This morning I decided it was time to address the “big lie.”  No, not the one that has dominated the news since the November 2020 election.  Not the one about elections or politics, but the one about federal versus state and local government.  Or the related one about federal government versus the private sector or the average American household.

The timing for this entry is the coming barrage of Republican and conservative arguments why Americans cannot afford President Joe Biden’s “Build Back Better” infrastructure program.  (Or as Carol Tucker-Foreman, director of the Consumer Federation of America’s Food Policy Institute suggested, “You can irradiate poop, but it’s still poop.”)  Primary among them is the “big lie,” the federal government, when it comes to budgeting, should be held to the same standard as state and local governments, many of which are required by law to pass a balanced budget each year.  Or, the even more populist argument, why should the federal government continue deficit spending when every family in America knows it should spend not more than it takes in.

There is room for legitimate debate whether all of the items on Biden’s wish list meet the definition of infrastructure, but the “re-woke” pay-as-you-go Tea Party Caucus would rather focus on the proposal’s impact on the federal deficit.  Their argument being, the timetable for spending and revenues is a radical socialist plot which will bankrupt America and destroy our grandchildren’s future.  Who could possibly believe allocating $2.2 trillion in improvements over eight years and then taking 15 years to recover the costs is a good idea?  Ooh, ooh, I know the answer.  EVERYBODY!!!  State government.  Local government.  Business.  And the overwhelming majority of American households.

Ready?  It is called “capital budgeting.”  Why does everyone except the federal government provide for it?  Because it makes sense from an economic perspective, connecting the cost of major purchases or improvements to the timeframe required to recover the initial investment.  Does anyone believe Delta Airlines writes a check for $100 million dollars every time it purchases a Boeing 757?  It either finances or leases the equipment, making payments over the expected useful life of the aircraft.  Is that not the same as deficit spending?

Or that a state or local government pays cash when it builds a new firehouse or upgrades water and sewer facilities?  They issue municipal bonds which are paid off over the “shelf-life” of those improvements. Again, sounds an awful lot like deficit spending to me. These examples are based on the very same economic principles a bank employs when it lends you money for 30 years to purchase a house.  Which, speaking of inter-generational obligations, becomes a liability for your heirs if not paid off before you die.

This is not a new idea, and if it has value, why has there been no movement to adopt it?  Non-believers offer a rationale for their position that deserves an Oscar for most inconsistent argument of all time.  On one hand, they claim the government needs to be run more like a business.  So, when they see a one-time payment of $1.7 billion for 17 additional F35 fighter planes in Donald Trump’s FY2021 budget, you would think they might ask, as does the CFO of Delta Airlines, “Does it make sense to fully pay for them at the time of purchase rather than spread the cost over the life of the equipment?”

But wait.  One of the primary reasons they are skeptics of federal capital budgeting is their belief (you guessed it) government does not operate like the business sector.  It does not respond to the same stimuli and incentives as private enterprise.  The underlying theory behind this position, held by both liberal and conservative economists, is the public sector is not subject to the same competitive forces in the marketplace when making decisions about capital expenditures.  In 1998, the late Charles L. Schultz, director of the Office of Management and Budget under Jimmy Carter, wrote the following:

In the case of private investment, competitive forces and the search for profits automatically exert some discipline over the quality of projects selected by private investors.

Of course, this is the same Charles L. Schultz, who as a member of Carter’s Council of Economic Advisors, warned the U.S. was losing its competitive advantage in the global marketplace to countries like Japan.  Some things do not change.  This is the same hypocrisy voiced today by those who decry how Chinese investment to grow their economy creates an unlevel playing field, but will not even debate the Biden infrastructure proposal.

What if we approach this issue from the opposite perspective?  If capital budgeting is such a bad idea, why not eliminate its use as an accepted accounting principle for everyone.  Business would have to pay for major improvements in the same year the costs are incurred.  School districts and local governments could not issue municipal bonds to cover school buildings or fire equipment.  You and I would have no option other than to pay cash for a new car, boat or home.  It does not require much imagination to realize what would happen.  In economic terms, America would become a dystopian society even Hollywood is yet to imagine. If such a film were made, I suggest it be titled, “Mad Mitch: Beyond Blunder Dome.”

For what it’s worth.
Dr. ESP

Since its inclusion in the House of Representatives version of the $1.9 trillion American Rescue Plan and parliamentary exclusion from the Senate version, there has been a lot of discussion about raising the minimum wage to $15/hour.  Unfortunately, political debate over this issue has drowned out enlightening economic considerations.  So let me take a minute to talk about what the new standard represents.

At $15/hour a worker would have a gross annual salary of $31,200. This is still less than half or the 2019 average annual household income in the U.S. of $68,703.  And for the record, it is 17.9 percent of the $174,000 salary of a U.S. Senator or Representative each of whom has received three salary increases since 2006, the last time Congress raised the federal minimum wage.

But salary comparisons are only half the story.  After employee contributions to Social Security and Medicare ($2,387), plus income tax on taxable income ($1,920), net take home pay is $26,893 or $2,241/month.  Of that amount, the majority ($2090) goes toward the following three items.  NOTE:  West Virginia has the lowest monthly housing costs while New York and California are over $1250/month.

Average Monthly Rent/$725 (WV)
Average Monthly Household Food Budget/$552
Average Monthly Transportation Cost per Individual/$813

The situation does not improve dramatically for a two-income household which may now include daycare at an average of $972/month and additional transportation costs.  And neither scenario includes other necessities such as clothing, education costs, etc.  A $15/hour minimum wage is no walk in the park.  Anything less is a jungle.

But, as usual, that is not what I came here to talk about.  Understanding why we do not have a higher minimum wage is as important as whether we need to mandate one.  There are several but the one that gets the most attention is income inequality.  Yes, politicians and analysts will point to the growing disparity between management and worker salaries and benefits.  And they are correct.  In 1965, the CEO-to-average worker compensation ratio (salary and benefits) was 21:1.  In 2019, that same statistic is 320:1.

However, no one seems willing to tackle an underlying variable which may be the most significant deterrent to a living wage.  To address what I believe is this bigger and less obvious reason, I will compare two very familiar brands: Amazon and McDonalds.  In January 2018, Amazon announced it would begin paying all full-time, part-time and seasonal workers a minimum $15/hour.  [NOTE:  Pressure from Senator Bernie Sanders and others contributed to this policy change.]  How could they do this?  Did founder Jeff Bezos contribute a major portion of his $182 billion net worth to the salary pool?  Not that I am aware of.

Instead, Amazon was able to raise its minimum wage without tapping Bezos’ fortune because it operates on a value proposition that generates enough revenue to compensate its workers at the new standard and continue to make shareholders (not to mention Bezos or his ex-wife) happy.  Think about it. Amazon customers believe they get enough value from this service, not only do they patronize the company.   One hundred twelve million households pay an annual fee (Amazon Prime) to have access to a higher level of service.

In contrast, McDonalds provides the following schedule of average salaries by position.

Team Trainer: $9.28/hour
Cook: $9.36/hour
Fast Food Attendant: $9.79/hour
Shift Manager: $12.01
General Manager: $14.67

Yes, even a general manager is paid less than the proposed $15/hour rate.  [NOTE:  Individual franchisees can diverge from the posted schedule.]

One would expect McDonalds’ management to be a major opponent of a federally mandated $15/hour minimum wage.  However, during a January 2021 earnings call to investors, CEO Chris Kempcziski reported the company is “doing just fine” in those states in which wage minimums exceed the federal standard.  A four-year analysis commissioned by McDonalds management found there had been no closures, job losses or increased automation directly related to increased salaries.

The higher labor costs were absorbed by an increase in the price of the franchise’s signature Big Mac.  By how much?  Economists participating in the four-year study estimate “a 10 percent increase in the minimum wage led to a 1.4 percent increase in the price of a Big Mac.”  Equally important, “customers did not eat significantly fewer Big Macs as a result of the price hike.”  Imagine that.  McDonalds could raise each employees salary by 50 percent by increasing the cost of Big Macs by seven percent from an average of $3.50 to $3.75.  If the price hike was spread across multiple menu items, that increase would be even less noticeable.

The source of its value proposition is not important.  In McDonalds’ case I doubt if it is the food.  Maybe it is simply brand recognition.  Consistency of product regardless of overall quality.  Or maybe it is just keeping the kids happy for an hour.  Bottom line?  Their own analysts admit there is something about the company which makes their products inelastic enough to increase customer pricing to the point where a $15/hour minimum wage will not make the Golden Arches collapse.

My point?  We need to stop asking, “Are some employees worth $15 an hour?”  Maybe it is time to approach the question from a different perspective.  Should companies which provide goods and services be expected to create enough value their customers are willing to bear the price required to pay the company’s workforce a decent wage?  And, if they do not create that value, should they step aside to make room for other companies that can?

In other words, a fast food restaurant that survives if, and only if, to attract customers, it offers a sandwich, fries and drink at a price so low it cannot pay its workers a living wage, maybe they should advertise it as a “NO-VALUE MEAL.”

For what it’s worth.
Dr. ESP

The sustainability of any business depends on its ability to either maintain and grow its current consumer base or develop and market new products and services to attract a previously untapped market.  Or sometimes both as has been the case of the Ford Mustang.  Facing competition from other automobile manufacturers for the “family car” buyer which had been the mainstay of its success,  Ford introduced the Mustang at the New York Worlds Fair in April 1964.  First year sales totaled 618,000 vehicles, more than five times the company’s pro forma projection.  For many of these initial model year owners, the Mustang was their first new-car purchase.

More than a half century later, the average age of Mustang buyers is 51 years old.  As they became empty-nesters, many loyal Ford owners have stuck with the Dearborn-based company, trading in their Escapes and Explorers for the latest version of the “muscle car” including the 2020 Mustang Mach-E, an electric SUV crossover (pictured here).  In other words, Ford used the Mustang brand to first attract the untapped youth market and later to recreate that experience for an older generation.

Based on an article in this morning’s edition of USA Today, I realized the same principle applies to political parties.  When their traditional base begins to dwindle they have the same choices.  Tap a new market, provide policies and programs that appeal to long-time loyalists or both.  Such is the case with the Republican party.  To fully appreciate its transformation, the first task is to ask, “What happened to the traditional base which produced presidential victories in all but four years (Jimmy Carter’s single term) between 1968 and 1992?”

The answer is pretty simple.  Between 1950 and 1980, real family income rose almost equally for all households regardless of economic status.  Since that time families in the top five percent have seen real income increase by 180 percent which median income gains equal 130 percent and lower income growth is less than 120 percent.  (Source:  Center for Budget and Policy Priorities based on U.S. Census data)  In partisan terms, for the first three decades after World War II, an overwhelming majority of Americans were benefiting from the post-war boom and viewed the GOP as the conservative force that would protect those gains.

As upper class households continued to flourish while middle and lower class family income was stagnant, the percentage of voters who identified as and voted for Republicans decreased.  Best evidence?  The GOP won the popular vote for president once (2004) in the last 28 years.  The Republican party was the partisan equivalent of Ford Motor Company in the mid-1960s.  To continue its viability on the national scene it had to stop the loss of traditional voters and fill the gap with new voters.

Which brings me to this morning’s report on a mid-February Suffolk University/USA Today poll of 1,000 Trump voters.  It suggests, even though the GOP hoped to hold on to upper income voters with tax cuts and deregulation, its ability to make the 2020 election closer than predicted is largely due to an increase in voter participation by Donald Trump cultists.  Consider the following Statista exit poll data for 2016 and 2020.  In 2016, voters with annual income between $50,000 and $99,9999 supported Trump by a margin of 50 to 46 percent.  Compare that to a 2020 Biden advantage of 56-43 percent for the same demographic.

But for one income cohort, the tax and deregulation strategy worked.  The 2020 margin of Trump support among voters with an annual income of $100,000 or more increased by almost 10 percent (54-43) compared to a less than two percent margin in 2016.  Unfortunately for the GOP, those voters made up a smaller percentage of the total vote in 2020.

With the decrease in voting power among upper income voters, the GOP needed to look elsewhere to make up the difference.  The USA Today  analysis by Susan Page and Sarah Elbeshbishi makes it pretty clear where they came from.

• 73 percent of Trump voters still say Joe Biden was not legitimately elected.
• Trump voters by a margin of 46 to 27 percent would abandon the GOP and join a Trump party if he decided to create one.  A similar margin believes the Republican party should be more supportive of Trump.
• 80 percent think the seven GOP senators who voted to convict Trump “were motivated by political calculations, not their consciences.”
• 58 percent believe the January 6th attack on the U.S. Capitol was “antifa-inspired.”
• 76 percent would support Trump for the 2024 Republican nomination for president and 85 percent would vote for him in the general election.

If half the 2020 Trump vote totals came from those whose first loyalty was to the candidate, not the party, it explains both the continuing hold Trump has over the GOP and the willingness of Republican officials to dance with him and down-ballot candidates like Lauren Boebart and Marjorie Taylor Greene.  If you think Texans were left out in the cold by an increase in renewable energy, that is nothing compared to what the GOP will face if its future is fueled by renewable conspiracy theories which are at the heart of this other “Greene New Deal.”

For what it’s worth.
Dr. ESP

The question of the day: “Why is it so hard to come up with solutions to the nation’s most pressing problems?”  Hopefully, the following example sheds some light on this often voiced critique of government as each option requires balancing opposing objectives.

A recent conversation with a long time friend and colleague focused on the pending COVID-19 relief package.  While we agreed those who had suffered the most economically during the pandemic need additional help, he asked the question most fiscal conservatives have ignored the past four years, “Who is going to pay for it?”  He then challenged me to come up with a way to pay down the national debt.

Within 24 hours I gave him one option based on the following facts and assumptions.

• The national debt is approaching $28 trillion.  With the addition of a $1.9 trillion relief package it will top $30 trillion in the coming fiscal year even with an anticipated rebound in GDP and employment.
• Labor is already heavily taxed when you take into account income tax, social security and Medicare.
• Non-labor income has had a relatively free ride.  Dividends and capital gains are taxed at a lower rate than labor-based income.  Hedge fund managers (you know, those people who bet AGAINST the U.S. economy) can defer income and have it treated as capital gains rather than management fees.
• Increasing government revenue is about more than tax rates.  It also depends on the base, i.e. the goods and services to which the rate is applied.  States and localities, most of which are required to balance their annual budgets, have added once tax-free commodities (e.g. downloaded software) to the list of taxed items to meet their constitutional requirement to match revenues and expenditures.

These facts and assumptions set the direction in which I sought a solution to the debt.  Was there a  currently un-taxed good or service that could generate enough revenue to pay off the national debt?  If so, could it be taxed and how?  And finally, would such revenue source infringe on state and local receipts?

The answer to the first question was easy.  How is buying stock different from purchasing a computer, car or clothing?  And stock transactions are not taxed by state or local governments.  The logical conclusion?  Impose a sales tax on the value of a stock purchase.  But would it generate enough income to eliminate the debt.  To determine this, I looked at the data about stock transactions on one day (December 31, 2020).

• The value of all stock sales (including all U.S. exchanges) totaled $411.2 billion.  I chose New Years Eve because sales volume is historically lower than an average day making any annual projection more conservative than might be expected.
• A 2.5 percent national sales tax would generate $10.3 billion on that one day.
• The markets are open 253 days annually.
• The annual revenue from the sales tax would be $2.6 trillion.
• At this rate, the current debt of $28 trillion could be paid off in less than 11 years.

If, however, you thought a 2.5 percent rate was too high, lower it to 1.0 percent.   Annual receipts would fall to $1.04 trillion, eliminating the current debt in just under 27 years.

I then applied it to my own stock transition history for calendar year 2020.  I had purchased stock valued at $30,053.  At 2.5 percent my contribution to debt relief would be $751 for 2020.  That seemed to make sense as a fair share for someone with our net worth.

My friend, who lives on the other side of the tracks (the good side), suggested his 2020 contribution would have been $300,000, to which he added the word, ‘Gulp!”  But, if you do the math, that meant he purchased $12 million in stock value last year.  To which I replied I doubted anyone who could spend $12 million on stock in a single year would miss a meal because of the new tax.  And then asked, “Would you prefer we treat dividends and capital gains as regular income subject to your marginal rate?”  He did not even reply to that inquiry.

I then anticipated an additional objection.  Any new tax, regardless of its initial purpose, would be more federal revenue and would only lead to more spending, not debt reduction.  So, I suggested any new tax must be dedicated to that specific purpose.  Right on cue, he asked, “Wasn’t that supposed to be the case with Social Security.  Yet Congress raids it constantly to cover the deficit?”  Yes, that is why this new tax should be created by amending the constitution as was the case with the income tax.  The 16th Amendment put restrictions on the imposition of a federal income tax.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Those restrictions have been upheld time and time again by the courts.  Therefore, the “power to lay and collect taxes” on the value of stock purchases for the sole of purpose of paying down the national debt could have the same judicial weight if violated by any future Congress.

After he shared my idea with several wealth managers, my colleague said their message was crystal clear.  Wall Street will never accept a tax.  I needed to focus on fees.  He recommended a $1.00 fee on transactions over $100.  Unfortunately this option had two drawbacks.  First, even if the $1.00 fee was applied to all transactions, the total daily revenue would be approximately two billion dollars, one fifth of that generated by the 2.5 percent sales tax.  Therefore, eliminating the current debt would take 55 as opposed to 11 years.  Second, a fee per transaction is highly regressive.  If I buy one share of IBM at $128, the fee would be equal to 0.7 percent of my purchase.  If my colleague buys one share of Berkshire Hathaway Class A stock for $365,000, his fee is 0.00027 percent of his transaction.

He came back with a suggestion the fee apply only to transactions over $1,000.  Okay, that makes it a little less regressive.  However, the average value of all transaction is approximately $117.60 (total dollar volume divided by block volume). In other words, the cost of making any fee less regressive is a corresponding decline in the revenue needed to erase the debt.

Which brings me to the title of this post.  After raising the more regressive nature of the fee over a percentage tax on transaction value, my friend responds, “Life isn’t fair.”  To which I reply, “You’re right about life not being fair.  But it’s fairer if you are rich and have lobbyists.”  Let me explain.

We hear a lot from fiscal conservatives about the cost of the social safety net.  Of course there are abuses, but the general principle is the “net” is designed as a hand up, not a hand-out, especially when Americans fall on hard times.  What we never hear about is the “corporate safety net.”  Consider the following occasions on which corporate America turned to the government for assistance which responded with the associated federal outlays.

• 1980s savings and loan crisis ($132.1 billion)
• 2008 subprime crisis ($700 billion)
• 2018 tax act yearly impact on corporate tax receipts ($116 billion/Source: Forbes)
• 2019 farm crisis due to Trump tariffs ($41 billion)
• 2020 pandemic relief to major industries in the CARES Act ($208 billion)

In contrast, the FY2020 federal budget included $16 billion for Temporary Assistance for Needy Families (TANF). $66 billion for Supplemental Nutritional Assistance Program (SNAP) and $60 billion for HUD Housing Assistance.  Compare that to the estimated $649 billion in direct and indirect U.S. subsidies to the fossil fuel industry in 2015.  (Source: International Monetary Fund).

So, the next time you hear a politician rail about entitlements and the welfare state being responsible for the national debt, those living in poverty are not the only beneficiaries.  Or when you hear Republicans accuse Democrats of wanting to give everything away for free, think about who else is currently on a free or heavily subsidized ride in America.

Deficit hawks who constantly preach about the critical need to bring down the national debt are no better than those they claim are living off the American taxpayer.  They want to balance the budget and eliminate the national debt.  But please, please do not ask them to pay to do it.  That is what makes them “WealthFare Queens.”

For what it’s worth.
Dr. ESP