Some Common Cents For August 25, 2017

Earlier this week, someone forwarded to me a link to an old video clip of a debate, if that is the right word, between Milton Friedman and Phil Donahue. The issue at hand was greed. Donahue’s argument was the, presumed, inherent greed within capitalism leads to an unfair distribution of resources. Depending on how you view the world, Friedman’s response was either completely misguided or analogous to the virtuous killing of a mosquito with a sledge hammer.

Now, I have seen this clip numerous times. Within it, I have always been struck with Friedman’s following observation: “Is it really true that political self-interest is nobler somehow than economic self-interest?”

That is a powerful question, one which should make you think.

Those that know me well know I tend to be, or can be, something of a cynic. Actually, you can scratch the word something more often than not. The reason being is: my experience is very few people tend to be truly altruistic. Certainly, there are indeed some, but these are more the exception than the rule. All the more so when you include things like power and influence under economic self-interest. It seems the former two almost always lead to the latter over time.

A fewer of years ago, I made an economic presentation to a group of younger professionals here in Alabama. During the Q&A, one individual asked me the non-question, and I paraphrase: “I am a Millennial. We take income inequality very seriously, and think this growing problem is both unfair and outrageous. What do you have to say about that?”

Brother, you should have seen the heads turn as one to hear my response. It would seem as though they had struck a chord, or should I say heartstring, with the others in attendance. You don’t have the benefit of the questioner’s tone of voice, which I remember quite clearly. Let me just say they came across to me as kind of self-righteous. Heaven knows, I have been there and done that.

To be sure, I am no fan of income inequality. Who is? It would be truly fantastic if we lived in a world where everyone had highly marketable skills. However, I also know things like wealth and income are completely relative. Further, how far out to want to extend the geography. By a house? A street? Zip code? A county? State? A country? Hemisphere?

You know, I think it unfair Massachusetts is so much wealthier than Alabama. Unfair is hardly a strong enough word. It is completely unconscionable! After all, the Bureau of Economic Analysis (BEA) estimated per capita Gross Domestic Product (GDP) in Massachusetts was 75.9% higher than it was in Alabama in 2016 ($65,545 vs. $37,261). I suppose some differential is acceptable, but, in a country as wealthy as ours, that type of inequality is utterly beyond the pale.

Well, maybe not. After all the Census Bureau in its 2011-2015 American Community Survey estimated 58.2% of adults in Massachusetts had a Bachelor’s degree or higher. By comparison, only 32.2% of adult Alabamians did. Further, Massachusetts had slightly more than double the number (by percent) of advanced degrees than Alabama. By this measure, our friends in The Bay State are better educated and better trained than we are in the Heart of Dixie. As such, it shouldn’t be all that surprising they generate more economic output than we do.

In a lot of ways, it is just math, as most things involving economics wind up being, and I confess I might have pulled a Friedman vs. Donahue with my response to the non-question about income inequality. I said something along the lines of:

Well, depending on where they are to the median, you can either bring people up or take them down to reduce income inequality. Since not everyone is going to have the same level of training, intelligence, capabilities and marketable skills, it would be quicker and easier to bring the top down, through increased taxation or some other form of expropriation.

Now, we live in a relatively poor state, and I imagine everyone in this room makes more than the median income in Alabama….probably comfortably more. If income inequality is that important to society, we can always turn over to the government the necessary amount of money it would require to take us to the median. Of course, the median would go down as a result, but it is a step in the right direction. You can go first if you would like….I am good for now.

They didn’t like this, even if a lot of folks thought it was pretty funny. Me? I meant, and still mean, everything I said. Still, I was kind of a jerk, but, then again, maybe I needed to be. I don’t know.

With all of this in mind, as I have written here in the past, Washington has, or should have, a lot of serious, pressing economic issues with which to contend. The same could be said in state capitals across our country, but it would be hard to know it from the news reports. To that end, I can’t remember a time in my adult life when our political structure has seemed so dysfunctional.

There has to be something “in it” for the powers that be. There simply has to be.

Indeed there is, political self-interest. After all, the Democrats believe they can make a serious dent in the House of Representatives next year, even if regaining control of the Senate might be an uphill battle. On the other side of the aisle, representatives from arch-conservative districts and states seem to be loath to compromise with more liberal elements in Washington, regardless of political party.

If you read this newsletter a couple of weeks ago, you might remember the following two paragraphs:

Earlier in the year, the talking heads said to expect some kind of tax reform package come August. Well, August is now here, and the New York Times has recently written the Administration wants a bill on the President’s desk “by Thanksgiving.” Okay, I suppose we are working on government time, but the headlines make one wonder whether the GOP will be able to get its act together to do some very basic tax reform, of what I would consider the low hanging fruit variety.

… it seems so apparent it (meaningful tax reform) would benefit the US economy, which would benefit our society and government tax coffers, and could be politically easier to attain IF they kept it simple. I have scoured the data and found one thing to be pretty much true across the board and time: tax receipts increase when the economy grows and wealth expands. We can debate tweaking marginal tax rates for the highest of income earners and this or that tax bracket, and probably never come to a clear conclusion. I can provide data which, on paper, would suggest or defend both sides of any argument.

I cut & pasted these two paragraphs for a reason. The US economy has some very significant obstacles in its path IF we want it to grow at (what used to be) the historical standard of 3%. In fact, I would go so far as to say it just won’t happen unless we make some pretty significant changes to how we are doing things.

First, we have a serious demographic problem in the country, at least when it comes to economic growth. Namely, we are getting older as a population, and more people are entering their retirement years than there are folks entering their peak earnings ones. This isn’t a secret. It is simply the function of annual live births and deaths which we have known about for decades.

As such, more people, in both absolute and relative terms, will be “taking out of the system” than putting into it. Again, this isn’t a mystery. We knew it was coming. As a result, spending on things like pensions and Social Security retirement benefits will consume an ever larger percent of public budgets and economic output. Yes, a million times yes, people paid into the system, but, unfortunately, that money has already been spent by the powers that be. To that end, the so-called Social Security trust fund is really nothing more than a whole bunch of inter-department IOU’s from the US Treasury. Seriously.

Further, due to this demographic shift, it is almost impossible to imagine the Labor Force Participation Rate and the Employment to Population ratio to approach the levels before the 2008 crisis for at least another decade. Couple that with potentially more stringent immigration rules, and there just won’t be enough folks actively participating in the workforce to generate a significantly higher rate of economic activity than we are currently experiencing.

Second, make no mistake about it, the world is awash with debt….not all of it good. Let me give you an example of good debt: I borrow $1 million and turn it into $2 million worth of economic activity. Good. Unfortunately, governments around the world seem to have been doing the following: borrowing $1 billion and turning it into $800 million in increased economic output. Bad.

As a result, the global debt to GDP ratio (as well as ours) has blossomed over the last decade, and that money has to be either: 1) repaid, or; 2) not repaid. If #1, we just keep rolling and adding to the debt load, which will eventually slow down or crowd out other investment. Sure, the slowdown in output might be hard to see on a spreadsheet, but it is there embedded in opportunity costs. If #2, well, money vanishes from the global economy, and that generally isn’t a good thing. Either way, this mountain of debt is a real problem. Hey, we don’t have to eliminate it, just reduce its relative size.

You can think of that last sentence this way: you have a large, 100-year old oak tree with a couple of dead limbs which overhang your house. If these fall, you will have to replace your roof. So, do you cut down the entire majestic tree to save your roof? Or do you lop those dead branches and be done with it?

Now, if government is the best creator of wealth available, the quick cure for what ails us is either doing nothing or increasing taxes. If the private sector is better at doing this, which history would seem to suggest, it would seem the best thing to do would be to unfetter US businesses and put as much money in the hands of the private sector as is possible. Simply put, we have to do something different UNLESS 2% growth and an ever growing debt/GDP ratio are acceptable.

Hey, I am not talking about income inequality here. That will continue to grow. I am talking about income in general. We can worry about how we cut the pie later; let’s just make it a really big one to start.

Admittedly, I haven’t crunched all the numbers and done a whole bunch of Monte Carlo simulations, etc., and I suppose that is important to some people…a lot of people. I guess I am just sort of the type of person who gets off the railroad tracks when they see a train coming, as opposed to one who keeps walking thinking the train is going to move for them. I don’t need to estimate speeds and time of terminal impact; I just go ahead and get on the siding, if not further away than that.

Right now, as I type and in my opinion alone, Washington is putting its collective political self-interest above the economic self-interest of the country. As Friedman might have mused: “is that nobler somehow?” If it is, why? If it isn’t, why are we letting it be thus?

In the end, I admit this piece might come across as alarmist, but I am really not to that point. Our situation IS different than Europe’s and Japan’s, and I am not trying to draw a comparison….although they are in worse shape than we (just saying). What I am saying is ‘we’ can make meaningful progress in our economic self-interests IF we have the conviction to put our political ones on the back burner for a little while.



Regardless of whether you agree with Friedman and his theories, I doubt many could argue it has been a long time since there has been a public figure who could argue the merits of free enterprise as coherently as he did.