Good News In Manufacturing Activity


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When economists try to predict future economic growth, they look to manufacturing output.  According to the Wall Street Journal’s Real Time Economics, the Federal Reserve reported a surprising rebound in output with a growth rate of 0.8 percent.  That almost erased the loss of 0.9 percent decline from the last month.  Overall, industrial activity rose by 0.6 percent.

Economic growth is highly correlated with the production of goods.  Over the last couple of months, we saw a decline in manufacturing, which caused concern that our economic recovery could be weakening.  However, February’s data gives credence that the decline could have been due to poor weather.

When industrial output rises, that indicates that businesses are ramping up production in anticipation of consumers buying more goods.  If more sales activity occurs, then that will lead to more hiring and incomes will rise.  That is why we should be encouraged by this data.

Not all of the news was good, though.  Home-related durable goods production fell for the second month.  Even though this could also be weather-related, it is also possible that this could be a precursor to a slowdown in home sales.  If that happens, then that will be a drag on economic activity.

When home sales fall, then that will lead to less spending on household goods and home furnishings.  Both are necessary to drive economic growth.  Therefore, let us hope that these last two months of decline do not become a pattern.

Only the future will tell us whether the trend in manufacturing will offset the slowdown in home-related goods.

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Do Jobless Benefits Hurt Or Help?


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This is a key debate that is covered in my Principles of Macroeconomics course.  Ben Leubsdorf of Wall Street Journal’s Real Time Economics cites two separate studies that suggest that extending unemployment insurance beyond twenty-six weeks caused the unemployment rate to rise up to 1.2 percent more.  They also qualify their findings by referring that this effect is stronger among higher educated workers.

Critics of extending jobless benefits will embrace these two studies and call for Congress to end extending unemployment insurance beyond 26 weeks because:

  • It causes people to slack on their job search because they have a safety net to delay reentering the labor force.
  • This effect was even present among higher educated workers, who conceivably would have an easier time finding a job than those with limited skills.

Supporters of extending jobless benefits will dismiss both studies and urge Congress to continue extending unemployment insurance beyond 26 weeks because:

  • Ignores the catastrophic effects of a financial crisis where firms were fighting for survival and not capable of taking on more payroll.
  • Neither study considered whether reentering the labor force quickly would result in underemployment where they find a job that is beneath their qualifications and skills.

If you believe that being out of work for an extended period of time will compromise the long-term job marketability of workers, then refusing to extend jobless benefits is the right course of action.  However, if you feel that the extended time is needed to find a job that matches their skills, then an extension remains necessary.

All-In Nation: Are You In or Out?


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Are you in?

All-In Nation is a collaboration between the Center for American Progress and PolicyLink  and it is centered on exploring ways to create broad-based economic growth.  Their progressive agenda is to lower income inequality by ensuring that barriers and obstacles are eradicated through encouraging more public investment and breaking down employment discrimination through stricter regulation.

Here are three reasons why the U.S. should buy in to All-In Nation:

  1. Minimizes income inequality, which is a threat to a stable democracy.

  2. Improves the skill-sets of workers currently not desired by the private sector.

  3. Ensures a more diverse leadership body by rectifying institutional bias through stiffer regulation.

Minimizes income inequality, which is a threat to a stable democracy.  Since 1980, there has been a steady erosion of the middle class as an emphasis on technology has transformed our workforce.  It was also during that time that we saw a drastic reform within our tax code where marginal income tax rates were substantially slashed at the very top from 70% in 1980 to a low of 28% in 1988.  While that encourages more investment and higher economic growth, the downside is that it could enrich few and impoverish many.  This result has given rise to grassroots movements, such as Occupy Wall Street, that are demanding that wealth be redistributed to the masses.  If this goes unaddressed, the basic fundamentals of capitalism could be threatened.

Improves the skill-sets of workers currently not desired by the private sector.  Businesses are committed to maximizing profits and that implies a lesser commitment to investing in individuals with less marketable skills.  In those instances, the public sector can fill those gaps through workforce development investments.  That could entail more funding to various local Department of Labor locations or grants to local colleges and universities.  There are also opportunities where there can be greater collaboration between the public sector and private sector, so that market forces are more aligned.

Ensures a more diverse leadership body by rectifying institutional bias through stiffer regulation.  It is human nature to have conscious or subconscious biases when it comes to hiring staff.  They can occur through distorted images from media or limited interactions with people of different cultures.  When making key hiring decisions, it is often more convenient to rely on an insulated network that is not as diverse.  With both instances, we see a management structure might not be attuned to their market and ignore highly talented prospects.  This can be rectified through affirmative action or other legislative acts that force management to broaden their job search scope.

Here are three reasons why the U.S. should pass on All-In Nation:

  1. Compromises future economic growth with taxes rising on more productive assets.

  2. Bureaucrats in Washington are ill-equipped to make decisions that will optimally benefit society.

  3. Discourages incentives by enabling counter-productive behavior.

Compromises future economic growth with taxes rising on more productive assets.  The U.S. has accumulated successively higher budget deficits because their spending has outpaced revenues collected.  Making investments in infrastructure that cannot be supported with current fiscal conditions will likely worsen future economic prospects.  While the U.S. has been fortunate to finance deficit spending without a huge increase in interest rates, this is not a sustainable strategy in the long-term.  Rising interest rates will undoubtedly occur in the future and that will hamper both businesses and consumers ability to access cheap credit.

Bureaucrats in Washington are ill-equipped to make decisions that will optimally benefit society.  The danger in placing more control with government is that they are either incapable of adjusting to dynamic market conditions or are more interested in fulfilling their selfish pursuits over more valued needs of society.  While the free market system allows market forces to veer to projects that will yield the highest economic benefit to society, yielding control over to bureaucrats might result in funding initiatives where political connections trump overall economic benefits.

Discourages incentives by enabling counter-productive behavior.  In an attempt to reduce inequality, many anti-poverty programs are designed to provide financial and food support.  Even though this is certainly helpful in the short-run for families falling on tough times, there are inadequate mechanisms in place to encourage people to wean off public support.  In fact, there are instances where people opt to stay on public support, even when work is available because they find it more financially beneficial.  While that might be helpful in the short-run, their future job marketability is compromised when the length of unemployment continues to rise.  Prolonged periods of unemployment end up hurting them more in the future and creates a poverty cycle that is hard to reverse.

Or are you out?

Why Tax Reform Is So Difficult, But Necessary


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If there is one thing that both Republicans and Democrats can agree on, then that would be the need for tax reform.  Unfortunately, their paths to achieving true reform are drastically different.

Even though it is acknowledged that cutting taxes on the wealthy will boost economic growth because they will likely invest in capital that will yield a higher rate of return, most of those benefits will revert to the highly skilled.  In America, unstable family structures and declining public education are creating an unhealthy division between those with marketable skills versus those without.  By simplifying the tax code and diverting new revenues to boost education and workforce development, we can help diminish the skills gap.

A simpler tax code will require strong political will with three particular entities posing as significant obstacles.  Those three entities include the middle class, non-profit organizations, and corporate lobbyists.  In order to achieve a simpler tax code, there must be a reduction in tax expenditures, which come in the form of exclusion, deduction, and deferral of tax liability.  Even though a simpler tax code would reduce burden and increase efficiency, it could potentially increase inequality.

One of the main avenues to achieving a simpler, more efficient tax code would be to reduce the mortgage interest and charitable deductions.  Reducing the mortgage interest deduction would be very unpopular to the middle class, yet it would extract the most tax revenues that could be reinvested back into the low- and middle-income households in order to boost their workforce skills.  By reducing the tax benefit for giving to charities, that would threaten a key revenue source for non-profit organizations and make it more difficult to distribute needed resources to the most vulnerable of populations.

Even though it is more symbolic because its cost is not as high as the mortgage interest and charitable tax deductions, it is more politically feasible and market-enhancing to limit the various corporate tax credits and deductions currently available to industry.  Certainly, those businesses with the political connections to craft legislation to benefit their industries will be harmed as a result.  However, it would allow less politically connected industries to compete on a more even playing ground, since their tax liabilities would be more similar.  In that case, innovation, customer service, and product quality will be the determinants of success, rather than governmental kickbacks and subsidies.

In order to enhance our workforce, a two-pronged attack is necessary with quick fix solutions for updating adult skill sets to adjust to new economy needs and more investment in early child education.  Older workers must change their mindsets toward technology and correct a perception among employers they are not trainable.  Rather than pursue expensive graduate degrees with questionable value, adults should consider acquiring certifications in specialized fields, such as computers or health care.  By upgrading funding to local Department of Labor centers, citizens would gain greater guidance and make better career choices.

As for schools, they must find ways to increase academic performance despite inherent challenges.  This must start with better parental training and access to early childhood education resources.  Even though the U.S. spends a significant money on educating students on a per student basis, there is a problem with how it is allocated.  More resources need to be devoted to identifying and treating learning disabilities at an early age in low-income schools.  There also needs to be strategies in addressing discipline problems where a small group of disruptive students can drastically affect the learning of all of the other students.  Until those two issues are addressed, then closing the skills gap will be cost-prohibitive and futile.

Each of these workforce development initiatives will require more funding, so it is important that tax reform be achieved to enhance rather than reduce tax revenues.  This can still be done without raising rates, but it will require sacrifice from three key constituents: the middle class, non-profit organizations, and corporate lobbyists.

When people wonder why tax reform is so difficult, consider this.  Prudent tax reform would be political suicide for legislators to support because Americans are more interested in their selfish pursuits rather than the collective pursuit of a broader, prosperous nation.

Three and Three Series: July Jobs Report


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In my inaugural three on three series, I will highlight three positives and three negatives that can be gleaned from July’s unemployment report released by the Bureau of Labor Statistics (BLS).

As for three positive takeaways,

  1. We saw the unemployment rate fall from 7.6 percent to 7.4 percent over the last month, and also experienced job growth of 162,000, which represents thirty-four consecutive months of positive job growth.
  2. A broader measure of unemployment (U-6) also decreased over the last year and is now down to 14 percent from 14.9 percent last year.
  3. Prospects of the long-term unemployed showed improvement with the median length of unemployment down from 16.8 weeks last July to to its current rate of 15.7 weeks.

However, there were also some negative takeaways, such as:

  1. This was the slowest amount of job growth since March and it fell short of analyst expectations of 180,000 jobs that were expected to be generated.
  2. Most of the job growth occurred in seasonal industries, such as retail trade and food services, while manufacturing and construction activity remain stagnant.
  3. While the labor force did not shrink much over the last year, the number of discouraged workers increased from 852,000 to 988,000.

In summary, the July jobs report was adequate, but little suggests that momentum is rising.  The next three months will be critical as we will see whether sequestration and congressional gridlock will darken future job prospects.

The Dimming of Detroit


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On Friday, July 19th, 2013, Governor Rick Snyder authorized the Chapter 9 bankruptcy requested by Emergency Manager Kevyn Orr for the city of Detroit.  Specifically, the city was unable to make a scheduled payment of $39.7 million for pensions and sought federal court protection in a bankruptcy proceeding.  While a combination of urban flight, auto industry restructuring, and government mismanagement all played a role in the steady decay of the Motown City, the eventual ruling from federal bankruptcy court may have significant ramifications throughout the U.S.

A Chapter 9 bankruptcy allows municipalities to receive protection from creditors as they seek to renegotiate more favorable debt repayment terms.  Detroit city officials are hoping that a federal court judge will grant a favorable ruling that extracts major concessions from bondholders, creditors, unions, and retirees.  On the other hand, creditors and bondholders are holding out hope that the bankruptcy proceedings will result in declines in compensation and benefits for city employees and retirees, so that will free up more money to pay back their investments and loans extended to the city.

There are two extreme scenarios to look at this issue:

  • Scenario 1:  Force bondholders and creditors to take a significant loss on their bond investments which will help facilitate the city’s efforts to reorganize their finances to fulfill agreements with unions and retirees.
  • Scenario 2:  Invalidate union and pension agreements and impose significant cuts to beneficiaries, so that can free up finances to pay back bondholders and creditors.

In all probability, neither scenario is likely and there will probably be some hybrid of both.

While Scenario 1 would be celebrated by union and retirees, this would be the worst case scenario for the financial community.  There is obvious appeal with this option because those most vulnerable to the financial crisis, blue-collar workers and retirees, would not see their standard of living impacted.  Even though highly-compensated bankers and investors would be subjected to severe losses, they have abundant resources to withstand it.

Though populists would love this result, there are potential long-range consequences that would be hurtful to the overall economy.  An unfavorable ruling to creditors will likely result in a credit crunch for cash-poor municipalities.  There is already a premium that municipalities faced when seeking funds to cover budget shortfalls.  That will only be exacerbated if the federal judge rules harshly against the creditors, who will be less enthusiastic about extending credit to poor municipalities without demanding even higher premiums.  It could also emboldened local officials to continue making irresponsible spending choices and not face harsh outcomes because they can go to a federal district judge to wipe away their debts.

Choosing Scenario 2 also carries significant political risks.  While bond investors would be overjoyed with this ruling, that will only embolden political activists to express their rage over the immoral, greedy actions of bankers.  Imagine the sympathy generated by showing retirees, who have limited means to recoup losses that were previously promised to them, struggling to make ends meet as health care cost rise and bills mount.  Contrast that image with the smug image of a well-groomed executive in a Jaguar and plush mansion.   That would be a public relations disaster for the financial community and will only increase calls for greater financial reform where more stringent regulations could hamstring corporate profits and restrict compensation levels.

Another problem with Scenario 2 is that it creates a moral hazard where taking on irresponsible risk is rewarded.  The declining fiscal finances have been well-documented over the last decade.  City of Detroit public officials have been convicted or indicted on charges of embezzlement and financial mismanagement.  Bondholders were already rewarded with higher than market returns because the default risk at Detroit is higher than most cities.  With that higher return, there is more risk.  Therefore, they should accept huge losses in this case and allow markets to work.  Poor decisions should result in severe consequences, otherwise markets will not function properly.

While it pains me to see that collateral damage will be felt by ordinary Americans, we must allow markets to run its course in this case.  Pain must be spread to all parties, though the brunt should be felt by the financial community.  Any result that overwhelmingly favors one party over another will only lead to more irresponsible actions in the future.  Investors must realize that there is no such thing as a risk-free investment.  When finances of an underlying bond falter, they must realize the consequences of a poor investment.  If that means losing all or a substantial portion of principal, then consider that to be a hard knocks lesson to learn.

Let this also be a lesson to citizens that there is huge downside to running large fiscal deficits, so they must hold their public officials accountable.  While we expect our government to provide quality service, we must realize that paying these services through more debt and higher taxes are not sustainable.   That will only drive wealth out of a community and lead to further decline and decay.

While the shade of indebtedness is dimming Detroit, let us ensure a brighter future elsewhere by shining the spotlight on poor investment practices and shoddy fiscal management.

Tax Burden In U.S. Rates Low Among Peers


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While attention is paid to marginal tax rates, the true measure of what an individual pays in taxes is the effective tax rate.  This is what individuals pay after taking out tax credits and deductions.  Even though Canada has a lower  top marginal tax rate of 29% compared to the U.S. rate of 39.6, the U.S. has a much lower effective tax rate.  The G-7 is my primary group that I am using in comparing the United States.  Those countries include the Canada, France, Germany, Italy, United Kingdom, Japan, and United States

Information comes from a 2012 Annual Survey performed by KPMG International, which covered 114 countries.  It should be noted that this survey took place before the increase in individual tax rates for individuals making over $400,000.  However, the scope of this review wouldn’t cover that range anyway.

From this survey, we learned that the U.S. effective tax rate for individuals making $100,000 is 18.7%, compared to Canada’s 27.4%.  The only rich country with a lower effective tax rate would be Japan at 15.2%.  Here are the rankings:

  1. Italy:  35.6%:
  2. Germany:  28.3%
  3. Canada:  27.4%
  4. United Kingdom:  24.1%
  5. France:  20.0%
  6. United States:  18.7%
  7. Japan:  15.2%

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When looking at individuals making $300,000, the U.S. effective tax rate increases to 26.8%, while Canada, is at 39.8%.  Of the rich countries, Japan is the closest to matching the U.S. in effective tax rates, but it is higher too at 30.7%.  Here are the rankings:

  1. Italy:  41.8%
  2. Canada:  39.8%
  3. Germany:  39.0%
  4. United Kingdom:  38.5%
  5. France:  34.0%
  6. Japan:  30.7%
  7. United States:  26.8%

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This analysis should quiet critics, who believe that the U.S. tax system is burdensome.