Wednesday, September 16, 2015

End the Federal Reserve's Morphine Drip of Ultra-low Interest Rates

Shaken recently by stock markets across the globe, the U.S. Federal Reserve ("Fed") may delay moving the economy away from its emergency monetary policies begun in 2008. In the 102 years of the Fed's existence, this organization has never so vigorously attempted to stimulate the U.S. economy with what many economists consider crisis measures.

Since 2008, the Fed purchased $4.5 trillion in U.S. Treasury bonds and mortgage backed securities intending to lower long-term interest rates and boost U.S. investment and consumption. Additionally, the Fed's interest rate setting committee, the FOMC, has kept short-term interest rates at close to zero for almost seven years.
Partially as a result of these measures, U.S. stock prices collectively have climbed at a pace six times that of the U.S. inflation adjusted economy since 2011 (3.5 times the non-inflation adjusted economy). And just last month, even the threat of a rate hike of ¼% slammed U.S. stock prices. However, raising interest rates at the FOMC's September 17 meeting will have several significant positive impacts.

First, savers will see a "light at the end of the tunnel" in terms of interest earnings. Second, rising interest rates will encourage businesses and home buyers to invest today in new capital equipment and homes in advance of rising interest rates. Third, it will help restore confidence in the U.S. economy that has been curbed by emergency interest rates. Fourth, and most importantly, it will begin the journey back to normal and sustainable interest rates.

Higher interest rates may well dampen stock prices, but the mandate of the Federal Reserve is to stimulate employment growth and promote stable prices. It is not to enrich stock market participants with price bubbles that must ultimately deflate, slowly or rapidly.

Ernie Goss

Friday, September 04, 2015

More Government Regulation Generates More Income Inequality and Slower Economic Growth

President Obama just announced plans to reduce, and ultimately eliminate, coal-fired electricity generation in the U.S. Data from the Department of Energy show electricity from existing coal-fired plants costs $38 per megawatt-hour compared to $106 per megawatt-hour from new wind facilities.

This action will contribute to rising economic burdens on low income families in the U.S. The bottom quintile of earners already spend five times more of their family income on electricity, compared to the top quintile of earners. Policymakers must consider potential impacts of this and other regulatory expansions on income inequality and economic growth.

Gauging income inequality with the 2013 Gini coefficient, measuring regulatory freedom with the Mercatus Center's regulatory freedom index, and capturing U.S. economic gains with 2008-13 Gross Domestic Product (GDP) reveals how rising regulation influences income inequality and economic growth.

When ranking the states from the most regulatory-free, Indiana, to the most regulatory-constrained, California, distinct relationships emerge. First, the 25 states with the most regulatory freedom in 2013 experienced GDP growth of 4.2% for 2008-13, compared to the 25 with the least regulatory freedom, which experienced a slower 3.3% GDP growth, and 3.7% greater income inequality.

Furthermore, the top 25 states, in terms of restraining regulatory growth from 2008 to 2011, experienced GDP growth of 4.6% compared to 2.6% for the 25 states expanding regulatory burdens. The 25 states growing relative regulation also suffered 2.9% greater income inequality.

This surface analysis should stimulate more in-depth research that examines how Washington's boost in regulation among the states impinges on both income inequality and economic growth.

Ernie Goss

Wednesday, July 15, 2015

Even with Billions of Dollars of Taxpayer Support, Elon Musk Is No Thomas Edison

Without an emoticon for bizarre or laughable, CNBC favorably compared Elon Musk, founder of Tesla Motors, to Thomas Edison. If nothing else, Musk should receive the chutzpah award for naming his company after Nikola Tesla, creator of modern alternating current (AC) electricity systems. But after 12 years of operations and $4.9 billion of taxpayer subsidies, as calculated by the Los Angeles Times, Tesla Motors will produce only 45,000 vehicles for all of 2015 compared to Ford and GM which will sell 225,000 and 246,000 vehicles, respectively, for July 2015 alone.

Matching Tesla's underachievement in sales, investors in Tesla stock will earn $1 every $80 of investor cash in 2015. Alternatively, investors can purchase $1 of earnings from Ford and GM for less than $8.

In other words, the rate-of-return for Ford and GM investors is approximately 15 times that of Tesla stockholders. Furthermore, the only reason Tesla is earning a rate-of-return less than 1% is taxpayer subsidies of almost $5 billion.

Think of what Thomas Edison could have done with billions of dollars of taxpayer subsidies. He would not produce fewer than 50,000 vehicles per year that have a range of less than 270 miles. Only Hollywood celebrities can afford a $125,000 vehicle that cannot transport them beyond their award ceremonies in Las Vegas. I did not know Thomas Edison - he grew up in New Jersey and I in Georgia - but I think I can confidently say that, "Elon Musk, you are no Thomas Edison."

Ernie Goss

Thursday, June 18, 2015

Kansas City, a Laboratory for Kansas Tax Cuts: Data Indicate Tax Reductions Stimulated Growth

The Kansas City Metropolitan area is divided into two portions, Kansas and Missouri. This makes KC a good laboratory to gauge the effectiveness of economic policy changes made on one side, but not the other. For example, what do metro growth numbers have to say about the wisdom of the 2012 and 2013 Kansas tax reductions?

Post Tax-Cut Earnings: From March 2012 to March 2015, the Kansas fraction of the metro grew its average weekly wages for private workers by 6.7%, which was higher than the Missouri side's growth of 5.6%.

Post Tax-Cut Job Performance: During this same time period, the Kansas side of the metro experienced private job growth of 7.5% compared to a much lower 4.4% for the Missouri segment of the metropolitan area. Both sides of the metro area reduced the number of government workers, but the Kansas side cut 4.8% of its government jobs, while the Missouri portion shrank 1.0% of its public jobs. Not surprisingly, Kansas public workers are raising a ruckus, claiming an economic calamity.

At the state level, 2012 to 2014 personal income growth for Kansas surpassed that of Missouri and Nebraska, but trailed Colorado and Oklahoma. But even after the tax cut, the Sunflower state's 2014 state taxes as a percent of personal income were still higher than all of its neighbors of Colorado, Missouri, Nebraska and Oklahoma.

Post tax-cut data from Kansas City, the state of Kansas, and its neighbors support the hypothesis that the tax reductions improved the state's relative economic performance. However critics of the reduction correctly argue that this data, as presented here, shows correlation, but does not prove causation. Too bad in 2015 Kansas politicians retreated, and once again boosted taxes before investigating the impact of the 2012 and 2013 cuts.

Ernie Goss

Thursday, May 21, 2015

Passage of Trans-Pacific Trade Pact Will Increase U.S. Exports and Economic Growth

Since the beginning of the U.S. economic recovery in July 2009, the nation's gross domestic product (GDP) has expanded at a puny pace even though employment growth has been fairly strong. Offsetting the job expansion, there has been lethargic capital spending and productivity growth. During this time, GDP per hour worked (productivity) expanded at a compound annual rate of 0.7%, which is one-third that in a typical recovery, and less than one-half of the annual pace since 1964.

Tom Duesterberg of the Aspen Institute argues that the collapse of U.S. export leadership has contributed to this decline. He finds the U.S. is party to just two of the more than 400 regional free trade agreements that have come into effect since 1995.

As a result, World Bank and Eurostat data show the U.S. share of global exports have sunk from 14% in 2000 to approximately 9% in 2013.

Have weaker exports contributed to differentials among productivity growth for the states? Since 2009, the top 25 productivity growing states increased exports at almost twice that of the remaining 25 states. Over this period of time, North Dakota came in at the top for productivity growth and expanded exports by 34.5%. Meanwhile, Florida, the bottom productivity growth state, grew exports by only 13.1%.

Additional statistical analysis show a strong positive association among export growth, capital spending and productivity gains at both state and national levels. The data provides solid support for Congress to boost the nation's capital spending, economic competitiveness and productivity growth by immediately providing President Obama with fast track trade authority so the Trans-Pacific Partnership trade pact could be implemented.
Ernie Goss

Thursday, April 16, 2015

Income Taxes, What's a Fair Share? Federal Government and Fed Actions Fail Low Income

In 2000, workers with incomes greater than $200,000 earned 33% of the nation's income, but paid 46% of income taxes. In 2012, well after the Bush tax cuts, the same high income group earned 41% of the nation's income, but paid a higher 55% of U.S. income taxes.

In 2000, workers with incomes less than $40,000 earned 14% of the country's income but paid 9% of U.S. income taxes. By 2012, this low income group earned 7% of U.S. income, but paid only 4% of U.S. income taxes.

That is, high income workers are paying an increasing share of the nation's income tax burden. Despite the rising share of federal income taxes paid by high income workers, income inequality continues to escalate. University of California at Berkeley economist Emmanuel Saez estimates that between 2009 and 2012, the top 1% captured 95% of total income growth.

What accounts for this? Certainly not income tax rates! It is arguably that the Federal Reserve (Fed) and federal government policies since the recession of 2008 have differentially aided high income, high wealth Americans.

The Feds bond buying programs (QE1, QE2 and QE3) pushed up asset prices including stock prices, bond prices, art, and other assets at an unprecedented rate. For example, between December 2008 and March 2015, prices of S&P 500 stocks collectively increased by 131%. Additionally, the 2008-09 bailouts of AIG, GM, Bear Stearns, Goldman-Sachs, Morgan Stanley, and the Obama Administration's $830 billion stimulus program mostly stimulated the incomes of the nation's wealthiest.

Federal government and Fed market intervention appear to have widened the gap between the high and low income groups. Tackling income inequality with income tax rates, as often advanced, has not and will not work.

Ernie Goss

Thursday, March 19, 2015

Presidential Budget Deficits, 1930-2014: Both Parties Big Spenders: Democrats Big Taxers

Since 1930, the federal government has spent a total of $71.5 trillion and collected $59.9 trillion in taxes, thus adding $11.6 trillion to the national debt, not including interest. As a share of gross domestic product (GDP), the deficit was 3.3% for the full 84-year period. In terms of party affiliation, Democrats expanded the debt by an average 3.1%, while Republicans boosted the debt by a higher 3.5% average.

As a share of GDP, both Democrats and Republicans spent an average of 20.3%, but Democrats levied higher taxes at 17.2% while Republicans imposed a lower 16.8% in taxes. In all cases, it was assumed that the incoming president does not own the deficit for his first year of service.

Among the 13 presidents serving during this period, the top deficit creating presidents were Roosevelt and Obama while the top surplus generating presidents were Clinton and Truman. Clinton and Carter collected the largest percentage of taxes while Roosevelt and Obama spent the most heavily among the 13 presidents.

With no budget surpluses in sight and 10,000 baby boomers retiring each day, the 2015 national debt of $18.1 trillion, or 103% of GDP, presents a real challenge for younger generations. With current federal tax collections below average, and federal spending above the 84-year average, the nation’s debt level will continue to grow as the share of the population bearing the burden declines.

Without tax reform and spending restraint, Gen-Xers and Millenniums will face higher taxes, elevated interest rates, rising inflation, or all three of these “bads.” Former Colorado governor Richard Lamm sums it up quite well saying “Deficits are when adults tell the government what they want-and the kids pay for it.”

Ernie Goss