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TRUTH AND CONSEQUENCES By Mike Gasior On many occasions over the nearly nine years that I've been writing these newsletters, I have attempted to use the application of economic facts to illustrate when certain situations are unsustainable and destined for failure. I've made assorted predictions over the years about a host of issues and some were right and some proved wrong. Although, I actually do like my batting average. There have been a few times where I've made extremely bold calls that I'm quite proud of. I wrote my March 2000 newsletter the exact day the NASDAQ hit 5,132.52 to tell people that the NASDAQ was going to drop from that level and probably not return to 5,000 for at least 10 years because there was no fundamental, economic basis for stock to be priced that high. You can view that entire newsletter at this link: http://www.afs-seminars.com/newsletter_Mar_2000.html I wrote this as part of my August 2002 newsletter: "BE CAREFUL WITH REAL ESTATE" "I know if I mention one more time my predictions about the NASDAQ back in March of 2000 many of you are likely to puke right then and there, so I won't do that. I had strong feelings about a decline in that market and I am suffering from similar feelings about the current state of the real estate market." http://www.afs-seminars.com/newsletter_Aug_2002.html The title of my March 2005 newsletter was "Real Estate is Over". Enough said. http://www.afs-seminars.com/newsletter_Mar_2005.html Below is a quote from my May 2005 edition written on a day that oil was trading at $48.84: "Many people think that the price of gasoline at the pump right now is at historically high levels, which is not at all true. By any inflation-adjusted standard, gasoline and other fuel prices are still well below any sort of record high, and the prospect of $5.00 or $6.00 per gallon gas in the United States in the next few years is a completely probable situation. Since fuel prices affect literally every aspect and sector of the economy, you can easily imagine the crippling inflation that will result from such a scenario." http://www.afs-seminars.com/newsletter_May_2005.html A more amusing read (providing your own life doesn't mirror the couple I chronicle in this edition) is my April/May 2006 newsletter that I titled "An American Tale - Mr. & Mrs. Ben Dover". It follows a semi-successful couple's adventure into massive amounts of debt during this real estate bubble. Interesting to me was that I authored this story a full 16 months prior to this whole "credit crisis" becoming a headline news story. It never fails to amaze me that situations that seem brutally obvious are never looked upon by most people as worrisome at all. http://www.afs-seminars.com/newsletter_AprMay_2006.html This is not an effort on my part to blow sunshine up my own skirt about how wonderful and smart I am or how I sometimes make fabulous predictions about things. All I would like people to do is consider that perhaps some of the issues being discussed during this current political season are not just your run-of-the-mill campaign promises. Maybe they are almost evil lies that will lurch the economy into even rougher waters. NEW YORK, BERMUDA AND GRAND CAYMAN TRAINING SESSIONS I will be holding some extremely timely seminars in New York this year, and a particularly relevant slate of "a la carte" one-day sessions in Bermuda and Grand Cayman as well. Rather than list them all for you here, you can see the New York and offshore calendars at the following links: http://www.afs-seminars.com/schedule.html http://www.afs-seminars.com/offshore.html So, without further ado, let's get to bottom of some serious economic myths and lies. "I'M GOING TO CREATE GOOD PAYING JOBS FOR AMERICANS" No they won't. They actually couldn't if they wanted to. I have a serious request for the remaining candidates in the presidential campaign: Don't say another thing about "creating jobs" or "bringing back jobs" or even form a sentence that contains the word "jobs" in it. That might seem to be a surprise at a time when I personally think the economy is already in a recession. At a time when the economy has officially eclipsed Iraq as the number one issue on many voters' minds. My rationale is that, except during the depths of the Great Depression, the government doesn't really "create jobs". I will admit that World War II created most of the jobs then, and I'm not particularly sure that's a direction we should go toward, but that's another discussion. Instead, what a sensible government should do is to foster an environment to help create a skilled workforce and provide companies a decent business climate in which to operate. If it does that, the jobs will take care of themselves. But the fact of the matter is that many Americans no longer have skills that make them competitive in this global economy. I've heard both Clinton and Obama make veiled threats against NAFTA and pandering to various audiences with protectionist overtones. Believe me when I tell you this would be a fabulous way to pour some gasoline onto the smoldering fire that is the current economic situation. To appreciate this lack of skills, consider a couple different scenarios. Here is the first one: 1. How many different jobs could you find in the next six or eight months if you had to? Not necessarily perfect jobs, but jobs where you could get hired and earn a salary reasonably close to what you're earning now. I will guess that the answer you come up with will vary widely among the people who read this newsletter. For a terrifically skilled orthopedic surgeon, the answer might be 20 different jobs, since every major hospital would love to have him or her on staff immediately. However, if you are an unemployed autoworker in Ohio, the answer might very likely be zero or else you wouldn't be unemployed currently. The crucial point I am trying to make is that unemployment and low wages are not a function of too few jobs, as most politicians would have you believe. They're a function of too few skills. First let's put "unemployment" into context. We're used to hearing about the unemployment rate, which rose to 5 percent in December. That figure is fairly misleading, because there's an extraordinary variance if you were to look at unemployment as measured by education level. According to the most recent data from the Department of Labor, the unemployment rate is as follows for these education levels: --8.2 percent for high school dropouts. --4.7 percent for high school graduates with no college. --3.7 percent for workers with an associate's degree or some college. --2 percent for workers with a bachelor's degree and higher. Do you see the pattern here? To really illustrate my point in the most vivid way, consider the situation for Alex Rodriguez as your second question to ponder. It cuts to the quick with regard to trade, outsourcing, and all the related causes of unemployment anxiety. As was heavily reported, in December, the New York Yankees signed Alex Rodriguez to a 10-year, $275 million contract with a $30 million bonus if he breaks the all-time home run record. Interestingly, no one questions why the Yankees didn't hire a Chinese or Indian worker who would take A-Rod's job for $500 a year, with a free moped for breaking the home run record. That's simply because there's not a person in all of China or India (at least that we know of) who can hit a baseball like A-Rod. The Yankees can hire lots of people cheaper, but they won't get the job done. Rodriguez can command a unique salary because he has unique skills. The same exact thing is true everywhere else in the economy, albeit to a less extreme degree than in professional sports. You get my point. There's a crucial link between your pay and productivity. Your job can't be outsourced if there's not someone in China or India or Vietnam capable of doing the same thing for less. Of course, the primary driver of productivity is education. That means everything you learn, starting in preschool, to highly specific skills that you learn on a particular job. I find it both puzzling and frustrating to hear politicians talk so much more about jobs than skills. The sad fact is that even if a modern automobile plant were to be built in Flint, Michigan this year, most of the unemployed workers there wouldn't even have the right skills to get hired. Seriously. Could they write the software to run the highly automated assembly process? Do they have experience with hybrids and other green technologies that will be at the core of the next generation of vehicles? No one is going to get paid an above-average wage to screw bolts on an engine block. It's just not going to happen. That's something that can be done easily and cheaply by just about anybody, anywhere else in the world. This distinction between jobs and skills may seem like a semantic point but it isn't. It's at the core of what constitutes good economic policy, and politicians who chase jobs tend to favor offering subsidies to attract or retain big employers. They favor making it more difficult to move jobs overseas and to buy foreign products and services. They view the world as having a fixed number of jobs that must be protected using government resources and money that could otherwise be spent on programs that actually make workers more productive. And that's just plain wrong. Remember, we decided that our orthopedic surgeon friend could find 20 jobs if he had to. And our unemployed autoworker friend in Ohio couldn't find a one. That's a skills problem, not a shortage of jobs. An extremely worrisome trend for me is the plateau in the proportion of Americans who are getting college degrees. This is a particularly odd one, since the economic benefits of a college degree are huge and growing, but the proportion of American high school graduates who enroll in college has been stalled since the early '90s. In fact, the rate of college participation for African-American and Hispanic high school graduates has actually been falling during that time period. Other countries around the globe are narrowing the income gap with the United States in large part because they're sending an increasing proportion of their young people to college and we're not. If the politicians want to truly change our trajectory for the better, in any speech they are planning to give that includes the work "jobs", they will do us more good if they replace it with the word "skills". Imagine that: "I'm going to bring back better skills to Ohio!" At least it would be a move in the right direction. "I'M GOING TO CUT TAXES TO THE MIDDLE CLASS" This one probably isn't an evil lie, but rather sadly true. And stupid. Let me first lay out the actual facts about who pays the taxes in the United States as of the most recent statistics available, 2004. --The top 1% of income earners pay 35.6% of all taxes, up from 31.6% in 1996. --The top 10% pay 67.6% up from 62.0% in 1996. --The top 50% pay 96.6% up from 95.6% in 1996. --And the bottom 50% pays 3.4% of all taxes, down from 4.4%. While I'm at this, let me remind you of the tax cut George W. Bush pushed through in 2001 that reduced taxes somewhat for higher earning taxpayers and that both Clinton and Obama have sworn to let expire and not renew. Even WITH this 2001 tax cut, the share of the tax burden borne by the top 1%, 10% and 50% of earners actually increased over those years between 1996 and 2004 and the bottom 50% saw their share drop by almost 25%. And PLEASE don't get me started with this ridiculously stupid "rebate" plan suggested by Bush and passed by Congress. Gosh, what gross lunacy. Now luckily, not all politicians are cut from the same cloth and there are those who actually understand the sorts of measures that can promote true growth within the economy; such as reducing the tax burden for corporations. One must remember that companies are actually the ones who employ the gigantic majority of citizens in any capitalistic country. I saw Jack Welch a little over a month ago on CNBC and he made the profound point that corporations aren't nameless, heartless, cold entities who need as much punishment as possible, but instead living, breathing organisms made up of human beings and owned by human beings. Thank goodness there were some politicians last year who voted to reduce corporate tax rates by 8.9%. Unfortunately, the tax cutting politicians with this sort of foresight and fortitude were German and not American ones. If you stop and think about it, when was the last time that you can remember a large merger between a U.S. company and a foreign one where the merged entity was based in the United States. With our punishing corporate taxes and overwhelming regulations like Sarbanes-Oxley no organization in the their right mind would want to be U.S. based. Yet I listened to endless people lament the loss of a large government contract that went to Airbus and not Boeing. Trust me that this wasn't Boeing's fault, but the fault of the government that created the uncompetitive situation for its own employer. And don't even start with me about the human rights problems and environmental sins that other countries get away with that the U.S. has to comply with. That's just crap. Airbus is not headquartered in China, Vietnam or other countries who are routine violators of these issues. Please trust that we wouldn't want to compare the pollution created, natural resources consumed or a host of other statistics between America and the countries in which Airbus operates. Our tax system and regulatory system for employers is among the most punishing in the industrialized world. Period. Paragraph. Most Americans would be surprised to learn that the United States has the absolute highest corporate tax burden of ALL industrialized countries with the exception of Japan, who basically has a 1% higher rate. For anyone who doesn't know, the highest U.S. effective tax rate on corporations is 39.3% (35% Federal plus an average of 4.3% state income tax rate). Before anyone believes that "yes, maybe there are some countries out there with lower taxes" please take a look at Mike's VERY complete list of overall tax rates JUST in countries with a better situation than the U.S. A list like this is very difficult for you to find anywhere in such a concise format and as you read it you should ask yourself where you would set up your own widget company. It was somewhat nauseating to me to even see France comfortably ahead of us: Australia 30% If politicians want American companies to employ more people within the U.S., then give them a reason to do so and stop bitching about how other countries are stealing U.S. jobs. Do your country a favor and at least drop the rate to a total of around 29%, which is the average for the largest, industrialized nations. Of course, this suggestion is far too sensible for a Congress that is gripped with a desire to soak the rich and punish business. So in the meantime the rest of the world will look increasingly desirable and candidates will continue to pander to voters about how all these other countries are acting unfairly. "I HAVE A PLAN TO FIX SOCIAL SECURITY/MEDICARE/PROVIDE UNIVERSAL HEALTHCARE" No you don't. Or at least you don't have any such plan that doesn't include massive tax increases, reductions in benefits, or other such icky type of legislation that balances the checkbook. Certainly there is plenty of government waste occurring at all sorts of levels, but to lie to voters that simply "trimming the fat" of bureaucratic excess is going to pay for any of these sorts of proposals is indeed an evil lie. These are HUGE problems that exist because multiple generations of politicians have passed this "hot potato" issue onto the next in line to address and the problem has only become exponentially worse. This ticking time bomb of an issue should have been handled long ago and whoever finally decides to tackle it is going to be the bearer of very bad news for American taxpayers. "DEMOCRACY IS THE ONLY PATH TO ECONOMIC SUCCESS" Oddly no. In economic truth, politically repressed societies have fared quite a bit better than the most politically free countries. When you consider this theory in its most simple form, all a government is SUPPOSED to be is a mechanism that makes collective decisions for a large number of citizens who have different preferences. Perhaps I'd like to spend billions of dollars a year on public dog parks because I happen to love dogs, while you might feel that the money would be better spent on more police. This process is called "aggregating preferences". In the United States we send signals via our voting to help our government aggregate preferences. Research has shown, however, that no voting scheme can be arranged within a democracy that will result in policies that actually reflect the aggregated preferences of the society as a whole (you should be thinking "lobbyists" at this moment). Ultimately, plenty of legislation is passed that is in fact not ideal for economic growth, job generation and other issues that will lead to economic prosperity. Simply stated, democracies will not always win. Now I personally would not prefer to live in any other society than the one I occupy now in the United States, but such a society may not be the best suited for a rosy financial future. We are all familiar with the experience of the previous century where the United States, and its free markets and democracy wiped the floor with the Soviet Union with its planned economy and party dictatorship. But now we live in the 21st century where things suddenly seem different. The dictatorship in China, for example, seems to have learned their lessons from the failed practices of their Soviet counterparts. Although they continue to suppress their political opponents, they allow for a very high level of freedom in respect to economic policies within their borders. There is an organization called "Freedom House", which ranks the level of political freedom of countries around the world on a scale of 1 to 7, with 1 being the most free. Both the U.S. and Italy get a rating of 1, while Singapore gets a 4.5, China and Saudi Arabia 6.5 and North Korea the bottom ranking of 7. With this scale in mind, the economic growth of global economies broke down this way over the past 16 years: 1991 to 1995 Politically Free Countries - 2.34% growth in the
economy 1996 to 2000 Politically Free Countries - 3.27% growth in the
economy 2001 to 2005 Politically Free Countries - 2.25% growth in the
economy Average Over the Past 15 Years Politically Free Countries - 2.62% growth in the
economy Now this entire argument is not to argue that the U.S. or any other free country to move towards becoming more repressed. The argument is that voting in legislation on the whim of current public opinion will often not result in policies that are most conducive for economic success. The throbbing masses aren't always aware of what will be the best policy for the future and it is the job of the politician to have the fortitude to make the best decision for the public good no matter whether it appears unpopular at the moment. Ending slavery was unpopular. Giving women the right to vote was unpopular. Desegregation was unpopular. However, all of them were the right things to do at and all were perhaps late in their enactment. What is even more troubling is that as the politically repressed societies continue to propel themselves to higher levels of success against the "free" countries, what incentive will they have to change their human rights policies then? Democracies will continue to thrive and I'll continue to live in them, but oddly enough it may be time for them to learn some economic lessons for the market-friendly dictatorships against which they now compete. YOUR FEBRUARY BRAINTEASER Since this newsletter didn't really offer any "light hearted" sort of moments, I will try to not make the brainteaser any sort of horrific nightmare. I truthfully found it quite funny and interesting and a departure from what I tend to offer you guys. So relax and enjoy. Here it is: "During a visit to a mental asylum, a visitor asked the Director what the criteria is that defines whether a patient should be institutionalized. 'Well,' said the Director, 'we fill up a bathtub. Then we offer a teaspoon, a teacup, and a bucket to the patient and ask the patient to empty the bathtub.' Okay, here's your test: What would a 'normal' person use to empty the bathtub as quickly as possible?" Good luck, and when you can't take it anymore you will find the answer at the following link: http://www.afs-seminars.com/brainteaser_Feb2008.html Copyright 2008, Michael Gasior. All Rights Reserved AFS Seminars LLC |
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February 2008 Newsletter
