Thursday, May 17, 2018

California Solar Mandate Hurts Poor, Benefits Tesla: Requirement Boosts Housing and Electricity Prices

On May 9, 2018, the California Energy Commission (CEC) unanimously voted to require that builders install solar energy generation in all newly constructed homes in the state. The CEC estimated that the mandate would add approximately $10,000 to the price of a new home, and importantly, reduce the state's dependence on fossil fuels.

But how will displacing fossil fuel energy generation with solar affect electricity prices in the state? Currently, Californians pay the seventh highest electricity prices among the 50 states at $44.74 per million BTUs.

The latest U.S. Department of Energy data show that California obtains 52.3% of its electricity from natural gas, and 8.6% from solar. Replacing half of the state's natural gas electricity generation with solar energy would increase the state's electricity prices by approximately 26.7% to $56.48 per million BTUs. This would effectively boost the state's electricity prices to the second highest in the nation, other factors unchanged.

Above and beyond the anticipated positive impacts on the environment, the new policy will add billions to the coffers of corporations (i.e. crony capitalism).

In 2016, Tesla Corp. purchased SolarCity for $2.6 billion with the solar firm accounting for $1.1 billion of Tesla's 2017 revenues. Despite losing money for 59 of 60 quarters since incorporation in 2003 with accumulated losses of $5.0 billion, Tesla stock is currently selling for approximately $300 per share. It is clear that Tesla shareholders are expecting energy mandates, such as California's, to enrich them in the years ahead.
Ernie Goss

Friday, April 20, 2018

Federal Government Has Spending Problem: Taxes Expand, but Spending Soars

Since 1930, the federal government has spent approximately $90.2 trillion and collected $69.7 trillion in taxes, thus adding $20.5 trillion to the national debt, or approximately 104% of total 2017 U.S. output. Adding to the debt problem, the Congressional Budget Office (CBO) recently estimated that the federal deficit will rise by more than $1 trillion yearly by 2020. Big Congressional spenders blame the shortfall on the 2017 tax reform package. But the CBO estimates that tax collections will grow by 10.2% over the next two years, while spending will soar by 13.1%. Thus, the true fiscal culprit is a spending explosion, not a lack of tax collections.

Central to the rising spending problem is the growth in programs such as food stamps (SNAP), Medicare and Medicaid. These three programs will skyrocket by 16.4% by 2020, or two and one-half times the expansion in the overall U.S. economy, to almost $1.4 trillion in 2020. Interest on the accumulated debt for these three programs will amount to almost $50 billion in 2020 alone.

Despite a robust and rapidly growing U.S. economy beginning in 2009 with unemployment rates dropping from 9.3% to 4.1%, the nation's food stamp program has expanded from 33,000,000 recipients in 2009 to 42,600,000 in 2017. This means that more than one of every seven Americans received food stamps in 2017 at a cost of $1,663 per household or $70.1 billion.

In an effort to slow the expansion in these three programs, President Trump last week issued an executive order calling for enforcement of existing work requirements and also reviewing current waivers and exemptions to working. However, since most households receiving food stamps contain a working adult, a work requirement will do little to reduce SNAP, or food stamp, expenditures. A better approach is to lower the income threshold beyond which households lose all, or portion of food stamps. Policymakers that advocate raising taxes to solve the debt problem are shooting at the wrong target.
Ernie Goss

Friday, March 23, 2018

Is the U.S. the Next Greece? Boomers Punish Millennials with Soaring U.S. Debt

Over the past 200 years, Greece has reneged seven times on the repayment of its national debt. And in 2017, Greece once again teetered on default but, by agreeing to austerity measures, was bailed out by the European Central Bank (ECB) and the International Monetary Fund (IMF). In most cases, Greek government spending beyond its means - i.e. deficit spending - produced these nasty outcomes. Will the U.S. government face the same problem in the years ahead?

With the U.S. debt, both public and private, now exceeding $20 trillion, or 104% of Gross Domestic Product (GDP), lenders and taxpayers are questioning the federal government's ability to pay interest and principal on that debt. The debt as a percent of GDP has exploded from 39.6% in 1966 to 103.7% in 2017 producing this concern. During this time period, U.S. presidents ranged in their contribution to the problem. As a percent of GDP, during Obama's term, the debt increased by 4.7 percentage points per year. At the other end of the spectrum, the ratio declined by 1.1 percentage points annually under Johnson. Others include: Bush Sr. a yearly gain of 3.1 points; Reagan an increase of 2.2 points annually; Bush Jr. an upturn of 1.5 points per year; Ford an expansion of 0.4 points yearly; Carter a reduction of 0.5 points per year; Nixon a decrease of 0.6 points yearly; and Clinton an annual drop of 0.8 points.

Adding to the potential crisis, the CBO projects that debt held by the public will advance by another 12% in the next decade. U.S. taxpayers and investors ask, is the U.S. the next Greece? The quick, short and accurate answer is NO! But why not?

First, the U.S. dollar is, and will continue to be, the global reserve currency. This means that foreign investors remain willing to lend to the U.S. despite the heavy debt load and current rock bottom interest rates.

Second, the U.S. Federal Reserve stands ready to buy U.S. debt regardless of the size of the debt. This Fed action would boost the money supply, increase inflationary pressures, and reduce the size of the inflation-adjusted debt.

Third, the U.S. Treasury can always open the dollar spigot to pay interest and return principal on maturing notes, again adding to inflationary pressures and diminishing the size of the inflation-adjusted debt load.

Finally, the federal government can raise federal taxes to cover government over-spending.
The outcomes from these actions for a younger generation are likely to be a combination of higher interest rates, greater inflation and expanding taxes.

That is, baby boomers stick it to Millennials!

Ernie Goss

Tuesday, February 20, 2018

Is Economic Growth Hurting the Stock Market? No! The Enemy is Higher Interest Rates, Mr. President

Just last week President Trump tweeted that "In the old days when good news was reported the stock market would go up." He went on to say that today good news pushes the market down. He asserted this is a "big mistake." But is it?

Last week the U.S. Bureau of Labor Statistics reported that year-over-year wages advanced by a solid 2.9% compared to the post-recession growth of 2.2% or less. Good news for the worker and economy, but since that announcement all three major stock indices are down dramatically.

Instead of making a "big mistake," investors are simply assessing the likelihood of higher wages producing higher inflation, and then generating higher interest rates. Higher interest rates encourage investors to move funds from the equity, or stock market, to interest bearing accounts. If investors' fears are borne out and interest rates return to their post-2000 average, how much lower will equity markets likely fall?

Between 2000 and 2009, the ratio of the S&P stock index to corporate profits, as reported by the Bureau of Economic Analysis, was 10.6. However post-2009, the Federal Reserve's unprecedented monetary stimulus helped drive the rate on the 10-year U.S. Treasury to an average 2.44%, and the ratio of the S&P to corporate profits to 11.2.

Even after the recent market decline or correction, the ratio is still a high 11.6 on February 15. Thus, if rising inflation, the reversal of the Fed's post-recession stimuli, and the expanding federal deficit force the yield on the 10-year U.S. Treasury to its 2000-09 average of 4.48%, investors could see a decline in the S&P by 8.9%, other factors unchanged. This estimate assumes a 4.8% increase in corporate profits from Q1 of 2017 to Q1 of 2018.
Higher profit growth, and lower interest rate increases would mean a smaller fall in the S&P. On the other hand, lower profit growth and higher interest rate increases would mean a larger fall in the S&P.

The next key indicator to watch will be the wage growth number coming from the U.S. Bureau of Labor Statistics' jobs report on March 9. A year-over-year growth number above 3.0% will put a dent in the S&P stock index.

Ernie Goss

Friday, January 19, 2018

Who Benefits from the 2017 Tax Reform? Workers Gain from Rapidly Expanding Economy

Republicans argue that implementation of the recently passed tax reform bill will stimulate economic growth, which will benefit the middle class, primarily by boosting wages and salaries. Democrats, on the other hand, contend that the benefits of any growth will flow mainly to the "rich" via higher corporate profits.

Does empirical data support the Republican or Democrat position assuming that the package, as advertised, raises GDP growth from 2016's 2.1% to 3.1%, or even 4.1%?

In 2016, the U.S. economy ended the slowest eight years of economic growth since the end of the Truman Administration in 1952. During this period of slow GDP growth, wages and salaries as a share of GDP dropped from 44.5% to 43.5%, but profits as a percentage of GDP climbed from 9.4% to 11.5%. Thus, superficially during this latest time period, slow growth had more of a negative impact on workers via lower wage and salary growth.

The accompanying table lists the GDP, wage & salary, and profit growth from 1947 to 2016. During this period, when GDP growth moved from an average of 2.4% to 4.6%, wage and salary growth advanced from 4.1% to 8.2%, but profit growth fell from 6.4% to 5.1%.

Calculating correlation coefficients for the data indicate a clear positive correlation between growth rates of GDP and wages & salaries (+0.74), but a negative association between GDP growth rates and profits (-0.29).

Theoretically, this empirical finding is consistent with the likelihood that businesses are required to bid up wages during periods of rapid growth with the result of lower profits. To quote British economist David Ricardo, "There can be no rise in the value of labour without a fall of profits."

Thursday, December 28, 2017

Death and (No) Taxes for Super-Rich: Give Gains to Charitable Foundations

Recently George Soros transferred more than $18 billion of his accumulated wealth to a private foundation that he controls. By doing so, he escaped paying taxes on the appreciated value of the assets forever. Here's how it works:

The super-rich who head corporations, such as Soros and Warren Buffett, can take a reduced yearly salary and pay income tax rates equivalent to that of middle-income Americans. However, they continue to have access to corporate private jets and other tax-deductible benefits unavailable to most middle-income Americans.

Meanwhile, the value of their shares of their companies grows. But instead of selling the appreciated shares and incurring capital gains taxes, the super-rich give the shares to private foundations and the income is forever untaxed.

For example, in 2017, Buffett donated 18.63 million Berkshire "B" shares valued at $170.25 per share with a tax basis of roughly $58.71 to the Gates Foundation. As a result, in 2017 alone, Buffett will avoid paying capital gains taxes of $141 million to Nebraska, and $463 million to the federal government. In the end, Mr. Buffett intends to donate more than $50 billion in appreciated stock to private foundations.

Buffett has ridiculed the current tax system, which taxes his secretary at a higher rate that what he pays. To rectify this injustice, he proposed that the capital gains tax be raised to 50%. But elevating the rate would have no tax impact on his accumulated stock wealth.

In the end, the current U.S. tax law allows death with (almost) no taxes for the super-rich. A potential remedy is to limit the amount of appreciated stock that may be gifted without taxes.

As stated by novelist F. Scott Fitzgerald to fellow writer Ernest Hemingway, "You know Ernest, the rich are different from you and me." To which Hemingway responded, "Yes they have more money." To be an even bigger wiseacre, Hemingway might have added "and the ability to die without taxes, Scott."
Ernie Goss

Tuesday, October 17, 2017

Is Trump's Tax Reform for the Rich? Top 1% Pay Seven Times the Rate of Bottom 50%

In September, President Trump unveiled his tax reform plan to a chorus of boos from the big government tax and spend devotees.

For example, New York Democrat Senator Schumer, Grand Poobah of the big spenders, tweeted, ""GOP #TaxReform plan & what @SpeakerRyan says about it are 2 diff things. Says plan is for middle class but 80% is for wealthy-Get real Paul."

According to the Tax Foundation, the latest income tax data show that the top 50% of income earners paid 97.3% of income taxes, with the bottom half of income earners paying only 2.7%.

Furthermore, the top 1% of income earners paid an individual income tax rate of 27.1%, which was more than seven times higher than that of the bottom 50% who paid an income tax rate of only 3.5%. Thus, a tax reform package that differentially supports low and middle income taxpayers would further distort a tax system that already punishes educational achievement, innovation, and entrepreneurship, all of which lead to income growth.

On top of this, the element of the President's tax reform package garnering the most criticism from supposed defenders of low and middle income taxpayers is the elimination of the deduction for state and local income taxes. Currently the benefits of this deduction go largely to high income earners, and it encourages state and local taxing units to raise taxes. Eliminating this deduction would cost taxpayers with incomes over $200,000 an average of $7,000, but an average of only $100 for taxpayers making less than $200,000.

To bolster passage of his plan, Trump might channel Nobel prize winning economist Milton Friedman who said, "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible."
Ernie Goss