to 6%. Just as the top federal income tax rate was raised from 7% in 1915 to 92% in 1953, it is likely that the rate and base would be expanded.
Would the tax be expanded to eventually swipe the innards of the piggy banks for ambitious, successful teenage newspaper carriers?
Third, U.S. wealth, for example, corporate investment, would be moved out of the U.S. to lower tax nations.
Fourth, certain forms of wealth are virtually impossible to value. For example, Leonardo's Mona Lisa sold for $450 million in 2017. Will the buyer have to cough up $27 million annually to fund Senator Warren's Medicare for All? Furthermore, after paying
$450 million for the painting, will the buyer have enough to pay this annual tax?
As one of the super rich, Bill Gates, who is giving away his fortune, advised Warren, "I implore you to connect the dots."
Economic jealousy is no basis for a sound functioning tax system that aids, not depletes, economic growth.
When I was a graduate research assistant at Oak Ridge National Laboratory in 1983, pursuing my PhD. in economics, I worked on a contract with the Solar Energy Research Institute in Boulder, Colorado.
At the time, solar energy electricity production was prohibitively expensive, requiring massive government subsidies for its mere existence. However, solar energy devotees argued that solar energy was an "infant" industry that, if properly supported with tax dollars, would become cost competitive with fossil fuel electricity production before the turn of the century.
Now, 36 years later, U.S. taxpayers subsidize solar electricity production to the tune of $43.75 per billion kilowatt hours (BKWH) compared to $1.04 per BKWH for coal, and $0.46 per BKWH for nuclear. Even with these massive solar subsidies, the levelized cost of electricity (LCOE) produced by photo voltaic solar is approximately 30% above that of electricity produced by coal, while electricity produced by thermal solar is 239% greater than that of coal.
Despite colossal subsidies, coal electricity production represented 29.2% of the total while solar was only 1.2% in 2016. Replacing half of coal production with solar would cost consumers approximately $2.9 billion in generation costs, and tax subsidies per year.
The latest data show that, as a share of income, the lowest quintile of income earners spent roughly 7 times that of the highest quintile of income earners on utilities. Thus, in addition to economically burdening all U.S. consumers, the shift away from coal to solar will exacerbate income inequality in the U.S.
Even with this compelling data, a host of Democrat presidential candidates argue for replacing coal with solar and, at the same time, for cutting income inequality. Julian Castro said he would put a ".... halt to fossil fuel exploration and fracking on federal land and would boost wind, solar and other renewable energies." And late last week Democratic presidential hopeful Senator Warren said that, "By 2030, no more cars with carbon emissions; and by 2035, no more production of electricity that has carbon emissions."
Thus, Democrat presidential candidates who argue for reducing income inequality at the same time as reducing the use of coal electricity generation, are being at best "disingenuous."