Tag: Economy

Money Makes the World Go Round

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And now it is clear what the economy of the US depends upon – it is advertising. Ad revenues drives the internet, it has caused newspapers to be bereft of sustenance, and it will inexorably be withdrawn from television once streaming becomes an unstoppable force. Those who have the highest profit margins appear to advertise the most. Hence the proliferation of pharmaceutical ads intended to draw consumers to the latest pill or injection allowed by the Federal regulatory bodies. You also see advertising for automobiles blanketing the airwaves. That is due in part to the business model requiring local dealerships. The local dealerships keep trying to wrest market share from other dealers (and car brands). Of course, the ads for the car brands are meaningful reflections of the American public. Who doesn’t want to be highlighted as the most masculine consumer out there, and the high energy products of the Dodge division will be sure to rub off on you if only you buy our cars.

Now, we see the next phase of advertising. All of the sports betting sites are showing off how much fun you can have by throwing your money down a black hole by selecting their site as your bookie of choice. I feel sorry for the underworld. One by one their markets are being usurped by legal ways to lose your own money.

Another area of the economy where money appears to be sloshing around is in the world of Medicare supplemental insurance. How many older celebrities can be resurrected on ads convincing gullible seniors to turn all of their health care needs over to a local HMO, who will be sure to have your best interests at heart as they try to glom onto yet another sucker. This is one where both the advertising dollars are at work, and the phone banks work actively too. We are some of the rare individuals who will answer calls on our landline for unfamiliar numbers. Since my wife is just about to become Medicare-eligible, we are receiving a large number of calls offering to assist her in her choices. My experience has shown the more effort made to separate you from your money, the more money is available to be made. With the plethora of people actively involved in trying to steer your decision, it is obvious Medicare is a gold mine for many companies.

For decades, the American economy has been dependent upon consumer spending. It was things that drove the economy, things manufactured in this nation. Now? As much money is spent on transient things as is spent on real items. Look at cell phones. The service that is sold can afford to underwrite the hardware (actual cell phone), and you end up paying the service a multiple of the price of the physical hardware. Of course, you are also paying for the signal being available, so energy and materials are used to build and maintain transmission towers. This is the hidden portion that backs up the handy signal you depend upon.

Just this year, we’ve seen the first crumbling of the “everything is available whenever you want it economy”. We’ve all been exposed to the barren shelfs in supermarkets, where product is totally unavailable at any price. From cream cheese, to canned cat foods, to infant formula, and toilet paper, we’ve seen what can happen when demand exceeds the ability of companies to deliver product in an efficient manner. In our spoiled society, we grow petulant when we are told we can’t have something the instant we want it. We look for scapegoats, and often it is the politicians in power who are blamed for any and all failures in supply chains. It is surprising how much we are in favor of free-enterprise solutions up until the time of a failure. Then we expect the government to have been anticipating problems, and are ready to throw the rascals out of office if they failed in their response.

In the coming years, many more things will either be unavailable, or only available at a price well above what we remember. We will see more things manufactured in the US, but will find out the cost is greater due to the higher costs in this country. The short-term memory of the US consumer and voter will once more blame the government for the higher prices, blissfully ignoring their previous desire to locally source the manufacture. We will have many chances to learn patience, and learn to be grateful for what we do have. I’m afraid, though, that we are so spoiled we will strike out in anger if we are told something is not available, or is much more expensive. Look at our experience with gas prices. People were not willing to take responsibility for their decisions to buy ever-larger vehicles. No, it became a huge crisis when the price of gas deviated from what people viewed as their right – to keep consuming energy without dealing with the true costs. We in the US are particularly spoiled – we view the rest of the world as our pantry, and expect all others to bow down before us since we are so exceptional. Except we are no longer that exceptional nation sharing our cornucopia with the rest of the world. No, we view it as our due to be able to consume on demand with no limitations. It will be difficult to adjust to a world with limits, but that is where we are.

Supply Chains to Nowhere

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For decades, manufacturers worked diligently to “right-size” their supply chains. By right-sizing, this meant lean manufacturing, or just-in-time manufacturing, so the inventory costs for raw and semi-finished materials were as close to zero as possible. Entire college degree programs were predicated on supply chain optimization, and for several decades, this approach seemed to be extremely successful.

Until. Until the pandemic caused untold upsets within the carefully crafted supply chains. Now it was not possible to get raw materials just in advance of the need for these materials in the manufacturing process. Now it became worthwhile to invest in inventories, since reducing inventory costs is meaningless when you cannot produce product. Manufacturers are having to take a much more holistic view of inventories in terms of ensuring continuity of operations. See what impact the microprocessor shortage is having in multiple manufacturing supply chains? Vehicle manufacturers have resorted to completing vehicles except for the electronics, and storing those vehicles locally until the computer chips are received and the vehicles can be completed. All of this extra work and extra inventory reduces the profit margins manufacturers have. The price the ultimate consumer pays goes up. And inflation, the dragon we thought had been vanquished, rises from his cavern and lays waste to all he surveys.

We had banished inflation due to several factors. But I believe the most important of these was the opening of the entire world as a potential source for finished products. Now it was possible to source goods from anywhere in the globe, and we had labor cost arbitrage playing out in all of the Fortune 500 companies. It simply cost a lot less to outsource manufacturing operations to other countries, and when you add in the reduced regulatory costs, we outsourced a lot of our pollution as well. American consumers didn’t care. All we cared about was receiving goods at the lowest possible cost. Thus we decided we didn’t need small-scale vendors for all of the items you could get from a big box store. A single store like a WalMart can replace dozens of small retailers, and we saw this happen in many, many towns across the US. Add the convenience of the internet in there, and it is no wonder the growth story of Amazon further drove consolidation of retailing.  Many pathways to the middle class were smashed along the way as Americans voted with their dollars.

The pandemic, though, caused the pool of consumerism to be overwhelmed by tsunamis. Shortages began to appear, and a public unaccustomed to any type of shortage, soon became attuned to things like delivery schedules to stores. Restocking would occur, only to be overwhelmed by those who stocked up in bulk when that was never their habit in the before times. Soon people noticed lengthening delivery times, and those promises often were violated as deliveries fell further behind. Auto dealer lots became dusty vacant parking lots as the effects of these disruptions appeared at the local level.

When the worker at the bottom of the pyramid saw what was happening, they realized the balance of power was shifting between employer and worker. The growth of the warehousing and delivery businesses offered an opportunity to increase an individual’s wages substantially. Once that happened, the restaurant and other service industries found it difficult to rehire a work force once they began to reopen. It was amusing to see the Republicans blame labor shortages on overly generous government benefits. Of course, the actions of the Republican governors were to end pandemic unemployment programs, which had minimal effect on labor shortages. It is good to see so many folks who believe in the intrinsic laziness of the citizenry, where any attempt at using the tax system to foster equality must be quashed in favor of more tax cuts for the wealthy. Some things just don’t change.

So the dragon of inflation once more is circling overhead, threatening to burn everyone and everything in its path. It is surely an unpopular view to say that we are seeing prices creep upward and it is totally justified. Yet if you look at what we’ve bought over the last 40 years, we did buy a lot of low prices. Our behavior demanded low prices. We viewed it as our right to always have everything we wanted, at our beck and call, and to never have to wait for anything. What we didn’t see was that this change in behavior was leading to the development of an underclass of workers who just couldn’t make it on their wages. If you look at a distribution of incomes across the country, you see a bulge around $20-30,000 per year. The largest number of households fall within that class. If you work full time at $15 / hour, you barely reach the $30,000 plateau. Hard working folks just found it impossible to get by on their meager wages. Since the average household income is over $60,000, it means there’s a lot of folks on the extremely high end of the scale to balance out those earning $15 per hour and less.

We have gone through amazing times with this pandemic. Perhaps it is enough to cause us to examine our own habits, and realize that the lowest price sometimes cost a lot more than buying local. You do see some examples of paying more voluntarily. The growth of organic produce and organic food choices is one area where people pay more in order to benefit themselves, and also the environment. But the same people who buy organic, will order items from Amazon, and not think at all about the impact of their ordering on the rest of the world. Maybe it is time for us to realize that low prices are not the most important part of our lives.

Would it be too much to expect people to change their habits to enable money to stay within their community, instead of enriching some global institution? Yeah, I think it is. That is why I expect politics to devolve into further blaming the current administration for all of the rise in prices. Just like we expect instant gratification for all of our purchases, we insist on flawless execution by our government and thus we always take the easy way out.

It’s Mine. Mine, I Tell You.

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Photo by Flavio Gasperini on Unsplash

The word of the day is:  Selfishness. This is the one thread that binds many of our current social ills together. Selfishness is behind those who proclaim loudly they need not support our schools since they no longer have any students of school age. Selfishness is behind those who claim they made it on their own, and therefore have no sympathy for those who may need a hand up. Selfishness is behind those who claim their decision not to be vaccinated affects only them, they have no responsibility for the rest of society. Selfishness is behind those who believe fervently that any public policy aimed at providing a needed service is symptomatic of creeping communism.

It was Ayn Rand who popularized selfishness. Before her books hit the mainstream, it was unfathomable that people would believe it was a moral wrong to provide charity. But her memes infected many who gained power over the years. Her philosophy served as impetus for people like Paul Ryan to wield his gavel in the service of selfishness. For many years, it was not thought necessary to inveigh against her beliefs, since the predominant philosophy from mainline Protestantism was Christian charity. That some of the charity was done by government was viewed as a necessary evil, and thus many of the programs set up became infested with bureaucratic means testing which often served to demean anyone who tried to use the “free money”. So people were prohibited from accumulating assets if they used a government program, since they could “afford” to go without the money if they had any assets whatsoever.

There is no doubt that the desire to prevent people from living high off of the dole has caused many programs to be bloated with government overhead. And many folks who could benefit from the programs, refuse to be subjected to the oversight of the government masters. Even the age of technology has been an impediment, since private enterprise is able to use technology efficiently to implement things like rewards programs, while government programs such as unemployment are saddled with antiquated systems totally incapable of dealing with the surges our new economy is able to create.

So the belief that anyone who became dependent on government support was morally inferior caught on with more and more of the population. Meanwhile, the private sector kept on evolving, while the government sector kept getting throttled and prevented from adopting new technology. Well, now we have seen the effects. An economy where the number of unemployed and the number of job openings are both high. An economy where private home ownership becomes unaffordable to more and more of the population, while inadequate investment in affordable housing creates legions of homeless populating the streets of major urban areas. Will we use the disruption created by the pandemic to remake the fundamentals of this economy? Or will we jump at the chance to regain a semblance of normality, and accept the human detritus unable to climb aboard the economic ship as a cost of doing business?

Even with the increased spending aimed at maintaining private consumption, we still find it nigh unto impossible to give the IRS additional funds aimed at collecting legal taxes due. Any attempt to include additional revenues from tax collection as offsets for additional spending were quashed. Why? Because of selfishness and a misguided belief that the government is already too intrusive on our lives, we certainly should not give them additional funding. So its ok to reduce taxes on the wealthy, but not ok to ask the wealthy to not cheat and to pay their fair share. I view this as an overt form of hypocrisy from our political classes. Though the Congressional Budget office predicts that $80 billion in additional spending will result in $200 billion in increased revenues over the next 10 years, the IRS is a Republican boogeyman, which makes any effort to increase its budget problematic at best. Let’s just chalk up one more issue that is falling prey to selfishness. Please note that IRS audits have increasingly focused on potential abuse of the earned income credit, where a few thousand dollars are at stake. The IRS is outgunned on dealing with higher income folks, and cannot take on the army of accountants and lawyers the rich can employ. So the bipartisan infrastructure bill lost its IRS component, leaving a long-term plan to address IRS changes in limbo.

Sooner or later, the concept of a guaranteed basic income will come to pass. If this is enacted, with no means testing, then it will prove to be an incentive to work, since benefits will not decrease with salary. As much as people may detest the idea of folks sitting on their asses, living it up on the government’s dime, we may need this type of program to rebalance the power differential between the wealthy few and the many who struggle in today’s economy. Think of it. We can eliminate welfare departments and greatly reduce the overhead required to administer benefit programs. As more jobs are eliminated due to automation and AI, this type of floor may be needed to prevent mass starvation and mass homelessness.

At some point, those who do not share in the prosperity around them, even though they work for wages, will realize they have the power to disrupt the lives of those who are comfortable. The right decried the demonstrations of 2020, where commercial properties were looted and burned. What will they do when it is the gated communities that become the target for mass action by those who do not believe they have anything to lose? If you don’t accept programs to improve the hope of the many, you just may receive the backlash from those who have no hope.

Remember Fram Oil Filters?

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The bill for deferred action has come due. During the forty years since Reagan famously announced that government was the problem, we have adhered to a philosophy of minimalism in government as an ensurer of social well-being.  According to the adherents of this philosophy, the free market is capable of providing aid in a much superior fashion. Thus we have seen a world where we all raced to the bottom, requiring competition globally for manufacturing wages. People have blamed politicians for abandoning the manufacturing class, with its guarantee of decent wages, but it was the corporations who kept looking for cheaper and cheaper products that drove the conversion. Suddenly you look around and see the only jobs available for folks without specialized skills are in food services, and in big box retailers. Neither of these options provide wages capable of sustaining families in many areas of this country.

We have become addicted to the siren call of the cheap. We didn’t like paying for the higher prices at local stores, so we flocked to Walmart for everyday low prices. Then we got tired of Walmart’s high prices, so we flocked to Amazon for the ability to purchase things for $0.10 cheaper than at Walmart. Now we see a retail environment bereft of local involvement, save for the drivers of the UPS and FedEx trucks hauling purchases to their last mile destinations.

Likewise, we were convinced of the necessity of paying low taxes everywhere. Taxation is viewed as legalized thievery, because all those who had made it in the world were sure it was solely due to their merit they had accumulated so much. And who was it that said we needed to pay for schools? Bah, humbug, to quote Ebenezer Scrooge.

I’ve been railing against the true villains of the age. Four years ago I wrote posts excoriating both Grover Norquist and Arthur Laffer. Their vision of the US has come to flower and bloomed during the pandemic. Unfortunate, the bloom was that of the corpse flower, offending all who were unfortunate enough to inhale its pungent aroma. We now have seen the effect of requiring people to work regardless of their health status due to lack of paid medical leave. Many people became involuntary Typhoid Mary’s as they spread virus particles to co-workers and customers. Likewise, we saw the futility of trying to mandate remote learning among our children, when many were unable to access adequate broadband service, and often were forced to attempt this with inadequate hardware. The virus has damaged many more than those who caught the actual disease, by disrupting education. Meanwhile, we had the science denier-in-chief thinking that he alone could defeat this disease by the power of positive thinking, and thus kept providing contradictory information to the population of the US. You hear the echoes of his proclamations still ringing out among those who were indoctrinated by his media enablers. “This virus is nothing to fear, you can use anti-malarial drugs to fight it, we’re going to develop a new means of interior lighting to zap it inside of the body.” So many have swallowed the lies and denials that we now are in danger of continuing the duration of this disease because folks will not accept the one proven remedy of vaccination.

So now we have a President who is willing and eager to address the deferred bill for those parts of the economy neglected over the past 40 years. Unfortunately, the cost of deferred maintenance is much greater than if proper attention were paid over the generations. But that would have required us to forgo our tax cuts! Well, there was once a commercial for oil filters that brought out the point of “You can pay me now, or pay me later.” It is definitely later. The question I have is whether it is indeed too late to fix the problems. And again, will we try to get by on the cheap for fixes that don’t address the real problem, like we’ve tried for too many decades?

One Problem Ending? Another Yet To Be Faced

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We may be finally nearing a solution for the current version of the pandemic facing this nation. A vaccine is being distributed across this nation, and if there are enough doses, and enough people are convinced it is safe to take, then it may be possible to begin relaxing the constraints felt by many across this nation. Felt by many, but by no means felt by all people. For there are still significant numbers who remain convinced that all of the past year represented a mere distraction orchestrated by shadowy forces intent on bringing in a new world order under the pretext of a global pandemic.

Such a view was represented in Washington this past Saturday when the newly elected representative for Virginia’s 5th Congressional delegate spoke before people who were holding yet another demonstration in favor of Trump’s claim of winning the election. He said, “It’s a serious virus, but it’s a virus. It’s not a pandemic,” said Good (R). Now one may quibble about semantics, but the degree of ignorance in his comments remains incomprehensible to me and to many who have recognized the dangers of viral spread since the beginning of this epidemic. Congressman-elect Good mentioned how good it was to see so many people rejecting the tyranny of the mask and showing their faces in public. I swear that far too many people in this nation will not recognize the seriousness of this medical situation unless we have someone going through our streets with a cart, calling “Bring out your dead”.

The voters in the 5th Congressional District had a choice in the general election, but also had a choice in the Republican primary. For in that election, the incumbent Denver Riggleman was defeated. Congressman Riggleman had the audacity to conduct a same-sex wedding while in office, and for that sin, he was expelled from his job. Bob Good, who was the athletic director at Liberty University, then faced Dr. Cameron Webb, who serves as a hospitalist at the UVA hospital in Charlottesville, and teaches at the University of Virginia School of Medicine. And, horror of horrors, Dr. Webb happens to be African-American. Can’t have that. So in a district that stretches along the Skyline Drive and Blue Ridge parkway, from the Potomac to the North Carolina border, the voters rejected someone who has personal knowledge and experience in dealing with health matters, and selected a Republican instead who would follow the current President over the precipice.

But then, this is the conundrum that we face in this country. We are seemingly a nation that refuses to acknowledge the value of knowledge, and instead insists upon fealty to a single person as head of a party that is increasingly intellectually bankrupt. Though we have now seen the risk of turning over the reins of government to someone who disdains competence, still we have a significant percentage of this nation that refuses to give any credence to any statement coming from the government. Well, we do not live in a world where we can pull up our drawbridge and retreat to our island stronghold. Britain is trying that and in a couple of weeks, when the reality of Brexit hits them, they will soon wish they had never cast a vote to leave the EU. Maybe we can learn from their mistake, and from the mistakes we’ve lived through over the past four years.

We know that the world is now interconnected in ways inconceivable a few short decades ago. Supply chains for international corporations require seamless transfer of materials and funds across national borders. Any disruption of those flows increases the overall costs. In essence, we’ve traded lower-skilled jobs, for lower inflation for the nation. That has resulted in economic losers in many rural and ex-urban regions, where the current strength of the Republican/Trump party now resides. But the discussion about whether we are willing to pay higher prices in order to move manufacturing back to the US has not happened. And on the Progressive side, we’ve not discussed how consumers will respond to paying higher prices for fast food, and pizza, and child /elder care if we institute a higher, livable minimum wage. Face it, part of the bargain we have made over the last several decades is we’ve traded lower prices for the loss of economic security for the lower class of workers. Whether it is the displacement of main street retail for the low prices of big box retailers, or whether it is an assembly operation that can be done for $0.25 less by an overseas supplier, this nation has willingly chosen the lower price.

Maybe we have gained a slight awareness of the value of local enterprise through the course of this pandemic. Personally, we have made the choice to forego any chain restaurant during this time, and spending our dollars on takeout or outdoor dining at truly local restaurants. But we are only one small bit in the economy even of the small town we live in. We are long overdue on having a discussion about acceptance of higher prices in exchange for better economic conditions at the domestic level. Until I see a political party willing to discuss this, I won’t take any efforts they make as being serious efforts to improve the economy.

Let’s Subsidize Work Instead of Shareholders

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Substation transformer

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.

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

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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.