Category Archives: Inequality

Trouble for The Eurozone with Trump’s Tax Deal

There was an excellent Opinion piece in today’s Wall Street Journal that calls out the less thought through implications of Trump’s domestic tax deal on international business. The piece, US Tax Reform Has Europe Worried, by Joseph C Sternberg, explores the writings of a German research group that details some thinking suggests some organizations will think twice about new investments in Europe – specifically Germany – with the new US corporate tax rates being leveled. The research piece is from ZEW and is here: Germany loses out in US Tax Reform. This is another dimension not modeled by US economists when they try to determine the impact of the tax reform on US growth.

The more important point however in Mr. Sternberg’s piece comes toward the end of his excellent article. The author suggests that US tax reform highlights a different opinion for taxation from an ideological perspective. This point needs to be talked about more since we have lost our Mojo for ideology in favor of a left-right populist dichotomy. The US reform is being used to alter tax incentives to drive growth, investment and job creation. Most of Europe, with is more socialist (and Democratic-leaning) policies, uses tax incentives mostly as a redistributive process for sharing an assumed pie. There is much less effort in driving growth or influencing investment to grow jobs. This is the dialog we had in the 1980s and it leads to the dialog about big government versus small government.

It is about time ideology got a fair crack again!


The Madness of Student Loans

I read an amazing article in today’s US print edition of the Wall Street Journal. The article was titled, ‘Parents are Drowning in College-Loan Debt‘. The front page article explored data that suggests new record levels of delinquency on college-loan debts associated with a government-managed program called Parent Plus. 

Apparently this program allows parents to borrow money to support educational costs over and above the maximum a child can obtain from federal aid. The article suggests that there is no limit to what can be borrowed via Parent Plus (created by Congress in 1980 when Jimmy Carter was president); and that the most information needed to qualify is a social security ID. Apparently there is no credit check or any other required qualification.

Excuse me? I had to read that part again. What idiot approved this policy? Talk about idiot. This is just the kind of lunatic policy that contributes to unsustainable price increases in secondary education that the droves demand for more subsidies, loans and debts. This is as close to nuts as the same socialist and left-leaning policies that suggested expanding home ownership for those that cannot afford it was a good thing. This is madness.

Not every child needs to go to college. But every child should have the opportunity. There is a distinction between those two points; and the result should not lead to governments controlling access by funneling loans to those that cannot afford it. Attendance should be based on merit. Thus fewer would attend and so prices would not rise as fast and so fewer loans would be needed. But socialism informs uneducated parents that they have a right to a college education and so Uncle Sam has to bend over and make crap up and print more money and screw everyone as a result. Nice.

Now we are again in another financial pickle. But I can’t stop and write about how to fix it. I am going to rush off to go apply for my free Parent Plus loan.

Note to Federal Reserve on Regulations: Step Down

News September 23rd in the US print edition of the Wall Street Journal reinforces how our mad love of regulation will ruin us. In “Fed to Curb Commodity Trading“, we hear of proposed rules that would impose massive capital charges in banks that trade in commodities. The problem being solved is that banks take risks and under excessive condition (i.e. black swan events) such financial firms might put the financial system at risk.

The problem here is that two forces are pitted against each other:

  • The need for risk taking which promises high returns drives innovation and productivity
  • The desire to reduce risk in order to preserve stability and avoid huge loss

Risk involved loss, and not all losses are bad. In fact some would say loss is good (i.e. creative destruction). The current government seems bent on destroying our ability to grow our economy in the name of such regulations. They say these rules are for our own benefit: the result being slower growth, increased inequality, lower wages, and now greater threats from afar.

If you add to this the inexorable growth in government spending, you can see that capitalism is being throttled and socialism is alive and well. The challenge is that no politician today will run on a ticket stating what needs to be done: they would not be reelected.  But I wonder: would the electorate reward a politician that shuts down half the government, for good?  

Turns out global trade is good for you and me

It is all the rage that global trade is bad for the middle classes. We have only just finished consuming the research from the “China Shock” that suggests that the injection of a massive cheap labor pool, represented by China entering the global workforce, may have overwhelmed western governments ability to develop support policies to help transition workers replaced by this China ‘shock’ of workers. As such global trade has been painted as the bad boy, and we are all now looking for ways to protect ourselves from global trade.

Well, it turns out that the China Shock may be a concern for specific industries and disruptions, but global trade overall has lifted the middle classes incomes and not made the richer as rich as we first were led to believe.

In Tuesday’s US print edition of the Financial Times there was a most fascinating article titled, “Incomes study tears up ‘elephant chart’“. The so called elephant chart refers to a graph from research by economist Branko Milanovic who famously demonstrated how global trade created a gap in incomes for middle classes (which went down) at the same time as for the rich (which went up). New analysis of the data suggests this conclusion is wrong and that the gap is much, much smaller and that middle class incomes were not negatively impacted; and Milanovic even updated his original thesis with new data and he now seems to agree with the new review.

The new analysts has found that some of the data used in the original analysis acted as out-layers to the broad tend and by removing that data, the great majority of peoples’ incomes don’t fall. For example, data from emerging markets that experienced accelerating population growth dragged down income data. The large number of Chinese families, for example, made it appear that the US poor were further up the income scale. Other data from former soviet states in Eastern Europe and Japan also caused issues in the data.

The bottom line according to the new analysis is that the middle-class incomes have not been negatively impacted by global trade, but regional differences do exist so analysis needs to look carefully at country specific data. Additionally the rich have not gotten that much richer – in fact the very rich lost the largest proportion of income during the period under review. 

If only our politicians understood this report.  But since its findings do not reinforce their message, it will likely be ignored.