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Tematica’s Take on Mnuchin’s Reforms and Growth Prospects

Tematica’s Take on Mnuchin’s Reforms and Growth Prospects


There are several drivers of a company’s business as well as the price of its shares, assuming it is publicly traded. We described many of these in Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns, but a short list includes new technology, regulatory mandates, the overall speed of the global economy and new policies flowing out of Washington. From a business perspective, more regulations and taxes tend to drive costs higher, leaving companies with smaller profits to spread across developing new products and services, implementing new technologies and creating more jobs – in other words investing for the company’s future.

 

We’re seeing this today in the restaurant industry, which is struggling with the impact of higher minimum wages as companies like McDonald’s (MCD) and others look to bring mobile ordering, as well as in-store kiosks like those found at Panera Bread (PNRA), to market. There has been much made about the low to no growth in the US economy over the last several years, but headwinds, like our aging population that has people shifting from spenders to savers and rising consumer debt levels that weigh on disposable income levels and consumer spending, make prospect for growth challenging.

 

Last week Treasury Secretary Steve Mnuchin reiterated in his testimony in front of the Senate Banking, Housing, and Urban Affairs Committee that the Trump administration’s goal of 3 percent or better GDP is achievable provided, “we make historic reforms to both taxes and regulation.” Mnuchin went on to say, “he’s got 100 bodies working on tax system reform and that they’re working on far more than just undoing the Dodd-Frank Act” including overhauling housing finance reform.

 

Over the weekend in a radio interview, Mnuchin noted, “The good news is that [the administration and Congress] all agree on the fundamental principles: simplifying personal taxes, creating a middle-income tax cut and making our business taxes more competitive.” Mnuchin went on to acknowledge that over the past eight years, the US economy has had very low growth, but “tax and regulatory changes and better trade deals” can unleash more historically typically growth rates in this country,” with “sustainable levels of 3 percent growth.”

 

The key word employed by Mnuchin is “reform,” and no matter which definition of the word offered by Merriam Webster – “to amend or improve by change of form or removal of faults or abuses” or “to put an end to (an evil) by enforcing or introducing a better method or course of action” – it’s rather clear Mnuchin’s language suggests something far more historic than a temporary tax cut or other one-time band aids like we’ve seen in recent years. That resetting should help reduce regulatory and litigation costs, but also a lower corporate tax rate, which would benefit predominantly US based companies like Verizon Communications (VZ), CVS Health (CVS), Walt Disney (DIS), Norfolk Southern (NSC) and others as well as their shareholders.

 

With true regulatory and tax reform, there would be the added benefit of certainty or at least greater certainty that would allow for longer-term corporate planning. It’s rather well understood the stock market abhors uncertainty, but uncertainty in the form of short-term tax cuts and ones that are about to expire as well as a shifting regulatory environment wreak havoc on corporate planning and subsequently spending. One example is Research & Experimentation Tax Credit (better known as R&D Tax Credit) was originally introduced in the Economic Recovery Tax Act of 1981 with an original expiration date of December 31, 1985.

 

Flash forward a few years, and the credit has expired eight times and has been extended fifteen times with the last extension expired on December 31, 2014. Not exactly a boon to corporate planning, but in 2015, Congress made permanent the research and development tax credit, which now allows more consistent planning and product development at companies ranging from Apple (AAPL) and Facebook (FB) to II-VI (IIVI) and Oracle (ORCL), not to mention food and beverage companies like Coca-Cola (KO) and PepsiCo (PEP). Douglas L. Peterson, President and Chief Executive Officer of S&P Global Inc. summed it up well when he said, “If we knew where the cost was going…and we’re able to predict it over the long run, we could have a completely different planning cycle and invest in the long run.”

 

While these reforms are likely to help reignite growth in the US economy, the stark reality is between increased spending to rebuild US infrastructure as well as the US military and ensuring entitlement programs are in place for our aging population, there is a deficit funding gap at least in the short to medium term that will need to be addressed. While there are several mechanisms being bandied about, a recurring one is the Border Adjustment Tax. There are those that oppose it, particularly retailers that source heavily from outside the US, but the argument for the Border Adjustment Tax is that it would help level the playing field between imported goods and those crafted within the US as well as encourage companies to source within the US, thereby developing industries and creating jobs.

 

The challenge here is that with the gap between Job Openings and Hirings already well above historical norms as companies struggle to find the right talent for open positions as we sit at what has been the lower range of the unemployment rate over the past fifty years, who is going to take these jobs? Regular Tematica readers will quickly recognize how this pertains to our Tooling and Re-tooling investment theme.

 

 

We frequently discuss here at Tematica Research how economic growth requires that either the labor pool grows and/or productivity must rise. If companies are able to keep more of their income thanks to tax cuts, they can invest back into their own operations so that the productivity of their workforce improves. That being said, cutting corporate tax rates doesn’t guarantee that companies will do such reinvestment as they could also look to return the additional funds to investors through dividends, fund buyback programs or hold onto it if there is concern that times could get tough in the near to medium-term future. Investors need to assess the overall economic conditions and business drivers as well as other incentives facing companies when it comes to decided just what to do with those tax savings.

 

As Team Trump and his allies, including Mnuchin, look to reset the administration’s timetable for meaningful reform, investors should begin doing their homework on which companies stand to benefit. If we see lower corporate tax rates like those being discussed, we could see greater earnings falling to corporate bottom lines, which could spur shares in those companies higher, outside of any decision on just what to do with those newly saved funds. If we see infrastructure spending beginning, it offers another shot in the arm for companies like US Concrete (USCR), Granite Construction (GVA) and aggregates companies like Martin Marietta (MLM). Any boost in defense spending would likely bode well for companies such as General Dynamics (GD), Raytheon (RTN) and Northrop Grumman (NOC).

 

The key is for investors to develop their wish list today and be ready to strike once we know the particulars on the actual reforms. While that is likely a sound strategy, we would suggest investors go one step further and utilize our thematic perspective to identify those companies already benefiting from pronounced multi-year tailwinds that could also benefit from tax and regulatory reform, rather than being dependent solely on these reforms making it through the D.C. sausage factory.

Greece in Hotel California

Greece in Hotel California

Greece was all over the headlines again last week as the deadline for debt talks neared. The Maastricht Treaty, which created the European Union, is starting to sound an awful like the Eagles “Hotel California,” with many in Greece left rethinking, “This could be Heaven or this could be Hell.” The treaty provided a lengthy list of requirements to enter the Eurozone “hotel,” but provides no way to exit, making all members, “…just prisoners here, of our own device.” Greece, among quite a few others, didn’t exactly meet the economic fitness requirements to obtain membership in the Eurozone. The current members were well aware that Greece was essentially doping to get the level of performance required and were all too willing to look the other way. After all, “We are programmed to receive. You can check-out any time you like, but you can never leave!”

 

After Greece made it onto the Eurozone team, things went quite well for a while. The global economy appeared to be performing in tip-top shape and “dealers” for Greece’s performance-enhancing creative debt securitizations were ubiquitous. Now before anyone gives into the desire to finger wag, first recall that parts of the US economy also indulged in such performance-enhancing financial supplements, (housing and now the auto sector). Frankly, pre-financial crisis the proliferation of creative debt securitization on the global stage was a lot like an excerpt from a Lance Armstrong post-2012 doping deposition, “Everyone was doing it. You had to if you didn’t want to be left in the dust.” Pssst, a version of this is still going on today, just ask any company that is juicing its EPS by using newly issued debt to fund stock buybacks such as Apple (AAPL), IBM (IBM), Monsanto (MON), CBS (CBS) and many more.

 

Today, global economic conditions are such that the hills have gotten a hell of a lot steeper, the pavement is full of cracks, there are powerful headwinds, rain flurries and Greece’s pre-crisis performance-enhancing suppliers are no where to be seen. Debt-doping allowed the nation to get away with all kinds of economic sins, gorging itself on regulations and labor laws akin to years of multiple-pint nightly threesomes with my two favorite partners-in-crime, Ben and Jerry, followed by many a lazy day-after spent series-binging on “Ex-wives of Rock” while sprawled on the couch munching on peanut butter Cap’n Crunch out of the box. Now with no “supplements” available, an overweight, out-of-shape and endocrine-exhausted Greece is being told to get pedaling faster and faster on a bike with bald tires, a broken gearbox and gyrating handlebars.

 

You would think that Germany, of all countries, would remember that driving a nation into the economic ground is never a good idea. Most economists and politicians refer to Germany’s understandable fear of hyperinflation but that overlooks the much more relevant and painful lesson from the impossible demands placed on the country post WWI, which destroyed not only its relationship with its neighbors, but also its democracy and ultimately led to WWII. How ironic that the Maastricht Treaty, which was conceived in part to prevent another war between European neighbors, is now the cause of so much inter-European strife!

 

Greece simply cannot pay its debt, which is pretty much its standard operating procedure. According to Kenneth Rogoff and Carmen Reinhart, “from 1800 to 2008, Greece was in default 50.6% of the time,” so angry bondholders, how about a reality check? Last week we mentioned that the nation’s economy had contracted by 26% from 2008-2013, yet it is still managing to remain current on its debt payments while running a primary surplus of about 1.5%. That would be a seriously crowd-pleasing performance on NBC’s The Biggest Loser!  The problem is its creditors want Greece to increase that surplus, meaning ride even faster up that blasted hill! Even Jillian Michaels wouldn’t push that hard.

 

Last Thursday Greece formally requested a 6 month extension after four weeks of brinkmanship, which was quickly returned with an “I don’t think so,” from Germany.  On Friday night a four month interim pact was reached that will once again kick the can down the road, albeit a much shorter road than after previous kerfuffles, conditional on Greece submitting a list of reforms by Monday 23rd.  Greece submitted such a list close to midnight on Monday, which the eurozone commission officials claim contains significant changes from “a more vague outline originally discussed at the weekend.”  One official reportedly said, “We are notably encouraged by the strong commitment to combat tax evasion and corruption.”

 

The Eurozone finance ministers will hold a conference call on Tuesday to determine the acceptability of Greece’s proposed reform plans.  Most likely an agreement will be reached.  The bailout money will continue to come and the European Central bank will continue to stand behind the nation’s banking system.  However, all the finger pointing and accusatory language has greatly damaged relationships and backed both parties into difficult corners.  The next round of talks in four months could be even more contentious.

Italy and California: A Sisyphean Nightmare?

Italy and California: A Sisyphean Nightmare?

I think most people are clear that in a robust, healthy economy entrepreneurs are able to quickly turn their ideas into reality, in the process creating jobs and occasionally having an enormous impact on the way we live, as in the case of Apple, Amazon, and for the ladies out there, Spanx.  My two homes, Italy and California both appear to be hell bent on becoming Sisyphean nightmares for not only the budding entrepreneur, but even for well-established, international corporations.

Yesterday the Wall Street Journal ran a piece entitled, “Can Italy Find it’s Way Back?”  The article opens with an example of just how difficult it is to get a business going in the country.  We are told of an entrepreneur who bought a tract of land when he was 45 with the intention of building a supermarket on it.  At 88 years old, he’s finally received the necessary permits!  Seriously!?  Colleagues of mine in Italy have shared similar insane tales of government bureaucracy, their frustration mounting and gesticulations increasingly animated as the bottles of vino empty.  It is Italy after all and intense conversation requires a good bottle of champagne or a rich bottle of red.

California is moving rapidly in the same direction, making it more and more difficult for entrepreneurs to translate a passion into reality, while for existing companies the regulator and tax burden is pushing them to locate elsewhere.  The headlines for years have told of one company after another deciding to leave the state.  Carl’s Junior announced that it would not open one more restaurant in the state because it takes too long and is too expensive to get through all the red tape.  Just this week Toyota announced it is moving a facility it has had in Torrance, California for over 30 years to Texas.

This is what I like to call, for obvious reasons, Elle’s Law of Unintended Consequences whereby bureaucrats’ attempts to protect invariably end up harming the very thing their legislation intended to protect.

Entrepreneurs, being adventurous types by definition, rationally choose to go where there are fewer barriers to success.  Large corporations may find that over time, the benefits of being in a specific locale are falling further and further below the associated costs.  When bureaucrats enact legislation that creates barriers, any reasonable businessperson will have to compare the associated costs with the potential benefits of operating under such conditions.

In Italy, labor laws have become so onerous that the economy is bizarrely bifurcated into two distinct types of businesses:  very small, family-run, mom-and-pop shops and large multi-national corporations that were already large by the time they entered the Italian market.  Why is this?  The labor laws that were enacted in Italy with the intention of protecting workers have made it inconceivably risky to hire anyone, because if it doesn’t work out, firing them is almost prohibitively costly.  If you have a small shop, with just you and your partner, it is insanely risky bring on additional help, so you simply don’t grow.  The economy is deprived of the potential success you could have had if the risks of expanding weren’t so great!  Think of how many jobs wouldn’t exist today if Google had never made it out of the basement.  Large multinationals that come into the country face a slightly easier mountain as for them, the likelihood of a high portion of hires not working out is fairly low.  Due to their size, they can survive having some level of deadweight, unlike the small firms.

Unfortunately, the damage doesn’t stop here.  The culture of protecting labor in this manner comes from a history of communism and socialism that emerged as a violent reaction to the hell experienced under fascism.  This mentality applies subtle negative attributes to those who attempt to be special, to do something unique and worthy of attention.  Thus there is a disincentive for putting in the extra effort, for taking the risks associated with overachieving and given this cultural climate, overachievers aren’t compensated much more than their colleagues who do the bare minimum.  Couple this with the reality that it is really difficult to fire someone, so imagine the incentives!  Shockingly enough, human beings, like all animals, respond strongly to incentives.  If I won’t get compensated much more for working my tail off, why would I put in the effort and take the risks to be outstanding?  If I can’t be fired, the floor for the level of performance I consider reasonable is going to be a lot lower than if I know there’s a line of people just waiting to take my place!  Now while we’ve all had days when this situation would sound awful comfortable, think about what it means for the performance level of the society as a whole.  How often have you heard envious tales of Italian efficiency and professionalism?

Is it any wonder that Italy’s economy is essentially stagnant?  How can it possibly grow when entrepreneurs are so heavily hamstrung and when workers have very little incentive to do more than the bare minimum where their is neither a carrot, nor a stick.

Sadly, every time I leave Italy and return to California I am struck more by the similarities than the differences.  The U.S. would be wise to look across the pond and understand what it is that is keeping so many countries in the eurozone economically stagnant and fight like hell to move in the opposite direction.

Michael Jordan and the B-Ball Inequality

Michael Jordan and the B-Ball Inequality

MKI know that this may come as a surprise to many of my regular readers, but I have a confession to make.  Michael Jordan is a better basketball player than I.  This basketball skill spread needs to be addressed. He shouldn’t be that much better than I. It isn’t fair.  No matter how much I practice, no matter what coaching I get, no matter how hard I train in the gym and follow a strictly regimented diet, he will always be better than I.  Unfortunately for Mike, the only way to address this issue, (given that there is a clear cap to my potential at 5’8″ with a proportional wingspan and at best, only slightly better than average springs) is to handicap him.  Now wouldn’t the world be a better place if the difference in our abilities were materially reduced?

You probably get where I’m going with this.  Before anyone gets into a tizzy and starts making all kinds of accusations about how mean and uncaring I am.  There is a serious problem today with respect to income, but the problem, thus the cure, isn’t what is preached in the popular media.

The billionaires at Davos, in what can only be described as irony of epic proportions, all agreed that “Severe income inequality” is one of the top 10 global risks of greatest concern for 2014.  You can read the report here.

So let’s break this problem down.  When people talk about income inequality there is a knee-jerk assumption that by definition, income inequality is bad, which in reality is quite destructive to society as a whole.  It intuitively doesn’t make sense that as a society we should strive to have income equality where regardless of what value an individual generates, income ought to be equal.  The guy who chooses to work 3 days a week sweeping floors at the local Walmart clearly should not enjoy the same income as Steve Jobs! So some degree of income inequality is Ok, right?  But not too much?  Hmmm, ok, then how much?  Who gets to decide how much is too much and how do they make that determination?  Then how do they enforce it? How do we trust that the person we give such enormous power to won’t abuse that power?  For argument’s sake let’s say they don’t.  What about their successor?  How likely is it that we continue to have only angelic geniuses that are able to manipulate society into a Utopian income spread without ever falling prey to corruption and graft?  So far the record throughout history doesn’t lead one to believe that is it all likely.

I spend a great deal of my time in Italy, where I sadly witness first-hand the awful consequences of this sort of societal structure.  If I get paid roughly the same amount whether I work my tail off and take risks trying to improve my performance or if I put in essentially the bare minimum level of effort, why try?  I see this everywhere.  Incredibly bright people who could be innovating like crazy, coming up with all kinds of solutions that would benefit their companies and eventually their nation are beaten down by a system that provides no incentive for those who really try to do something great.  Those who are naturally innovators want desperately to try new things, take risks, but for them there is only downside risk.  They can’t improve their income level through hard work and risk taking.  They only risk annoying their colleagues and supervisors by trying to improve things.  Status quo is the rational choice.  Notice the level of innovation coming out of Italy and its rate of growth!?

I sit at dinner and hear the agony in my friend’s voices as they vent their frustrations and their anger at how a colleague who does very little gets paid roughly the same as they do.  This type of structure infects relationships because it forces people to live in a lie, a lie which is painfully obvious to everyone. The guy who barely shows up to the office and only does the bare minimum knows that the guy who’s working his tail off, (he can’t help but try as innovation is in his DNA) is angry that they both get paid roughly the same.  They both are aware of the resentments, but are powerless to do anything about it because society tells them that this is a far better way to live.  It is more fair. What the hell?  More fair that those who are willing to sacrifice and take risks are basically barred from enjoying any benefit from doing so?  My Italian friends all talk wistfully about how great it would be to work in the U.S. where at least there they can hope to get rewarded for accomplishing something great.

As for the U.S., I struggle to see where this horrific trend we keep hearing about is evidenced.  The table below is from an excellent study by Alan Reynolds of the Cato Institute.  You can read the entire report here. The data does not prove out the claims, at least in the U.S..  The bottom two quartiles and the top quartile enjoyed nearly the same increase in income on a percentage basis from 1989 – 2007.  From 2007 – 2010, the bottom quartile experienced a rise in income, while all others experienced a decline.

Now where is inequality a problem?  Barriers and disincentives to improve one’s lot in life ARE problems.  Subsidies such as those in the Affordable Care Act put the poor in a veritable poverty trap in that as they work to improve their situation, the subsidies are taken away at such a pace as to make them far better off overall working less.  That is both demeaning to the individual and immoral in that it forces others to eternally be enslaved to subsidize their fellow citizen, despite the reality that the guy being subsidized may desperately want to get out of his situation, but is faced with overwhelming incentives that keep him dependent, resentful and demoralized.

There is also something horribly wrong with a system in which savers are punished through financial repression.  The Federal Reserve, by keeping interest rates low, forces savers to go into inappropriately risky investments just to try and get a reasonable return.  Those who are already wealthy and are able to invest heavily in the stock market enjoy out-sized returns courtesy of the Fed’s QEInfinity as evidenced by the 90% correlation between the Fed’s balance sheet and the stock market starting in 2008.  Previously the correlation was essentially 0!

The free market system is far from perfect, full of all kinds of flaws, but it is infinitely better than anything else out there.  There are no angelic, omniscient bureaucrats that can manipulate our world into a more Utopian state.  Be wary of any who claim they can.

That there is a Pavlovian dog: Obamacare and mismatched incentives

That there is a Pavlovian dog: Obamacare and mismatched incentives

This one ought to go down in the annals of “You just can’t make this stuff up,” but sadly when it comes to the twisted rewards system innate in government, this is more the rule than the exception.

Recently the Daily Caller reported that the very firm responsible for the disastrous roll out of Obamacare was awarded six more contracts by the administration’s Centers for Medicare and Medicaid Services AFTER the massive flop of a launch!  Yes, you read that right… AFTER!

In the private sector, businesses and individuals are rewarded for doing more with less.  The company that is able to provide a better product that costs them less to make will be able to charge less than the competition and will sell more.  Win!

Individuals that are able to accomplish more in less time or with fewer resources tend to get promoted, get raises, bonuses, more responsibilities.  Win!  Their behavior gets rewarded, so they do more of it.  The incentive system focuses them on being more efficient, accomplishing more with less.

The company that is able to generate greater returns for investors with fewer resources is rewarded with increased investor interest, lower borrowing costs, (as they’ve shown they are less risky) and better talent shows up on their doorstep, wanting to be associated with such a successful organization, (think Google).

These normal human desires, when expressed in the public sector, get seriously wonky.  Bureaucrats publicly state with great pride that some societal ill is a serious problem and they are going to marshal their resources to address it.  Fantastic.  We’d all like to see a lot less of whatever ill is the flavor of the week.  Who could possibly be against that?  So now all these well meaning sorts get together to work on the problem.  They come up with a budget to address the issue over the next few years and off we go.

Except unexpected things happen along the way, as they always do, and we can’t quite get this addressed the way we originally planned.  The easiest solution would to just get more money.  In the private sector, getting additional funds takes a lot of work, is time consuming and in the end may be impossible.  In the public sector, just whip up some stories that pull at the heart-strings and what politician can risk appearing heartless?  More funds are granted and government spending goes up.  If the plan actually starts to work, now we have to worry, as how do we justify our salaries?  The budget we control?  Ah ha, scope creep!  Now we need to expand into yet another area that is in “crisis” and probably need a bigger budget too while we are at it.

In the private sector, more funds are awarded when you prove you are able to accomplish your goals.  In the public sector, more funds are awarded when you can’t accomplish your goal as originally planned.  In the public sector, the greater the problem, the harder it becomes to solve, the larger your budget.

The private sector pressures individuals and organizations to be efficient with the resources, (money and time) that is invested in them.  The public sector rewards ineffectiveness with bigger budgets and greater scope … because clearly now that I look at it, this problem is just so much bigger than I originally thought!

Bottom Line:  In the private sector you always have to answer to someone for what you are doing with their money, which keeps the pressure on.  In the public sector, there is no such pressure, so the reward system is no longer tied to effectiveness and taxpayers in the end pay too much for too little.

 

Obamacare and the Orwellian Oath

Obamacare and the Orwellian Oath

On February 18th, I spoke with Charles Payne and Julie Roginsky on Fox Business’ Cavuto show about the headlines claiming that Obamacare aka the Affordable Care Act (ACA) will harm jobs. We had a lively debate, which was surprising given that the three Sports Illustrated models gracing this year’s cover were waiting in the green room, an understandable distraction for many! Got me thinking that perhaps I ought to entertain the idea of becoming the first “bikini economist.” No sure that my supply curves would stimulate like claims around QE, but I digress…. For all the administration’s protestations that the ACA isn’t going to harm jobs, their own actions show they know it is. In a press briefing last week Treasury officials made it clear that firms will be required to certify to the IRS under penalty of perjury that ACA was not a motivating factor in their staffing decisions. So… to protect your company from the increase in costs from ACA you must swear that you are not trying to avoid the impact of ACA. But I thought this wasn’t a problem for jobs? If it has no impact, why the Orwellian oath? To be fair, the CBO doesn’t exactly say that jobs will be lost, but rather that ACA discourages work, particularly for those at the lower end of the income scale, in that you get bigger subsidies the less you make. Talk about a poverty trap! When did rewarding people for NOT trying to improve their circumstances become the American dream!? What kind of senseless drivel has the national conversation descended into when Jay Carney assures us that rather than “disincentivizing” these subsidies allow people to “pursue their dreams” without having the terrible burden of working. And just who is paying for these people to pursue their dreams? Oh right, those who STILL WORK! What about their dreams? Their desire to pursue other leisure activities? I guess it is OK to put those on hold so that they can involuntarily support the pursuit of dreams for those who choose to not work! Oh, and wait a minute! I thought this was all supposed to be good for the economy. Now how in hell does having fewer people working or having people work less grow the economy? So far the ACA gives us three little gems

  1. The employer mandate discourages hiring. No point in arguing that fact since firms now have to certify that it didn’t alter their staffing decisions!
  2. ACA delivers $1 trillion in tax increases . What does Congress do when it wants less of something, like smoking tobacco or using fossil fuels? Tax it! So again, can’t argue that this is a negative for growth.
  3. Now the CBO acknowledges that the $2 trillion in subsidies discourages work, but hey, how great is it to pursue leisure interests at the expense of your fellow taxpayer?

Well… at least you get to keep your insurance if you like it.

American Income Levels Stagnant for over 20 years!

American Income Levels Stagnant for over 20 years!

On February 13th, at I must add the ungodly hour of 6:30am PST, I spoke with Stuart Varney on Fox Business concerning the dismal state of income levels in the United States. According to the US Census bureau, median household income is just over $51k, which is about where it was 20 years ago! We also just learned that real disposable personal income has fallen by 2.7% from a year ago, the biggest collapse since the semi-depression in 1974!  American income levels have been stagnant for over 20 years.

On top of weak income levels, the employment situation continues to be of great concern. US unemployment rate is now at 6.6%, but this measure has become relatively meaningless as it no longer accurately describes what is happening in the work force. A more descriptive measure is the labor force participation rate, meaning the proportion of the population either employed or looking for employment as a percent of the population. That number is down at 63%, a level we have not seen since 1978! If the labor force participation rate were still at pre-crisis levels, the unemployment rate would be closer to 13%. Some argue that the decline in the labor force participation rate is primarily driven by the inevitable retirement waves of the baby boomers. However, the chart below illustrates that baby boomers are in fact participating in the work force at a higher rate than in decades, for women we are at all-time highs.


With income struggling, it should come as no surprise that savings levels are well below what they ought to be for a financially healthy country. The IRS’s most recent Quarterly Statistics of Income Bulletin is for the 2010 and 2011 tax filings, so it is a bit dated, but nonetheless, very insightful as to trends. According to the release 145.6 million taxpayers were eligible to contribute to an individual retirement account (IRA) in 2010, but only 3.5 million actually did so and of those that did, 62% were over 49 years old. Uh oh! Only 2.4% of those eligible to contribute to their IRAs did so. The average account value is only $92,000 and only 27.6% of all tax filers even have an IRA. Lastly, that wee bit of spending spree we experienced in December? With income struggling, that was funded by consumers dipping into their piggy banks to the tune of $46 billion causing the personal savings rate to fall from 4.3% to 3.9%, the lowest since January 2013.

Another unilateral change to Obamacare

Another unilateral change to Obamacare

Obama already pushed back the employer mandate to 2015 from 2014, conveniently after the mid-term elections. Now his administration is pushing back the mandate for businesses with 50-99 employees to 2016. For companies with over 99 employees, they must cover 70% of employees by 2015 vs. 95%.

 

This is now the 18th executive branch unilateral change to the Obamacare. Safe to say that at this point, the LAW now says whatever Obama wants it to say on any given day. So much for our Constitutional Republic form of government! Changing a statutory mandate requires the approval of Congress, yet Congress hasn’t done much to stop these dictatorial edicts.

 

We were told that ACA was going to solve a myriad of problems and that once we got it, those of us who were opposed, would understand the veritable utopia it created. If that’s the case, why keep delaying implementation? If this thing is so great, why wait at all? What is it that is going to happen in a year that will then make this legislation a net positive whereas apparently today even the White House thinks it is a net negative?

 

Let’s take a step back and look at the big picture. The administration claimed that the ACA would lower healthcare costs for the vast majority and would provide “affordable” insurance for significant portions of the population that were previously not covered, with the assumption that those without insurance were in need or desired it.

 

So where are we now? So far costs are going up and we have a net loss of coverage as more people have lost the coverage they had pre-ACA than are gaining coverage without having any previously. This is not at all surprising and some simple economics tells us that it’s likely to get worse. ACA increases the demand/use of healthcare while at the same time doing nothing to increase the supply, and in many instances actually reducing the supply of healthcare. How can the price not go up?

 

Now we’ve gotten an even more troubling dynamic going on with more artificially created warfare between various parts of society. The administration has been doing a bang-up job creating an irrational and self-destructive war between different income and wealth levels, now they are fostering a war between individuals and businesses, creating a lovely trap that the Republicans seem all too eager to fall into.

 

We’ve now got the Republicans ranting and raving about how it is unfair for businesses to get a break when “hard working families” aren’t. I suppose that makes for a compassionate sound bite, but talk about losing the forest for the trees. Healthcare isn’t a war between businesses and families. Hell, the two shouldn’t even be in the same sentence. Why is health care even remotely related to employment? I don’t get my car insurance or my home owner’s insurance through my employer. Why is my health insurance employment related?

 

Employers didn’t start offering health benefits roughly 60 years ago because they were experts in medical decisions. It was a way of circumventing the World War II wage and price controls. Barred from offering higher salaries to attract workers, employers offered health insurance instead. Aided by an IRS ruling that said workers who received health benefits did not have to pay income taxes on them, and by the fact that employers could write off the cost of the health benefits as a business related expense, this accidental arrangement became the primary way most Americans access health care and is now viewed as just the way it works.

 

The system worked at first, but a lot has changed in 60 years. Back then, the average soldier returning from World War II took a job with a local company where he would work for decades until he got a gold watch at a big retirement party. Today, lifetime employment is dead. By 42, the average American will change jobs 11 times.

 

Sixty years ago, most American companies competed only against neighboring companies for lucrative contracts. Today, most businesses are up against foreign companies that don’t foot the bill for their employees’ health-care costs.

Bottom Line: Obamacare cannot reduce the price of healthcare when it increases demand and at best keeps supply flat, at worst decreases it. What the legislation has done masterfully is show how poorly the public sector addresses pricing and availability problems in the private sector. Health insurance and employment should be separate. Individuals should be able to pick whatever type of insurance best suits their preferences and finances. One-size fits all solutions stifle innovation and in the end, satisfy no one.

Obamacare delays highlight the dangers of an ever-expanding government

Obamacare delays highlight the dangers of an ever-expanding government

By completely restructuring how health care works in the US, those responsible for implementing the Affordable Care Act are restructuring and controlling what today amounts to about 15% of the U.S. economy.

With that in mind, after having 4 years to prepare for this, they still are not ready to implement a major portion of it.  The Obama administration has stated that it will not have the capacity to collect from employers the information required to determine which employers will be subject to penalties in 2014.  Thus it will not require employers to report that information until 2015, even though the very statute that this Administration pushed through Congress requires employers to furnish that information in 2014.  This doesn’t exactly instill confidence in the government’s ability to improve our healthcare system not does it? 2013-07-11 Expect-Delays-sign2

Four year and they can’t even collect data!

The employer-mandate penalties unequivocally take effect on January 1, 2014.  When Congress passed this Act, it gave the Treasury Secretary no authority to postpone the implementation, which is not unusual.  Congress rarely passes anything giving other parts of the government discretion over how and when to implement.  This would be akin to Congress raising or lowering tax rates, but then telling the Treasury it can decided when it wants to implement those  changes,  “Ehhh, next year or maybe the year after.  Whenever you can get around to it.”

The statute gives the Treasury secretary the authority to collect these penalties “on an annual, monthly, or other periodic basis as the Secretary may prescribe.” It does not allow the secretary to waive the imposition of such penalties, unless the State has implemented an acceptable health insurance program for its residents.  Then the Treasury is allowed to waive the imposition until 2017.

So here we have a clear example that Congress did in fact contemplate giving the Treasury the ability to waive penalties, but decided to do so ONLY under specific conditions.

If one wants to continue to try and argue that the Treasury does in fact have the ability to waive parts of the ACA, then what is the limit of the Treasury’s ability to waive any portion?  If it can extend 1 year, why not 5 or 10 or 500?  What authority then does Congress have to enforce the very Act it passed?

Now the Republicans, seeing clear signs of distress from their opposition, are trying to take advantage, as is always the way in DC.  They are saying that if businesses get a one year waiver, individuals should too.

No wonder American’s have less respect for their government than at any other time in history.  Those in DC, whether it be Congress, the President and his Administration, the Treasury and the IRS, have no respect for the very laws they pass and are charged with enforcing and are even comfortable exempting themselves from them!  This is exactly what one would expect to happen when you have a government that has grown entirely too large and is beyond unruly.

We cannot respect our government when it does not respect itself.  If we cannot respect our government, then how does our society function when those tasked with implementing and enforcing laws cease to do so in any reasonable way?  Rome…are we there yet?

Changes in Unemployment

Changes in Unemployment

Unemployment continues to be a drain on the economy and the ranks of those even searching for a job declines.

Employment Chart

With such slow economic growth, it isn’t possible to get the unemployment situation to improve significantly, despite the attempts at upbeat headlines.  On April 5th we learned that March experienced the biggest monthly increase in people dropping out of the labor force since January 2012, with 663,000 no longer looking for work. This means that we now have 90 million working age Americans who are not in the labor force. Of those, 6.5 million want a job and want to be in the labor force, (Bureau of Labor Statistics). The labor force participation rate has now dropped to 63.3% of the population, a level not seen since October 1978. The number of Americans officially unemployed has almost doubled since the market hit these levels in 2007 while the number of Americans on food stamps has risen to levels never before seen, with an almost an 80% increase since 2007. It is no wonder that consumer confidence continues to sit in recessionary territory. What is most troubling is that a full 40% of those unemployed have been long-term, (see chart below). Remember that the growth of our economy is dependent on the quality and quantity of labor and capital in the economy. With so many leaving the workforce and so many others out of work for an extended period, both quality and quantity are being materially reduced, which is a detriment to future growth prospects.

Employment 02