Frequently in Error But Rarely in Doubt

Posted January 2, 2019 by Brian Gottlob
Categories: Federal Deficit, Federal Spending, Fiscal Policy, Tax Revenue, Uncategorized

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In my economic presentations I often say that I am ‘frequently in error but rarely in doubt.”  Still, when in error I admit it, it’s a sign that I am willing to ask myself “why” in order to improve my methodologies.  I was wrong when I predicted NH’s job growth would be under 1% in 2018 (it is double that), largely because the labor force was able to grow more than I had forecast (see my previous post on net in-migration to the state).  In a letter to Congress over 100 economists asserted that “the macroeconomic feedback generated by the “Tax Cuts and Jobs Act” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time. Federal revenues have a seasonal (monthly) variation, with some months bringing in more revenue than the government spends and vice versa.  Comparing similar months over time thus offers some insights into the deficit trends over time and in different economic conditions.  As the chart below shows, the November 2018 monthly deficit (the most recent data available) show that during a period of solid economic growth the U.S. ran the highest November monthly deficit in its history.

november deficits

 

Proponents of the bill also claimed that we would see enough additional investment to boost growth by 4% per year. That implies an increase in annual investment of roughly $800 billion.   But, as this post noted, investment has not jumped to that level, nor does it show signs of doing so anytime soon.  The economists who predicted that tax cuts would spur a rapid increase in investment and higher revenues have been proven wrong.   They have also remained silent, which suggests that they are not at all surprised to see revenues and investment fall far short of what they promised.  Many, if not most, will dismiss the rising deficit (see below) during times of solid economic growth as a function of rising spending.

Deficit nov 2018

Rising spending is, in fact, a major but not unexpected contributor to the deficit problem.   Stagnant or declining revenues in a strong economy are not the norm, and are the kind of pro-cyclical fiscal policy (cutting taxes in a strong economy instead of filling coffers during a strong economy so that taxes can be cut to stimulate the economy when it is weak) that is going to make the next economic downturn much more difficult to combat.

NH Never Really Lost its Attractiveness

Posted December 28, 2018 by Brian Gottlob
Categories: Demographics, in-migration, migration, NH, Uncategorized

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There is no more overblown or misunderstood issue in NH than its demographic trends. There are challenges to be sure but almost all of the popular memes don’t withstand solid empirical analysis.  NH’s extremely low birthrates among women 15-44 (first or second lowest in the nation over the past many years – again a sign of NH’s successes not failures as it is a result of women in NH having with high levels of educational attainment and who have a high level of participation in the labor force) means the state must rely on net in-migration for labor force and population growth.  I have argued for more than a decade that there is nothing that has fundamentally altered NH’s attractiveness as a place to live, despite a number of years recently where more individuals moved out of the state than moved into NH. During times of recession NH tends to lose educated and talented people to places with more opportunity, while the housing crash that prompted the last recession made it especially difficult for NH’s core in-migration demographic (two wage earner, married couple families, ages 30-44, with children) to move into NH because they likely would have had to sell a house with an underwater mortgage and they would also have wanted to buy a house in NH (both of which were much more difficult between 2007 and 2013). Like all rural states, NH also sees a high percentage of young people leave and that has not changed in decades.  The good news is that net in-migration to NH is resuming and gaining steam, NH had the 6th highest rate as a % of its population of any state and the demographics of in migrants were a bit younger than prior years.  In addition, about 55% of in-migrants to NH over the past five years have a post-secondary degree, adding to the overall skill level of NH’s population.

2017 State to state

Still, net in-migration tends to be concentrated in a few areas of the state, the Seacoast, Strafford  and Rockingham Counties in particular, and in several communities. While state policymakers worry about statewide demographic trends it is most important to remember that the state and its communities are not monolithic.  Trends vary greatly across communities and it is the decisions and policies of local communities that most affect demographic trends.  It would be wise for policymakers and local officials to look to the characteristics of communities that are bucking the trends about which policymakers are most concerned (aging, out-migration, etc.) for prescriptions to address their concerns.

Where is the Boom in Business Investment?

Posted December 21, 2018 by Brian Gottlob
Categories: Fiscal Policy, Tax Revenue, Uncategorized

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Federal corporate tax revenues have fallen about 30 percent on a year-over-year basis since the tax rate w as lowered from 35% to 21% in January.

Investment

A lower tax rate increases the return on investment and should provide an incentive to investment. That was the rationale for the recent tax cut. Business investment increased some after the cut but has barely increased (1% not annualized) in the most recent quarter. But here is the thing, businesses won’t make investments if they don’t see profitable opportunities. There are likely to be fewer opportunities for profitable investment as the economic expansion ages. So while a corporate tax cut was needed, the stimulus value of a large tax cut late in the business cycle was questionable.

BG SMPS NE Presentation

Enacting some smaller cut, helping the government avoid depleting its coffers during a period of solid economic growth, and saving any additional cuts for a time when the economy is weaker, would have been a better path. For the same reason that very low interest rates in a strong economy limit the ability of the Federal Reserve to stimulate the economy as growth weakens, so too does a large corporate tax cut in an economy with near full employment and with solid economic growth.

R.I.P the American Made Sedan

Posted November 28, 2018 by Brian Gottlob
Categories: Automobiles, manufacturing, retail sales, Uncategorized

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In the last six years the share of light vehicle sales (sedans, station wagons, SUVs, pickups, minvans) in the U.S. that were autos (sedans and station wagons ) versus light trucks (pickups, minivans, SUVs) has declined by 20%.  Autos are now about 30% of all light vehicle sales, in 1990 the percentage was 65%.  Of the top 5 selling light vehicles in the U.S. in 2017, only the Toyota Camry is a sedan and there was not a single American made sedan in the top 20 selling vehiclesShare of Autos

By far, the top selling vehicle is the Ford F series pickup, selling more than twice the number of the top selling sedan, and 60% more than the next best selling vehicle (the Chevrolet Silverado pickup).  The market has clearly changed, helped by lower gasoline prices, recent changes in CAFÉ (fuel efficiency) standards, and most importantly consumer preferences.  GM recently announced the closing of several manufacturing facilities.  I worked on 2 energy projects in Lordstown, OH where GM built its (once) popular Chevy Cruz and it is painful to hear that GM will be closing that facility after what was a period of renewed optimism in the region.

How Much Should We Pay to Save a Steel Mill Job?

Posted November 16, 2018 by Brian Gottlob
Categories: International trade, manufacturing, Tariffs, Uncategorized

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There are about 86,000 steel mill jobs in the United States, down from a decade ago when it was about 100,000. At its nadir in early 2017, steel mill jobs were under 81,000. About 6,000 jobs have come back since tariffs were introduced, but the producer price index (PPI) for steel mill products also soared as a result. The value of U.S. steel mill output was about $78 billion before tariffs while the producer price index for steel mill products has risen just over 20% since tariffs . Those numbers imply a cost of tariffs to purchasers of U.S. steel mill products (U.S. companies and governments) of about $16 billion, as well as a cost per job saved of about $2.7 million. If instead of tariffs the U.S. had offered each of the 6,000 laid-off steel mill workers a generous $100,000 stipend per year for 3 years to replace lost pay and benefits and to retrain, it would have cost $1.8 billion, saving U.S. companies and governments $14.2 billion in tariff-related costs. A  less than 1% surcharge on imported and U.S. steel mill products could have paid for such a policy without adding to government debt. I’m not arguing for such a policy but that 1% seems like a small price to pay to avoid punishing 20% price hikes.

Steel Prices and Emp

It’s a Good Time to Be a Bank

Posted October 15, 2018 by Brian Gottlob
Categories: Banks, regulation, tax cuts, Uncategorized

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It’s a good time to be a bank, well a BIG bank anyway. Bank of America’s Q3 profits are up by 32%, JPMorgan/Chase’s by 24%, Wells Fargo by 32% in the 3rd quarter.  Higher interest rates, a strong economy and needed (for smaller banks) regulatory relief have helped but the biggest contributor has been the reduction in the corporate tax rate.  Industry-wide Q3 results have not yet been reported but looking at Q2 and Q1 2018 data compared to 2017 shows the impact of tax cuts.  While banks pre-tax income was up by 12-13% in 2018, net income was up 27-28% because applicable income taxes (federal & state) were down more than 20%.

Bank Earnings

The banking industry has been perhaps the biggest beneficiary of the Trump administration’s initiatives.  Earlier this year I examined over 400 press releases announcing how companies would be using the proceeds from corporate tax cuts and highlighting employee bonuses, minimum wage hikes, etc. (the releases were remarkable in their similarity as were the benefits accruing to employees – a small percentage but more about that in a future post).  Despite banks being only about 1% of all business enterprises thy accounted for just over 30% of the press releases highlighting worker and civic benefits of the tax cut.

press releases

Protectionist Fallacies and Promises

Posted October 11, 2018 by Brian Gottlob
Categories: E, Employment Growth, International trade, manufacturing, Uncategorized

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Repetez moi: “tariffs are stupid.” Our President, who should know better, said the U.S. has collected billions of dollars from China as a result of the tariffs placed on imported goods. Well no, not exactly, actually not even close. Those billions of dollars have been collected from U.S. companies and manufacturers importing products and materials (like aluminum and steel, electronics, etc.) for use in the products and services that they sell. Tariffs have already cost Ford Motor Co. $1 billion in profit. U.S. consumers are also paying, until recently only on a few products (the CPI for laundry equipment was falling for about 10 years but is up 13% over the past year) but who will soon see prices on more products affected, as tariffs are placed on more products. Auto workers who were promised protectionist policies would spur manufacturing job growth must be disappointed as growth has fallen since 2017 and has been negative since mid-2017. Obviously, there are other influences on emp. growth in autos but protectionism isn’t helping. NAFTA version 2 (which looks a lot like NAFTA version 1) is hailed as the next savior for employment. Why not, those protectionist promises have worked-out so well thus far.

auto manuf emp


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