The Chickens Have Come Home To Roost

The true Laugher Curve

Pity the poor Republicans. For forty years, they have followed the mantras spouted by their soothsayers, Art Laffer and Grover Norquist. “Lower tax rates bring in more money. Prosperity will trickle down. I want a government so small I can drown it in the bathtub.” For forty years, we’ve been subjected to an experiment aimed at fulfillment of the Republican dream. Then, with the ascendance of a so-called “businessman” to the Presidency, they had their wish totally fulfilled. Tax rates for corporations were slashed, incremental personal tax rates were cut further, and the estate tax now only affects a truly small segment of the population. We should have seen wild growth in our economy! Everyone truly happy and sharing in the national prosperity.

Except. Except we were not sharing equally in the prosperity this nation generated. Many, many folks were caught in the grinding wheel of trying to survive inside of a high cost society. Some lived in fly-over land, where it took a little less to survive, but still, it was nearly impossible to survive on a single income earning anywhere near the minimum wage. If they fell behind, then there were the predatory lenders, the auto title lords, the pay-day lenders, who would take advantage of those who had the least and withdraw funds feeding those who already had made it.

Now the Republicans are facing an opponent that doesn’t buy into the Ayn Randian philosophy permeating the Republican party. And those same Republicans, forced to compete on the field of ideas and policy, are retreating to their well-worn phrases against socialism, and attempting to incite culture wars in order to keep their base energized and engaged. It seems as though the first cracks are appearing in the Republican monolith aimed at enshrining Trumpism into the political hall of fame. Erstwhile supporter of Donald Trump, Matt Gaetz, now finds himself at the focal point of the magnifying glass of the Federal investigating agencies, while the bright light of the press shining through that same magnifying glass has caused the first smoldering of combustion to appear.

There now is someone in charge who believes we’ve had a decades long dearth in the investment provided through the Federal government. The bill has come due in the amount of spending required to repair the neglected arteries of our commerce. Perhaps the global commerce cardiac infarction from the Suez Canal blockage will show folks what can happen if something we depend upon within the US is suddenly taken out of service. Were we to suddenly lose train routes from New Jersey to Manhattan, or lose I-95 due to a bridge failure, we would see how vulnerable we are to this type of incident.

But its more. We now have a society where access to the internet is taken for granted in most population centers. Unfortunately, it is not a given in much of the lower population density regions that extends across the nation. As someone who lives in one of these lower population states, non-existent or extremely poor internet service is the norm anywhere outside of what passes for a population center in the state. Private industry has not found it profitable to serve much of the area in the country, since there is so little population there to amortize their investment. One of the real reasons for population declines in my state is due to the inability to compete because of poor internet connectivity. This really was apparent during the pandemic, where there were attempts to conduct remote learning through the internet. Whole swaths of this state were unable to do this due to the lack of internet service. The internet has become a necessary utility, like electric, phone, and water. Now it appears we are addressing those regions where it is not available, and that is good.

So now we hear the wails from the Republicans about the extreme leftists who have taken over the opposition party. Nowhere do we hear about the extremism we’ve endured on behalf of the ideology of “I’ve got mine, now go screw yourself” party we’ve seen for over a generation. Like it or not, no one is a raging success on their own. If we’ve been successful, it’s because of education systems put in place a long time ago. When people began abandoning the public school system, mainly due to the integration of that public system, then their engagement with that system has atrophied. Many no longer believe they have a role to play in the success of the whole. Instead, they decry forced taxation as legalized theft. They don’t care if the poor can’t get ahead, they’ll just hole up in their gated community and enjoy the fruits of their supposed labor.

Well, better historians than me have traced the decline of societies to the times when a significant underclass no longer feels they are able to share in the wealth of the society. That’s when desperation leads to true socialistic movements that will overwhelm any gates the rich can put up to isolate themselves. We can begin to address the obscene inequities present in our current system, or we can pretend that we can escape the world’s ills by flying to Cancun while everyone at home freezes in the dark.

What Happens Next?

Despair creeps in when hope is exhausted. For so many during this long pandemic season, despair has been a constant companion after the shock of the first few weeks passed. But now, along with the seasonal change, hope is returning. For some, the financial boost coming from the COVID relief package will enable them to hang on until the economy fully recovers, and they can go back to a service economy job that pays just enough to squeak by. For many others, the opportunity to abandon the prison of their home with the onslaught of vaccination, will bring back essential socialization and family interactions. Still, it is hope that is omnipresent in this time of rebirth in nature.

As a nation, we begin to crawl out of our foxholes and survey the landscape around us. Some things should come into focus, even if they were visible prior to the pandemic. Though visible, they did not register as urgent problems in the before times. Will we have the collective will to address these problems now? We will see. The COVID relief bill has taken a first step towards solving some of these problems. But it is time-limited relief, and its provisions are for only one or two years. The problems, like child poverty, have existed for far longer. It was only during the nadir of the pandemic that we realized how interconnected we all are, and how we need to solve the problems of our brothers and sisters in need, or we will be swept under the tide of humanity crying out for aid.

We had a foretaste of what can happen when we ignore these problems for too long. Demonstrations aimed at protesting excessive use of force by law enforcement, were coopted at night by those who favored direct action and anarchy. It is important to recognize that the demonstrations were instigated by acts of violence, but the economy was also a significant factor. When people do not see hope in their lives, despair can overwhelm them and it is a small step to violence. Of course, those who saw only the violence in the streets were convinced that the source of that violence was organized, and financed by an evil cabal. Then we saw what could happen when those who decried violence, decided to perpetrate violence themselves on January 6. Certainly we all were living in a state of despair at that time.

Will we learn our lessons? Will we let the siren song of substance abuse wrap its embrace of slithering tentacles around us? Will we continue to insist upon punitive actions only as the sole treatment method available to those who succumb to its fatal attraction? Will we realize that the costs of maintaining our prison complex are vastly greater than the costs of providing real treatment? That’s just one of the problems that existed long before the pandemic, yet shows up now in greater relief.

Will we be willing to invest in improved facilities for schools? In some states, the disparity between school facilities and achievement is immoral. The zip code you live in should not be the primary determinant of your educational outcome. Yet it is in far too many states. But of course it is the greedy teachers’ unions that are seen as the source of poor student performance.

Will we continue to accept that in the service economy we now have, it is not moral to allow those who look after the most vulnerable in our population to work full time for wages that do not provide enough money to live in dignity? We’ve lost many of the jobs we had in small towns, where a manufacturer could take those who did not pursue advanced education and provide them jobs where they could support a family. We may decry the global shift of labor and capital, but it will not reverse and provide those jobs in the future. Any manufacturing that returns, will use smaller amounts of labor, and require advanced education in order to control and maintain the machines that actually perform the manufacturing. We can wail and moan about this change, or we can accept it and try to fashion our real world into one where we’d like to live.

We’ve just gone through a period where we tried to squeeze out testosterone as a grease for our economy. Witness the frantic push to grab the last bit of fossil fuels out of the public lands. Because, you see, drilling for oil is manly. And we need that image of the roughneck out there in his domestic pickup, living his life out in the frontier towns of the Dakota’s, or among the tumbleweeds of Texas, showing the best of what America has to offer. Yes, doesn’t require much education to be a roughneck. Just what we need to Make America Great Again. But the investment required to keep the oil and gas flowing through the fracking fields won’t just keep coming, since it is nigh unto impossible to make money when the output from the wells declines so precipitously. So will we turn from the allure of fossil fuel towards a cleaner future?

The Texas freeze has shown us just how vulnerable our energy infrastructure is. Will we have the will to require investment in upgrading facilities and making it possible to integrate periodic sources of energy generation (i.e., renewables) into our delivery systems? The next failure may not just be in Texas, but can be global in nature, especially if we get smacked by a coronal mass ejection from the sun. Are we willing to spend money now to protect against something that may not happen for 100 years?

All of these problems (and many more) have existed for decades if not longer. The virus has shown us that we are all living on borrowed time if we expect life to continue blissfully ignorant of the risks we run. Somehow we need to change our mindset from a heedless rush for maximum profits by corporations, to a model where some of the excess profits are recycled into system improvements that ensure continuity of service. Can such a change in mindset happen without government mandates? Texas may be our canary in that a completely deregulated environment did not ensure continuity of service to cover a once in a hundred-year weather event.

Since the 1980’s in the US, we have seen government put down as being the worst enemy of true Americans. It is past time to put that phrase into our history books, as we see what that philosophy does to a society after over 40 years of implementation. You end up with massive inequality in the economy, a bulging underclass that does not share in the overall prosperity of the nation, and facilities that all depend upon that have grown increasingly frail. It is time to change our perspective and look at what can be, and work to create that future for all of us.

Weather – We Like It Or Not

In January 1982, I worked at a chemical plant in Memphis when we suffered through a spell of bitterly cold weather like Texas went through last week. Chemical plants are like other similar facilities, such as oil refineries and power plants. Memphis is not in the deep South, but our plant was not designed for an extended period of extremely cold weather.

So I can understand why Texas has suffered as much as they have in their current cold snap. And the longer temperatures remain so much below freezing, the worse the damage will get. When we suffered our freeze in Memphis, our first priority was to shut down in a safe way and prevent leakage of hazardous materials. Once that was safely completed, all we could do was settle in for the inevitable thaw that would come.

But when the thaw came, that is when the true damage was revealed. All of the water and steam piping that froze, often burst. The sound of dripping water showed how much repair was needed before we could start up again. In our case, large diameter cooling water pipes had frozen solid and burst, which delayed our restart for weeks. This was certainly a contributing factor in the decision by Du Pont to close the process a year later.

For facilities in Texas, often it’s the smallest components that cause the biggest issues. Pressure sensors have very small diameter piping that leads to a gauge and signal transmitter. That little bit of piping is often what freezes, leading to a loss of the sensor. Faced with the option of running their process blind, operators shut down their facility. Then the loss of heat from combustion or chemical reaction leads to more freezing. It’s a vicious cycle.

There are other factors that exacerbated the situation in Texas. By isolating themselves from the national power grid, they were able to claim that their utilities were not engaged in interstate commerce. That freed them from Federal regulation, and enabled them to rely solely upon intrastate regulation. For Texas, that is a prime motivating factor, and one reason why the situation has been so dire during this time. The few corners of the state that are tied into the national grids (El Paso and Beaumont) appear to have come through this crisis with minimal damage, since they were able to import electricity from outside of the borders of Texas. But everywhere else has been held hostage to the native stubbornness of the state.

To many on the outside looking in, it is inconceivable that Texans would willingly put themselves through a disaster just to continue to be free of external regulation. But that would not be a true assessment of the state of Texas. I first visited Texas nearly 50 years ago, and was struck by the attitude I encountered there. If any place in the US could be an independent country, Texas was that place. In the intervening decades, it seems this feeling has only strengthened. What Texas will find out is that there are real benefits to be had in integrating with the rest of the country. What I fear is this most recent incident will only serve to ossify the attitudes of true Texans, and perhaps send the secessionist movement into overdrive. It seems as though the tendency in Texas, and through much of the country, is that it is much better to go it alone. As if someone could wall themselves off from the rest of the world and still maintain a standard of living better than anyone else.

This was the motivating factor leading to the building of “the wall”. If we could just put up a barrier and prevent the others from diluting our genes, we would solve many of the problems of the nation. Funny thing, though. In Texas the concept of private property rights proved ascendant to the need to build a barrier. In many of the border lands adjacent to the Rio Grande, families that had owned the land for generations objected to their property being broken in two by a barrier wall. Civil litigation has held up construction for years, and there’s no end in sight.

So the tragedy unfolding in Texas is both of natural and human making. The cold they’ve been subjected to is certainly something that would cause much suffering by itself. But it was due to the nature of the power business in Texas, where no one enforced requirements to maintain back-up capacity, or winterize their facilities, that made a natural disaster an order of magnitude worse. Keep the situation in Texas in mind as Republicans keep insisting on a steady drumbeat of deregulation. Maybe regulations are more expensive. Maybe we pay a little more each month to ensure continuity of service. I know that it is a bitter struggle each time a utility in our state tries to recover funds spent on upgrading infrastructure. But as Texas has shown, you can pay me now, or pay me later. For Texas, later has arrived.

Let’s Subsidize Work Instead of Shareholders

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Looking back, there is no surprise that the result of the tax reductions passed by Republican votes in 2017 failed to rejuvenate the economy. The stated belief was that businesses would use the windfall from reduced taxation to invest in their employees, through higher wages, or invest in productive assets and expand their production base. Surprise! They didn’t. Businesses found that their analysis of the best use of the windfall was to increase stock buybacks and increase stock dividends. The main reason? There is just not justification for investing in new productivity within a mature market like the US.

Production facilities were not relocated from low wage countries, since the cost of labor greatly exceeds the benefits from lower taxation. Therefore it does not make economic sense to relocate low-value manufacturing back to the US for strictly economic criteria. It is only due to events like the supply chain interruptions from the pandemic (and to a lesser extent trade and tariff wars) that created a new incentive for bringing low value manufacturing back to the US.

What is needed is to create new incentive to build businesses that address needs within the US that are additive to the existing consumer base, rather than attempting to relocate existing production to meet stagnant demand. The best place where new demand could be created is in the energy markets and the infrastructure of the electrical grid. Somehow we must make it worthwhile to cause a market shift to use of renewable energy on a smaller scale than through citing of huge power plants, which result in inefficiencies through thermodynamic factors and through distribution from the grid. We already know that large power plants and the necessary facilities to distribute the energy are vulnerable to external shocks. A single large coronal mass ejection event from the sun could result in system wide outages for months at a time until new transformers are built and installed. Similarly, with the destabilization of international relations, use of electromagnetic pulse weaponry could cause equivalent destruction. Either way, our civilization is vulnerable to external forces that would bring us immediately back to the pre-industrial age, leading to immense loss of life.

So it makes it very clear that we need to create enough incentive to enable the decentralization of our electrical system. By doing that, we would improve our own future by reducing the potential for severe disruption. We would also create literally millions of jobs by creating a market for home energy system improvements that would use local labor to install and maintain. And our large scale manufacturing would also benefit by creating the solar panels and battery storage devices that the new grid would use.

Several years ago, we in West Virginia suffered through the aftereffects of a derecho that stopped electrical service across our region for multiple days. Living through that encouraged us to purchase a whole-house electrical generation system, powered through natural gas. Those systems have a weekly 5-minute system test where the generator runs. In my immediate neighborhood in West Virginia, I can hear three generators (including ours) conducting their tests over the course of the week. Good for us. We are assured that we cannot lose electrical power for an extended time. Or are we? Since we would all tap into the natural gas system, would it have enough capacity to handle all of us (and the others up and down the line) who have generators to handle peak demand? There is no way for us to know that except to run the full-scale test and suffer through an extended power outage. Surely this back-up generator expansion is not a scalable solution for metropolitan areas, since I am aware of no studies indicating how much gas would be available if it was being used extensively to replace standard electrical service.

Electrical service is the best example of an area where new means of producing and distributing a commodity (electrons) could be reworked to create new opportunities for investment and entrepreneurship. Unfortunately, other areas of our infrastructure are not as amenable to creating new incentives for reworking and repair. Other utilities such as water and gas are already regulated, and new fees for upgrading service are scrutinized and rarely approved by regulatory agencies. Face it, to replace water or gas lines involves huge investments, and the incentive to do that is not worthwhile for the private market to seek this as an area for investment. But it is crucially needed. Therefore if we are looking for places for government to stimulate the economy, it makes much more sense to provide subsidies for additional productive work rather than to provide tax reductions that only benefit shareholders. And I’m speaking as one who is fortunate enough to receive dividend income through my owned equities, so I am a beneficiary of the current system.

If anything has become evident during this year of pandemicmonium, it is that maintaining the ability of the consumer to keep stimulating the economy through spending is vital. If we suddenly turn off the spigots, then the result is longer term shrinkage of the economy, and a further increase in income inequality. So the types of changes I am proposing are not appropriate for this stage in the pandemic. But coming out of this mess, it is vital that we begin to plan to actually improve the state of our nation and its infrastructure, rather than accept what we had as being adequate. We now have a wealth of data to show that we’ve lived with inadequate systems, merely because it would have gored someone’s ox to fix the problems.

Only a Cold

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I caught a cold last week. It showed its ugly presence on Saturday, with spasms of sneezing, a sore throat, and a developing cough. In the four days since that time, I’ve persuaded myself that it is not the dreaded new disease (no fever or chills), and that the disease is receding as I would expect it to. But its appearance even in the time of increased precautions against viral invaders shows that the new virus can be just as sneaky and opportunistic.

It is amazing how quickly the world has changed. Last week at this time, we were still looking forward to taking a trip to Key West for some hedonism. That was before I saw a cumulative display of disease cases day by day since January. When you see for yourself that the rate of reported cases was increasing by 12% per day, the numbers came alive for me and told me that if we ran the risk of taking a trip, we were not going to have a good time. Even if we safely ran the gauntlet and did not catch the disease, our time of relaxation would be ruined by worrying about making it back in one piece.

Having a background in math and statistics made it clear to me that we are in a global exercise we’ve not gone through since 1919. When a new virus emerges and passes into the human population, one that no one has immunity to, and one that appears to have a significant mortality factor, you have to watch it closely in order to gauge its infectivity and its effects. What is ironic is that China and the US shared an initial response to belittle the potential harm that this virus posed. In China, this resulted in the doctor who raised the initial alarm being censured by the Chinese state, prior to the time that the doctor succumbed to the disease. In the US, the potential for an epidemic was ridiculed by the President and his favorite press sources. We heard about the Democratic hoax that was aimed at bringing down the President. Even today, as of March 17, you can see a post by Dr. Ron Paul decrying the response to this epidemic as being overblown. In both cases, China and the US, precious time was lost in responding to the emergence of this disease. They will only take this disease seriously when family members are stricken by the pneumonia this disease can cause, and those family members are turned away from all hospitals because they’ve had to ration respirators and only those under age 80 will be treated. That’s the decision they are making in Italy, having to ration their available slots to the younger population.

It is a bit jarring to hear myself described as elderly, but since I’ve now crossed the age 65 divide, I now fall into the target demographic for this virus. So far the effect for us has been canceled concerts and canceled trips, and a lack of church services. The chorus we’ve been working on for months, a performance of Carmina Burana scheduled for April, has not been canceled formally but since no one can rehearse for it, it is on borrowed time. Our children are out of the house, and though one son is working in retail and will likely take a hit, we are able to help him out if needed. If we are not hit ourselves by the virus, we will weather the storm relatively easily.

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But for the economy of the world, we are now seeing the issues caused by the streamlining of supply chains by linking to non-domestic sourcing of parts. For decades now, the maxim of running public corporations solely for the maximizing of return to the shareholders has caused businesses to rely fully on foreign partners, either for finished goods, or for creating semi-finished goods that get completed elsewhere in the world. Quality improvement processes preached the benefits of lean assembly lines, since excess inventory hid systemic inefficiencies. So more and more businesses performed global integration of their supply chains. That process worked well until there was a supply disruption at the original point of manufacture. If the ultimate goal is to have product available to sell, then some inefficiency may be needed to allow for supply chain interruptions.

The disruptions in supply chains will continue to ripple through the world’s economy for months to come. Add to that the immediate disruption in the lives of service providers who will be laid off from their retail and food service jobs in the coming weeks, and we have the potential for a huge decrease in economic activity during the year. Already the governments of the world are generating proposals for helicopter money to be shoveled out and spread across the land. All of it with money borrowed from our distant descendents. This crisis has the potential to turn into a debt implosion, with the destruction of much of the seemingly secure capital in the world through waves of bankruptcy and discharge of debt. Will this black swan event be the one that causes the world to fundamentally reset its economic system? Growing economic inequality and growing dependence upon government debt to sustain the illusion of economic growth are at the point of totally collapsing. When no one can keep the appearances up, what happens to the world?

The barren shelves in the stores and the anecdotes about pitched battles for the last shreds of toilet paper have shown us how close we are to unraveling as a civilization. As long as we had sports, and access to material goods when desired, and good restaurants to pig out at, then we were happy. But let us have one week where demand outstripped supply, and we see how thin the veneer of civilization is.

I figured that the tone of this post is so much bleaker than most of my posts, that I needed to leaven it with a reminder that there is still beauty in the world. The pictures are of my daffodils that have burst into glorious flower within this past week. Every year I have a couple of weeks of peak daffodils. This is their time, and a reminder that spring is coming, and better times are ahead. I leave you with a delight of daffodils. Stay well in the days ahead.

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The Amateur Hour

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Amateur – 3. A person inexperienced or unskilled in a particular activity

The United States is conducting an experiment. An experiment that affects each and every person inside of the country, and many others around the world. This experiment involves turning over the operation of the executive branch of government to a group of amateurs, and observing what happens when amateurs are turned loose upon the gears of diplomacy, economics, and the military.

So far, the results have not been catastrophic. Taking the issue of the economy for example, the trends established since the economy bottomed in 2009 are continuing to result in gains in employment, and in measured economic growth. Despite claims of exceptional performance under the current administration, GDP growth averaged 2.2% from 2010 through 2016, while GDP growth during the current administration has been 2.6%. Using the statistical t-test, the two sets of data (past administration vs. current administration) are equivalent. There is not a statistically significant difference between 2.2% and 2.6% growth. But the one knob that this administration has turned, the tax cut, has yet to factor into the performance of the economy. The tax cut does have the potential to increase the rate of GDP growth significantly. However, the tax cut comes with a cost that has yet to be reckoned. The estimated deficits will increase greatly due to reduced tax revenues, and if there is an economic downturn in the next few years, the normal response of loosening fiscal policy to boost the economy will likely not be available. So we are at the mercy of the amateurs in the administration who believe it to be prudent fiscal policy to significantly cut taxes at a late stage in an economic recovery that has entered its ninth year. But what do experts know, anyway?

If you consider diplomacy, there is certainly a mixed bag to date. It does appear that twitter tirades and brazen bluster did result in at least enabling an initial meeting between North Korea and the US, with a generic agreement being signed. If this is indeed a first step towards a ratcheting down of tensions on the Korean peninsula, then this administration will have accomplished a worthwhile and noteworthy goal. But if the North Koreans continue playing Lucy with the football to the US’s Charley Brown, then relations may end up worse off than if there was no meeting.

That is the good news on the diplomacy front. Elsewhere, it is evident that this administration has zero respect for, and zero admitted need for diplomatic experience and expertise. Witness the exodus of State Department veterans over the first year of this administration. As of last November, 60% of the top management of the State Department had left government service, according to the American Foreign Service Association. A hiring freeze instituted under Rex Tillerson has been lifted by his successor, but nothing will replace the institutional memory and experience of those who were driven out by the bias of the current administration against subject matter expertise. The supporters of this President would say that this reduction in long-time employees is “draining the swamp”. What they do not realize is that this world is complex, and the diplomats at the front line in embassies around the world are essential in preventing US interests from being damaged. There will be costs, some of them severe, in the years to come due to the sabotaging of the diplomatic corps.

Meanwhile, the diplomatic style of this President was fully on display at the recent meeting of the G-7. The petty nature of the response to Prime Minister Trudeau’s press conference, replete with the denunciation of Trudeau as having “stabbed the US in the back” by declaring that Canada would not be bullied by the US, shows how much of this President’s actions are guided by his personal perception of slights. The threats unfurled against the strongest allies and trading partners of the US show that he has a vanishingly small knowledge of international trade and the risks to the economy of the world, by insisting on retreating to an era when America may have been great, but by imposing tariffs, we helped to drag the world into depression shortly thereafter.

Militarily, we are repeating the follies that have bedeviled military planners ever since military technology began changing year by year. That is, we are fighting the last war, not the next war. Thus the huge increase in the military budget over the coming years is earmarked for more ships, more fighters, more bombers, more in-air refueling capabilities, and keeping older hardware systems running. Meanwhile, the funding for cyber security ends up with a scant 4% increase when all of the ups and downs of spending by department are added up. Undoubtedly, there is a need for building ships to replace those that are near the end of their useful life. Likewise, replacement aircraft are needed. But the budget funds multiple generations of new weapons systems with no apparent overall strategy on what the military force of the future should look like.

The wars of the future will increasingly be economic or cyber in nature, and seeing funds spent on hardening the electric grid, purchasing large numbers of replacement transformers that could quickly be put in service should a grid disruption occur, these funds would be well invested for our economic and physical security. In fact, just as we used to have strategic metals reserves in case our supply got cut off, we should have a strategic transformer reserve, where these substation-level transformers that will be fried in an EMP (Electro-Magnetic Pulse) event can be quickly replaced. The best way to provide such a reserve was investigated by the Department of Energy and the report was issued to Congress in March of 2017. It does not call for a Federally owned reserve, but calls instead for increased coordination across utility companies. It does call for an increased reserve but one that is maintained and controlled by utility companies. Will such a program work when it is called upon? No one knows. But we do know that the huge increase in military spending is not going for what can happen in the present or future. No, it is going to the weaponry of the past.

Once again, the amateurs determining the strategy for national defense are insistent upon spending large to procure the weapons of the past, while ignoring the needs for the defense of our nation and our lifestyle from the real threats that we face.

The concept of amateurism is good. In athletics, we maintained the façade of amateurism for many decades, but eventually it was broken down. In tennis, in the Olympics, in all sports, it is recognized that if you wish to have excellence in performance, it is necessary to have people who can dedicate their lives to the sport by being paid for their efforts. We followed the same principles in our government. Those who were willing to sacrifice much larger private sector paychecks for the limited compensation of government positions were recognized and honored for their expertise and their service. But in this misguided administration, we have sacrificed those who developed their expertise over decades, in order to promote the agendas of the amateurs who struggle against the current of events in their fields. The problem is that there are real consequences that come from having amateurs deal with issues that can cost real money, and real damage to international relations, and cost lives when dealing with the military.

 

Social Security – the Personal Option

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One of the greatest problems that we face as a country in the US, is that too many people end their working life without assets they can use for their years after work. Another issue is that many people do not benefit from overall improvements in the economy. They have no stake in the game. And a third problem is that Social Security will exhaust its trust fund within a small number of years. For the third problem, there are solutions that will push the day of reckoning for Social Security out decades longer into the future (raise the taxable base, limit further the benefits paid to workers who earn well above the median wage, small increase in the Social Security tax rate). But I’ve not seen any proposal to solve the first two problems. This post provides a potential solution for these critical issues.

First, some background. The Standard & Poor’s 500 stock index, known as the S&P 500, is an index of the largest companies by stock valuation that trade in the US. Since 1926, it has included at least 90 companies, so that its performance is nearly a century old. Since 1957, it has contained 500 stocks. If you invested money in the index in 1928, just before the Great Depression, it would have earned an average of 9.6% per year if you continued to reinvest the dividends. So over time, the investment earned at a higher rate than investing in bonds, and that covers all of the stock market declines since then. Other stock indexes exist that track US corporations, and they show similar rates of growth over time.

The proposal is this. Out of the current 12.4% of employee contribution (split evenly between employee and employer) that currently goes into the Social Security fund, allocate 2% of new employee contributions into a personal account that invests in a stock index fund of companies based in the US. All dividends from the stocks will be reinvested into the personal account. At the time when a person takes Social Security payments, this person will have the option of converting the account to an IRA rollover, or converting it to an annuity.

A simple spreadsheet model shows the potential value of this approach. For someone at the lower end of the income spectrum, a person with salary income of $30,000 per year whose salary increased by 3% per year for a 40 year working career, the personal account would be worth $220,000 assuming that the accounts earn an average 8% per year. The 8% is less than the 9.6% average of the S&P for the past 90 years. This would enable someone who retires to have a significant account that reflects the growth of the economy during their working years. If they choose to select the security of an annuity, it would be administered by the Social Security system in order to avoid additional expenses of going through an insurance provider. Using an annuity calculator, the income for a 67 year old investing $220,000 would be about $1200 per month. This would be a significant increase in the benefit available as compared to the Social Security benefit for an individual.

The Social Security benefit would need to be reduced to reflect the smaller amount of tax revenue that is allocated to the standard benefit pool. But that reduction would take into account the length of time that a person has paid into the personal account fund. Social Security uses a 35 year working career as its basis for calculating benefits. Therefore, someone who has paid into the personal account for 35 years would have a benefit reduction of 16%, since they paid 16% less into the program(2% going to personal account / 12.4 % going to Social Security originally). For those who paid into the personal account for fewer years, the benefit reduction would be approximately 0.5% per year that they paid into the personal account.

What would the effect be of this money being funneled into the stock market? It would be relatively small. In 2016, the amount of money going into the Social Security system accounts from wages was about $700 billion. The proposed personal account would be about $110 billion per year. That amount of increased demand for stocks would raise valuations somewhat, but the investment markets should be able to absorb the incremental demand for investment. This would need to be modeled by real economists, instead of armchair analysts armed with Excel spreadsheets.

Those who are wary of stock investment will point to the inherent risk of stocks. And yes, there will be times when the value of personal accounts will go down on a year over year basis. But the nature of the equity markets has tended to go up when viewed on a longer timescale, such as a person’s working career. Perhaps there could be a personal option for those who are philosophically opposed to investing in stocks, but it would be one that people would have to select, instead of being the default option.

Those of us who have had the fortune to be able to invest over a lifetime, know the benefits of our economic system. We’ve been able to build up our pile of equity. But many folks will work their entire lives and have little to nothing to show for it, except for a Social Security payment. This suggestion would allow for everyone to have a stake in the economy, and would allow for individuals to either opt for the security of annuity payments for their lifetime, or to assume control of a personal account for their own benefit, and for the benefit of their heirs. I believe it is time to think outside of the box in order to attack some of the intransigent problems that this country faces.

Back during the administration of G. W. Bush, Social Security privatization was proposed, and quickly abandoned due to the outcry from many supporters of the system. Those proposals included more diversion of accounts than this proposal, and added more complexity in terms of investment choices. This approach keeps it simple, stupid. And since it rolls out so gradually, everyone would see how well their accounts are doing over time, and should be pleased with the long-term performance of their fund. It’s been nearly 15 years since the last attempt was made to enable private accounts. It is past time to reconsider the approach, and recognize that this is a populist proposal instead of a free ride for Wall Street.

Holy Grail of Growth!

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Economic growth as far as the eye can see! A thundering flood of growth, enabling total tax revenues to increase while cutting the absolute share of income going to taxes. That is what Congress in the US have pledged will happen by their adoption of yet another version of trickle down economics. This post is not intended to discuss the merits of the tax bill. Instead, it is intended to discuss the holy grail that we seek – economic growth. What is it, and how is it different now than it was during the time period that Donald Trump seeks to return us to – when America was great.

Back in the 1950’s and 1960’s, the economic cycle was centered directly on manufacturing things. When the economy was good, factories that made things expanded. Capacity of making things kept increasing. Eventually, capacity exceeded demand, and the manufacturers of things cut back on production, procurement, and people. Layoffs would occur, and since the economy was in synch, cutbacks in one segment caused cutbacks in others. Within a few months, or a year or two, the imbalance in supply and demand would favor production, and the economy would reverse its downward trajectory and start expanding again.

This cycle held firm through the post war period, until the 1980’s. The byproduct of these economic cycles was inflation, especially when it was accompanied by deficit spending from the Federal Government. Severe fever medicine was supplied to the economy through crippling interest rates. I remember buying my first house in 1982, when I assumed existing mortgages. One was a smaller second mortgage with a 15% interest rate. The inflation fever broke, and the economy of the US began a glide path enabled by falling interest rates.

Throughout the 1980’s and 1990’s, the economic cycle began to change. US manufacturers, having grown complacent servicing their captive market, began to lose market share to those who paid attention to the voice of the customer and improved the quality of their products. Often those were foreign producers. Auto manufacturing was the poster child for this transition. But the change to the economic cycle accelerated due to the end of the Cold War, when the entire world became open for production. Now began the exodus of manufacturing jobs to lower wage nations as China became everyone’s favorite supply chain partner. No need to worry about those union workers and the environmental regulations – we will outsource both our labor and our pollution.

But a strange thing happened in the 1990’s – the economy grew even though the manufacturing sector declined. How was this possible? It was because an increasing portion of our economic output depended not upon the manufacture of things, but upon the manipulation of electrons. With the advent of the internet, it enabled generation of economic activity that relied much less upon the manufacture of things. Compare and contrast the economic activity of the old Ma Bell phone company, with their offspring, the cell phone and internet service providers. Since phone service was viewed as an essential public good, the old phone company received a monopoly to service a region. They were regulated so they would be ensured of operating at a profit, but not so much that their fees would generate a backlash. Then they had to maintain their system of copper wires and switching centers, and received payments from each household for renting their phones, for local service, and charges for each long distance call made by a subscriber.

Now look at the telecommunications sector today. Cell phone service is rapidly replacing land lines, and in order to provide cell service, it requires dispersed cell towers instead of a distribution network of fibers and poles. Much less stuff is required to maintain a network, meaning that manufacturing and resource use decreases, while the economic activity from cellular services grows exponentially. Then you have the alternative service providers, like those who bundle internet, cell service, and TV in one package. And then there’s the lucrative practice of selling data. Quite literally, the economic activity generated by electronic waves means that money is being plucked from the air. If you compared the fraction of income that was spent on phone service back in the 1970’s, with the fraction of income spent on cell service, data features, and internet service now, far more economic activity is occurring in the telecommunications sector now than in the era of Great America.

If you examine the economy over the last 50 years, manufacturing still maintains a high share of economic activity. But that share is spread more thinly across the landscape, since manufacturing productivity has increased so much, and manufacturing employment has declined precipitously. We are now at the cusp of yet another inflection point in productivity. Robotics and the use of Artificial Intelligence will replace the human worker at an increasing rate. In fact, one unintended consequence of the tax bill may be that companies who repatriate money from overseas and invest it in the US, choose to invest it in automation that further reduces the human input.

So it is possible to increase economic activity while decreasing physical inputs into an economy. We live better by consuming less. That is undoubtedly good for the environment, but how does that affect the world of labor and enable those who work to have motivation to improve their lot in the future?

The premise of the Make America Great Again movement is that we can withdraw into our own borders and internalize manufacturing, thus unleashing the ability to generate economic activity in every town in the nation. Manufacturing is viewed as the panacea that serves as a labor force relief valve for those who choose not to continue education. Yet now, manufacturing labor requires significant knowledge skills beyond that of a high school graduate. Many manufacturers despair of finding qualified candidates for their openings. Even if a candidate is able to pass drug screens, they are not willing to commit to a rotating shift lifestyle. And despite the desires of leadership to isolate the US economy, we are competing globally, and no one else owes us any economic favors now.

Economic expansion in the era of technology requires making a commitment to provide the labor force for high skilled manufacturing. This appears to be a requirement of the public sector to provide the training required, due to the failure of the private sector to serve as a competent trainer for skills. Think ITT technical and other private educators who delivered only excess debt instead of marketable skills. Community college needs to serve both as the foundation for trades education, and as the entry level for bachelor degree programs. It will require close coordination with industries so as to deliver potential employees with enough knowledge to be worth hiring. This increased support for community colleges is essential if we want to benefit from the leveraged growth that new manufacturing jobs can provide.

The other area where growth can be generated is in developing an extended plan for upgrading our deteriorated infrastructure. There are some places where private / public partnerships can be created to build new features, but that will result in ongoing expenses to ensure investment return to the private entity (think more and more tolls). Still, the huge unmet need in renewal of our existing infrastructure must be met by government expenditures. Again, this can be funded by the users of the infrastructures, but the traditional techniques like a gas tax will not work in the era of electric vehicles. At some point, those who keep trying to shrink government will have to realize that targeted tax increases are required in order to keep our civilization vibrant and productive, and to increase economic growth. The recent tax bill where simplification was touted, but the net result was to redistribute income up the income chain, shows that we as a nation are not ready to address the real issues facing our country. Maybe when multiple bridges collapse due to neglect we will realize our folly.

 

Past Performance Is No Predictor of Future Performance

 

Your right to swing your arms ends just where the other man’s nose begins. This adage has meaning beyond its original intent when considering our current world. Like it or not, since the earth is now crowded with billions more folks than it had 50 or 100 or more years ago, and thus the free range of motion of our own arms has shrunk. We no longer can pull our nation’s head and legs into our own shell and exist on our own island. The fallacy of this isolationistic perspective is being tested with the self-defeating policies that the Trump administration is attempting to implement.

According to the Trump doctrine, in order to make America great again, it is necessary to reverse decades of stitching together the nations of the world in greater interdependence so as to allow American exceptionalism to reign supreme. The world we knew when everyone who wanted entree into the middle class could walk into the nearby factory and punch their timecard in a manufacturing plant, that world no longer exists. We can mourn the absence of the world that existed when the US served as the only intact manufacturing entity after WWII, and thus held an immeasurable competitive advantage for decades. Those were the decades of greatness that the America First agenda wishes to bring back.

It is always foolhardy to craft national policy on the basis of nostalgia, but that apparently is what is motivating the America First crowd. Instead of looking behind us for inspiration (Immigration Act of 1924, Leave It to Beaver, Homestead Works of Pittsburgh belching sparks and smoke), I prefer an attempt to steer our country and its economy towards the future. What does the future hold? Where are the opportunities for new jobs that can provide a true middle-class lifestyle?

First, let’s acknowledge that many of the jobs of the future look a lot like the jobs of the past. In particular, skilled craftsmen and women have a bright future ahead of them. Manufacturers cannot get enough skilled welders. An industry trade group projects that the nation will need 290,000 new welders by 2020 in order to accommodate those welders who will retire, plus handle the new jobs being created within manufacturing and the energy industry. There will always be opportunities for plumbers, and electricians, and for skilled carpenters. These professions also offer the chance to become an entrepreneur, since most opportunities in these fields are local. The demographic wave of the baby boom generation crested long ago, and that wave is withdrawing from the shores of the labor market. The vacuum in the labor market must be filled, and for those who have desires to work with their hands, there are opportunities. What is needed is strong vocational training and/or apprentice programs to transition folks from novices to skilled craftsmen and women.

Next, let’s talk about energy. This field runs the gamut from solar panel installation, to wind turbine construction and maintenance, to electrical grid modernization, to drilling rig worker, and to pipeline construction worker. In my state of West Virginia, where the coal industry has scalped the tops of our small mountains, leaving behind ground denuded of topsoil, but a relatively flat surface, we have the opportunity to develop large-scale solar farms. These farms can be integrated with small scale agriculture intended to take advantage of the shade provided (ginseng, anyone?), and can serve as a career option for the last generation of coal miners and those who currently have no hope and are surrendering their future to oxycontin and heroin.

Now let’s address the elephant in the room – the Republican-led conspiracy to deny that changes in energy policy are necessary, in order to mitigate a warming environment due to burning fossil fuels. I’ve seen the entire range of beliefs of those who refuse to acknowledge that atmospheric effects from anthropogenic emissions are changing the thermometer setpoint of the earth. Some of their stated beliefs are possibly correct (example – we may be entering a solar minimum period that may overwhelm any changes from atmospheric composition). Some of their beliefs are simply incorrect (temperature records are invalid since they represent a change from rural to urban temperature measurements, and besides, climate scientists have fudged their records, and besides, you know, thermodynamics is just so wrong). Some of their beliefs are based upon religious claims, like mankind has no capability of overruling God’s control over our environment. And some are purely conspiratorial in nature, such as the belief that claims of global warming are a tool of the one-world agenda deep state that wishes to impose political control over each and every aspect of life in our country, causing us to cede our sovereignty to a one-world government.

To refute each of these beliefs would take more space than my blog normally uses, and besides, my argument is that in order to transition away from fossil fuels, it is actually necessary to use one version of fossil fuels more extensively than we have in the past. Of course, that fuel is natural gas or methane, which has the virtue of emitting much less carbon dioxide per kilogram of input than any other hydrocarbon. Simply put, displacement of a high carbon fuel source (coal) with methane is the main reason why the US has reduced CO2 emissions over recent years. According to the US Energy Information Administration, CO2 emissions in the US decreased 12% between 2005 and 2015, and the drop is mainly attributed to replacement of coal by natural gas in electric power generation. So if we are waiting for renewable energy to take its place as the primary power source , or if we are awaiting for advancements in either fusion or fission (see thorium reactor cycle) in nuclear energy, then methane serves as a reliable bridge fuel.

Methane also offers many opportunities for jobs. Since much of the methane resources available through fracking are not in areas with pipeline infrastructure, it is necessary to build new pipelines, and that is a key source of job opportunities. Fracking also requires many more drill rigs due to the rapid depletion of fracking hydrocarbon reservoirs. I know that there is much dispute over environmental damage done by pipelines and by fracking. But it is not realistic to transition directly from dependence upon coal, to a totally green energy solution. Methane offers a transition period that enables maintenance of the living standard we enjoy that relies upon intense consumption of energy. Those who rely upon and believe in the moral superiority of coal and oil will not give in easily, though. In West Virginia, one of the bumper stickers used by the proponents of coal is “Let the Bastards Freeze in the Dark”. Those stickers are often affixed to the bumpers of diesel pick-ups that have been fixed with special combustion controls that dump excess fuel into the cylinders, causing a cloud of black smoke that they use to obscure the visibility of Prius drivers, like myself. I’ve been coal rolled a few times.

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Photo of rolling coal from Jalopnik.com. Justin Westbrook credited on story.

Jobs in agriculture have been decreasing for generations. Many city dwellers are now several generations removed from the farm and from rural life. Yet amazingly, farming is now coming into the cities. High technology hydroponic farming is making it possible to use some of the urban real estate that used to house factories, and convert it into high-yielding produce farms. In the suburban/rural interface, high-tunnel greenhouses are allowing intensive cultivation on small plots, enabling small-scale farmers to supply the local produce markets for cities that want organic produce sourced locally. As western diets move away from corn and soy based food chains to more vegetables, look for the number of people making a living growing food to increase steadily.

One area where the job demand is increasing is also one where the wages earned do not reflect the value provided to society. That is in the personal care industry. Whether we are looking at home assistance provided to the elderly, or the labor needed for assisted living facilities and nursing homes, these workers provide a service that our society should value. The low wages provided for these workers shows that the current job market does not value these workers, and as a result, those who are in the field are often overworked. Abuse (either intentional or not) can result, since in our society we do not properly value this form of labor.

What should we not look for in the future job market? We should not look for low-value manufacturing to return to this country, regardless of the tariffs imposed on those exporters who are accused of manipulating their currency to hurt us in the US. It is unlikely that we will ever see inexpensive metal implements to be manufactured in the US again. It is also unlikely that we will see basic garment manufacture to be sourced domestically again – unless the manufacturing processes are automated to such an extent that the number of jobs associated with the manufacture is reduced by an order of magnitude from the old garment mills. US manufacturing jobs will increasingly be focused on huge, high-tech machinery, or on processes that can be completely automated. Either way, the new manufacturing worker must be educated and trained well beyond the existing labor forces capabilities.

What we will find as we swing our nation’s fists wildly in an attempt to protect ourselves from the rest of the worlds increasing integration, is that our fists are as likely to strike ourselves in the nose as we are to rain blows down upon our perceived adversaries. The world’s economies are too tightly interwoven to enable one country to extricate ourselves from the tentacles of commerce without ripping our own economy to shreds. Beware the effect of unintended consequences as we try to make America great again.