Author Archives: andrewwhite921

The Republican Tax Plan – Is it a Tax Cut Too Far?

I noted recently that economist cannot agree on the good, bad or ugliness of the medium to long term impact of near-zero interest rates or quantitive easing (QE). This suggests that economics is in a sad state of affairs. Even the Republican tax deal, winding its way through reconciliation this week, continues to create fervent grounds for disagreement. The most important sticking point concerns the rate of growth the tax changes might lead to. This is critical since it is the resulting change in GDP what will spin off excess profits and therefore taxes that will go to pay for the tax breaks. If GDP does not grow fast enough, insufficient funds will be created. If GDP excels, al will be well and the Democrats won’t be happy since they may lose the next general election.

In the Wall Street Journal on December 2-3 there was an interesting opinion piece by Phil Gramm and Michal Colon titled, Don’t Be Fooled by Secular Stagnation. Mr. Gramm is former chairman of the senate banking committee and now with the American Enterprise Institute. Mr Solon works for US Policy Metrics. The article compares America’s GDP averages over recent history and the assumptions that the Republicans are making with their forecasts. The two are not that far apart at all, yet other reports from different perspectives, using different assumptions, suggest growth will not reach its goals. The COB suggests growth might make 1.9% over 10 years; the Republican’s are looking for 2.6%. It turns out that since the end of WWII to 2008, America has averaged about 3.4% and this includes 10 recessions!

Then, when you get under the hood of the various models economist use you find the strangest of assumptions. The CBO’s model does not allow for any spin off of profits generated from growth to be plowed back into the economy to drive more growth. This the model is quite limited. Why don’t our economists or civil servants update their modes? Because it would be more political than economic. The CBO, as the article suggests, has been worn more times than it has been right with its GDP forecasts in the last 20 years. We might as well just ignore them and set up a new government department. At least that adds to employment which I am sure is irrefutable.

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Financial Times’ Martin Wolf Finally Get’s it Right

In “Fix the Roof while the sun is shining“, on Wednesday December 6th, Martin Wolf reports on how excessive low interest rates and quantitive easing create conditions that lead to rampant and growing debt, and now this might hold our newly growing global economy back. No kidding. It is about time that Mr. Wolf caught up with the rest of us. QE and near-do rates have were useful in saving the economy, but after a very short period of time we should have pushed rates up and had the Fed (and other central banks) withdraw from QE. If we had any form of real global central bank collaboration, this could have been coordinated together and thus no single region would have been subject to any disruption. We don’t have any form of Bretton Woods 2.0 and so we were all left to figure this out alone.

Now the newly recoding and growing global economy is now dunk on debt. We have sovereign states, states, cities and the public sector that have stoked up on cheap money. Worse this cash has not been used to drive growth economy that would have spun off profits to feed the governments, such that recovery would have improved sooner. If your home is anything like mine, the State of Georgia has rebuilt roads that were perfectly good before; and not added valuable new roads or services. The private sector has been buying back shares to drive EPS to feed the bonus needs of executives; and been gorging on M&A activity that was not driven by weak firms failing but hostile acquisitions of reasonably performing assets. On top of this, in some regions of the world (see Italy as a good example), zombie banks and firms have been hogging underperforming assets in the interests of keeping employment going. Thus the Nannie state is alive and well, dressed up in a veneer of free market economics.

Much has been written since the financial crisis about how moribund the state of economics are. It seems we no longer have a core base of trusted economists guiding anyone, let alone our political leaders. The economists are almost as decided as the politicians are. Yet even in the most basic of areas, debt and credit, we have failed. How on earth unrelenting debt, massive imbalances, and market-inflicting Federal involvement in the bond market would be a good idea but for a fleeting while is beyond me. The blind were leading the blind. At least Mr. Wolf has removed his blind. Let’s hope the rest do – and soon.

One small picture says it all

Standing about 2-3 inches tell and 1-2 inches across, a small chart in page A6 of this last weekend’s Wall Street Journal, sums up our economic predicament. The article, Japan Firms End Yearslong Price Freezes, reports that a growing number of businesses are reporting that labor shortages and increasing demand are leading to price increases. The chart shows a pleasing, gradual but clear rise in prices in Japan over the last year, now approaching 1%. This is important.

Though 1% inflation sounds measly for Japan it could be a short-term boon. The nation has been bedeviled for over 20 years with meager growth, stagnant wages, and tepid productivity growth. In fact some economist suggest that Japan’s fall from economic grace that preceded the West’s financial crisis of 2007, demonstrated early what would happen in a deflationary economy with massive quantitative easing. QE did not drive Japan’s economy to growth; it does not seem to have done so in the west, though it may have saved it from crashing and now we see how it’s persistence has led to financial and investment dislocation.

The news all around us is quite positive:

  • Most recent quarterly GDP in US was restated up to 3.3%, almost unimaginable a year ago.
  • EU economic growth rates are forecasted to grow above their recent meager levels in recent OECD reports
  • ‘Currency war’ reports appear in the press infrequently, even though global trade remains torn by the idea that the US wants a stronger negotiating position (for what is, essentially, a very small part of the US economy).

But inflation remains stubbornly low almost everywhere. If Japan soon demonstrates ongoing growth in inflation, and global commodity prices push up, the result will be a wave of input price increase around the world. Some months later the US and more clearly the EU will see producer price increase and so consumers may see pass-through increases. This will encourage central banks to continue their march toward normality.

The downside with a return to inflation: Debt servicing becomes more onerous as interest rates increase in response to inflation increases. As such, governments and businesses that stocked up on cheap debt during QE and the near-zero interest rate period will have to squirrel away more cash to pay their interest charges. This will reduce what’s available for investment, thus slowing down growth.

The cycle feeds on itself so it can sometimes stabilize or other events can kick it into maddening swings. We will just have to see what happens. It may depend on how fast inflation growth returns. But for now, that little picture on page A6 looks very nice in a chilly autumn morning.

Regulating for Regulations’ Sake?

I read in today’s US print edition of the Wall Street Journal (see Change Proposed on Who Gets Tips) of a proposal to overturn a regulation concerning how tips are pooled that will impact restaurants, casinos and the like. Apparently under Obama’s reign, regulation was written that protected front-office staff from having to share tips with back-room staff. Now under Trump’s reign this regulation is being overturned and the industry may revert to the previous practice, that required tips to be shared with back-room staff.

I didn’t know such a regulation existed. Why does the federal government, or any government, regulate how tips are shared or pooled? Why is it not a decision for owner, manager and staff to work out? If it were left to local folks running the businesses, employees would flock to those businesses that offer the approach they appreciate the most.

This is a classic example of regulation for no other purpose than growing big government. We need to get Uncle Sam out of the kitchen and accounting office and back to running the armed forces.

Normalcy is Slowly Coming Back to our Economy

Love Trump or hate him, the one thing you have to say about the economy since around his election, it is starting to show signs of normality. That is, certain data suggest that firm behavior is slowly moving back toward what is more normally expected and widespread before the financial crisis.

Front page news in today’s US edition of the Wall Street Journal, “Firms cut buybacks as stocks become too expensive“, report that – as the title suggests, stock buybacks are falling again. This is a fall compared to recent record highs, so it is not that we are done with the mischievous side of Quantitative Easing. At a run rate of $500M spend by S&P 500 this year, 2017 will be fourth or fifth highest ever. The growth of which signaled that investors had noting better to do with their money then play with the earnings per share metric in order to pay out bonuses to executives. The negative to all this was the poorly performing capital investment side of the economy.

So here is where the other side of the story adds weight to the early sings of good behavior. The article continues on the inside front cover and there is a graph of capital expenditure. Running at near all time lows for a number of years, it is showing signs of increasing in 2017, This implies new plant, new equipment, new spend on IT and other productivity inducing and growth driving engines. This is what we want to see. It is not that our economy is well, really, it is just that it is a twisted monster. It is to a free market; it is a contorted, overly regulated morass of centrally guided actors. We need to get out from under QA and allow money and investment to find returns that are normal. If we were to couple this with the promised tax reform, we might unleash a new normal for 2018. Let’s see.

EU Intransigence in Brexit Negotiation Echoes Trump: Putting EU First

In today’s US print edition of the Financial Times there was a Comment piece by Jean-Claude Piris, former director-general of the council of the European Union’s Legal Service. It is titled, The Myth and Delusion over Single Market Access. In the piece he argues that Britain does not understand what access to the “free market” means. As Britain seeks a unique relationship, he claims that Britain is ignoring facts and should drop such ideas and focus on what the EU offers. This Comment is political posturing and not in fact true.

His key point is this: “…[T]he single market is based on the free movement of goods, services, capital and people, and choosing among these freedoms is not permitted.” This maybe a rule enshrined in EU law but it is just that. Many other enshrined EU laws, created for its benefit, have been negotiated way – such as France and Germany both violating the budget deficits.

The free market can be whatever it needs to be. It can exist between the free movement of goods and services, and capital. It does not require the free movement of people. That adds a social-cost and social-layer of bureaucracy that is the main reason why Britain left in the first place. It is this argument, that the EU cannot separate the components of this “law”, that will undermine the Brexit negotiations and sits at the heart of the success of the EU.

Before the forerunner of the EU was founded, the EEC, Britain was closely involved in the original concept of the “United States of Europe”. While Churchill may have implied both an economic and political model, he did not imply political union – even though this had been offered in a desperate moment some years before in 1940 to France at the point of collapse under the weight of the German Army.

But just as the original ideas for a barrier-less trade framework was being explored, Britain exited the dialog and so the French and the Germans continued the work. It was still mostly an economic model – but Britain’s withdrawal from those early stages were fatal. The EEC formed up and without Britain to act as a counter weight, France and Germany – for different reasons – pushed forward with ever greater economic and creeping-political alignment.

So it’s disingenuous for EU leaders and others to say what the free market is and is not. All is possible. It is purely a negotiating ploy to try to trump an argument. It is no different than saying, “Put EU First” just as Trump says, “Put America First”. No different.

Democrats Desire for Regulation Increases Inequality

Yes, you read the title of this blog correctly but you wont accept the point. It so happens that one small data point represents a major contributing factor to inequality. Since WWII the availability of affordable housing has declined. First both left and right drove increase affordable housing. It was good for the wider population as it led to a wider base on which the American Dream was driven. However, the plan backfired.

Over time more and more lower income families took up the opportunity and more and more subsidies were driven into the market. This even led to aspects of the financial crisis that sits at the root of our current economic malaise. But the key is that an effective level of affordable housing around the US supports the need of workers to move to where there was work. This is one of the factors that drove growth and even productivity. That is, until the late 1980s. Since then productivity has been slowing, and it turns out, the stock of affordable housing. At the same time, Americans move less, and the baby boomers have started to retire.

But the odd part is not that left and right supported the goal, it is the left that have fought against themselves. In the US print edition of the WSJ on Sept 30-Oct 1, there is an Opinion piece title, “Why Housing is Unaffordable in California“. This article nicely captures the facts that democrats, in control of Californian legislature, have passed land regulation that limits how land can be used. This has contributed to continuing and driving land prices up and at the same time pricing lower paid workers out of the region. Yet at the same time the state legislature encourages its population to bass bonds to fund new affordable housing plans. It is thus fighting against itself. The rich are getting richer and the poorer are unable to get a hold on the work that would help them close the inequality gap.

Why don’t our politicians stop being politicians and get out of the way of real decision makers that work together and in the same direction?