Donald Trump, often a master of snide generalities, has been very precise about not only his plans for undocumented immigrants and Obamacare, but also his approach to taxes. The presumptive GOP nominee has laid out detailed proposals to cut tax rates, expand the standard deduction, and sharply shift the approach to business taxes. I’ve reviewed his proposals, and the conclusions are sobering. For a starter, Trump’s tax cuts are so expansive, they would decimate either the federal budget or the U.S. credit rating. Moreover, the GOP “populist” channels most of the benefits from his tax cuts to the country’s wealthiest individuals and businesses. So, Trump characteristically doubles down on the Democrats’ central meme of income inequality, and ensures that one of the biggest winners would be the Donald himself, through a giant tax windfall for The Trump Organization, LLC and other privately-held enterprises.
Just to begin, Trump’s proposals are wildly reckless as fiscal policy. According to the Tax Policy Foundation, a joint enterprise of the Brookings Institution and the Urban Institute, Trump’s tax plan would gut federal revenues by $9.8 trillion over 10 years. In 2020, his plan would reduce personal income tax revenues by $695 billion or more than 36 percent, and gut corporate income tax revenues by $196 billion or 50 percent. All told, the revenue losses under Trump’s plan in 2020 come to $915 billion, equal to all defense spending projected for that year ($570 billion), plus 44 percent of all Social Security retirement benefits in 2020 ($793 billion) . If Trump wants to finance his tax plans by borrowing instead of cutting spending, he should know that such a large, additional burden on credit markets would push up interest rates and slow growth, and likely trigger a U.S. debt crisis.
Turning to the details, one feature of Trump’s plan that would help some middle-class Americans is his proposal to expand the standard deduction from $6,300 to $25,000 (singles) and from $12,600 to $50,000 (couples). His plan also simplifies and lowers marginal income tax rates to 10 percent, 20 percent, and 25 percent. But these changes provide nothing for the 45 percent of U.S. households with low or moderate incomes, because they are not liable today for any federal income tax.
Apart from the big standard deduction, Trump channels virtually all of his tax benefits to high income people and businesses. Trump’s plan would save an average household that pays income taxes $2,732 in 2017, mainly from the expanded standard deduction. Those in the 95th to 99th percentile, however, would save $27,657 in 2017, 10 times the benefits for an average taxpayer. Further, households in the top 1 percent would save $275,257 in 2017, 100 times the benefits for the average taxpayer. And those at the very top of the income ladder, the richest one-tenth of 1 percent of households including Donald Trump, would save $1,302,887 in 2017, or 480 times the benefits for average taxpayers.
These windfall gains are driven mainly by Trump’s proposals to reduce the top tax rate from 39.6 percent to 25 percent and slash taxes on businesses. So, Trump would cut the corporate income tax rate from 35 percent to 15 percent. Trump’s enthusiasts will note that his business tax reforms include ending the right of U.S. multinationals to defer their U.S. tax on income earned abroad, much as President Obama has proposed. But only Trump would cut the U.S. corporate rate to 15 percent. Some 96 percent of the foreign income of U.S. companies is earned in countries that tax corporate income at rates of 15 percent or more, and those U.S. companies get U.S. tax credits for the taxes they pay abroad. So, under Trump’s 15 percent corporate tax rate, 96 percent of the foreign-source income of U.S. multinationals would be free of any U.S. tax – much more than under current law.
Trump provides equally large tax windfalls for non-corporate businesses such as LLCs and partnerships, which account today for more than half of U.S. business revenues and profits. Here, Trump appears to agree with Obama and Hillary Clinton about closing down the “carried interest” loophole, which taxes most of the income earned by hedge fund and private equity fund partners at the 23.8 percent capital gains rate. But Trump’s version of this reform is meaningless, because he also cuts the top tax rate for income earned in all “pass-through” entities such as hedge funds and private equity funds to 15 percent: So, they would pay even lower taxes under Trump’s plan than under the current, carried interest loophole.
That’s not even the worst of it: This 15 percent rate would apply not only to hedge funds and private equity funds, but to all partnerships and privately-held businesses, including the Koch Brothers’ companies and The Trump Organization, LLC. Instead of paying taxes at the current 39.6 percent top personal rate, or the current 23.8 percent capital gains rate, or even the 25 percent top personal rate under Trump’s plan, the Koch brothers, hedge fund partners and the Donald himself would pay 15 percent. Under Trump’s plan, he and his company would pay a lower tax rate than an average American earning $47,750 today. That’s chutzpah even for Donald Trump.
This post was originally published on Dr. Shapiro's blog.
In last Thursday’s GOP debate, Marco Rubio, Ted Cruz, Jeb Bush and Chris Christie avoided any mention of their common proposal to “reform entitlements” by raising the Social Security retirement age from 67 to 70. Their silence was the right decision: Their proposal demonstrates their lack of understanding about the demographics of older Americans, especially the dramatic disparities in their life expectancy associated with education and race.
Recent research on life expectancy indicates that their proposed change would effectively nullify Social Security for millions of Americans and sharply limit benefits for many millions more. While many people in their 30s and 40s today can look forward to living into their 80s, the average life expectancy for the majority of Americans who hold no college degree hovers closer to 70, or the average life expectancy for all Americans in 1950.
A recent study in Health Affairs explored the average life expectancy of Americans who were age 25 in 2008, or 33 years-old today. It reports that the average expected life span of 33-year-old high school educated men is now 73.2 years among whites and 69.3 years among black—n compared to 81.7 years for whites and 78.2 years for blacks for their college-educated counterparts. American women on average live longer than American men, but their differences based on race and education also are dramatic. The average life expectancy of high-school educated women age 33 today is 79 years for whites and 75.4 years for blacks, compared to 84.7 years for 33-year old whites and 81.6 years for blacks of that age with college degrees. The projected life spans of Americans now in their 30s without a high school diploma are lowest of all, ranging from 68.2 years (black men) and 68.6 years (white men) to 74.2 years (black and white women). Surprisingly, the data suggest that Hispanics have the longest life expectancies of any group, even though they also have the lowest average years of education; but those anomalous results may reflect sampling problems.
(The Brookings Institution just issued a more detailed version of my analysis, with tables, which you can find here.)
Using Census data on the distribution by education of people age 30 to 39 in 2014, we further know that 20,292,000 thirty-somethings or 54.9 percent of all Americans in their 30s fall in educational groups with much lower life expectancies. Some 45.4 percent of whites in their 30s or 10,613,000 Americans have a high school degree or less, and their average life expectancy is 9.4 years less than whites in their 30s with a B.A. or associates degree. Similarly, 64.4 percent of blacks in their 30s or 3,436,000 Americans have a high school degree or less; their life expectancy is 8.6 years less than blacks in their 30s with a B.A. or associates degree. Finally, 75.6 percent of Hispanics in their 30s or 6,243,000 Americans have a high school degree or less, and their life expectancy is 5.0 years less than Hispanics in their 30s with a B.A. or associates degree.
Across all communities – white, black, Hispanic — improvements in secondary education to prepare everyone for higher education, and measures to ensure full economic access to higher education, would add years to the lives of many millions of Americans.
These findings have special significance for Social Security, because the number of years Americans can claim its benefits depends on how long they live. Americans in their 30s today will be able to retire with full benefits at age 67; but depending on their education and race, they should expect to collect those benefits, on average, for a period ranging from 1.2 years to 19.3 years. The most pressing cases involve white men, black men, and black women without college degrees. Among Americans age 33 today, white and black men without high school diplomas and black, male high school graduates can expect to live long enough, on average, to claim Social Security for less than three years. Similarly, white and black women without high school diplomas and black, female high school graduates, on average, can expect to collect their monthly benefits for less than eight years. By contrast, white college-educated men and women age 33 today can expect to receive Social Security for between 14.7 and 17.7 years, respectively; and 33-year old black men and women with college degrees, on average, will claim benefits for 11.2 to 14.6 years, respectively.
These findings dictate that proposals to raise the Social Security retirement age should be rejected as a matter of basic fairness. As noted earlier, GOP hopefuls Ted Cruz, Marco Rubio, Jeb Bush and Chris Christie all have called for raising the retirement age to 70 years. Among Americans in their 30s today, their proposal would mean that black men without a college degree and white men without a high school diploma, on average, would not live long enough to collect any retirement benefits. White and black women without high school diplomas, and in their 30s today, along with 30-something white men with a high school diploma and black women who graduated high school, on average, would live long enough to receive Social Security for just 3.2 to 5.4 years. All told, the GOP proposals would mean that after working for 35 years or more, 25.2 percent of white Americans now in their 30s and 64.4 percent of blacks of similar age would be able to claim Social Security benefits for about five years or less. And that alone should disqualify any proponent of a higher retirement age from the presidency.
This post was originally published on Dr. Shapiro's blog.
At the risk of spoiling your holidays, it’s time for a serious talk about what’s driving the race for the GOP nomination. It’s not just personality, although Donald Trump and Ted Cruz are certainly more effective messengers than, say, Ben Carson and Carly Fiorina, their ideological doppelgangers. More important, the broad appeal to the party’s base of the extreme attacks by most GOP candidates on immigrants, Muslims, the mainstream rights of women, climate science, and government under both parties raises questions about where the Republican Party is headed.
As is often the case, one reason these messages resonate so powerfully among GOP voters lies in the economy, especially what’s happened to their incomes. New research shows that across groups which account for nearly two-thirds of American households — those headed by people without college degrees — median household incomes fell pretty steadily from 2002 to 2013. (Over the same years, progress by households headed by college graduates slowed but didn’t turn negative.) These data tracked people’s incomes as they aged, capturing their actual economic experience. So, for example, the median income of households headed by people without college degrees who were 35 to 39 years old in 2001 fell about 1 percent per-year from 2002 to 2013, when those same people reached ages 47 to 51.
As documented in my report for the Brookings Institution, these persistent income losses as people aged are unprecedented in modern America. Households headed by people ages 35 to 39 in 1981 and without college degrees saw income gains averaging 2.3 percent per year under Ronald Reagan; and the median incomes of comparable households in the 1990s increased 2.8 percent per-year under Bill Clinton. (An infographic version of the report can be found here.)
White males without college degrees make up a major share of the GOP’s base, and it’s unsurprising that many of them blame their hard times on competition from immigrants and women, abetted by the alleged indifference of the government under both parties. Nor is it unreasonable that people who already feel vulnerable economically also are sensitive to the specter of a new physical threat, including terrorism — so much so that they’re open to ostracizing anyone who shares the faith of the small group of terrorists in Paris and the isolated couple in San Bernardino. Judging by the last GOP debate, most of the candidates (all but Trump and Rand Paul) also expect their base voters to welcome America addressing terrorism by going to war again in the Middle East.
Divisive fights inside the GOP between mainstream conservatives and right-wing populists are not new. In fact, they were features of the 2008 and 2012 nomination races. In the past, the Republican establishment papered over the split by acknowledging the noisy complaints of the right-wing populists. John McCain did so by naming Sarah Palin to his ticket, and Mitt Romney called for anti-immigrant policies so onerous that 11 million undocumented Hispanics would “self-deport.”
This time, the right wing is poised to claim the top of the ticket, intensifying the candidates’ competition for hyper-conservative voters. The race has not only pushed Trump, Cruz and their anti-establishment confederates further to the right; it’s also forced more traditional candidates such as Marco Rubio and even Jeb! Bush to fall in line on most matters. So, come next July in Cleveland, the GOP almost certainly will present itself as a vessel for an anti-immigrant, anti-Muslim, anti-women, anti-science, and anti-government agenda.
These developments present a serious dilemma for the majority of GOP office holders in Congress and the states, who still identify with mainstream conservatism. Across the Midwest, parts of the South, and most mountain and southwestern states, Republican candidates will have to choose between angering their party’s radicalized base and turning off millions of moderately conservative suburban women and millennials, on top of nearly all Hispanics and Asians. Whatever choice these GOP candidates make, many may not survive 2016 — and the day after the elections, the Republican Party will still face its Hobson’s choice.
The hard political truth is that no one can reconcile alienated, right-wing populists and mainstream establishment conservatives. Unless the economic casus belli for these developments disappears — and strong, broad income progress returns — one side or the other may well be forced to look beyond the GOP.
All of this sounds like good news for the Democrats. In fact, 2014 was the first good year for most households’ incomes since 2000. If Hillary and the next Congress can enact policies and programs that sustain broad income progress, the Democrats could become the nation’s default governing party. If not, the Democratic Party may find itself by 2020 in a bind similar to the Republicans — riven by an ideological battle between angry left-wing populists and the party’s establishment.
This post was originally published on Dr. Shapiro's blog.
For a change, the latest Census Bureau data on what’s happened to the incomes of Americans is good news. For the first time since the 1990s and 1980s, household incomes rose substantially in 2014, and did so across all demographic groups. You might miss the good news if you looked simply at everyone’s median income or median wage. What’s actually happening becomes clear only when you track, as I have, the income paths of various “age cohorts,” year after year as they grow older. Using this approach, the new data show that across households headed by people in their late 20s, their late 30s and their late 40s in 2013, median household income grew an average of nearly 2.7 percent in 2014.
This is a big and important change: As documented in my recent Brookings Institution report on income progress since 1980, the median income of households headed by people of comparable ages in 2001 declined an average of 0.1 percent per year from 2002 to 2013.
Drilling into the new data, we also see that households headed by minorities made considerably greater progress in 2014 than their counterparts headed by whites; and households headed by men had larger income gains than those headed by women. Yet, all of those groups saw significant income growth. Most striking, households headed by high school graduates, as well as those headed by college grads made substantial income progress in 2014; and even those households headed by people without high school diplomas had significant gains. While all of these happy developments reflect just one year’s data, they nevertheless bear watching.
Let’s step back and put these new data in their larger context. The Brookings study covered the period 1980 to 2013. I followed the incomes of households headed by people who were 25 to 29 years-old in 1975, until they reached age 59; and then repeated that process for households headed by people who were 25 to 29 in 1982; as well as 25 to 29 in 1991, and 25 to 29 in 2001. The analysis showed that across age groups and across gender, race and ethnicity, and education, Americans made strong, steady income progress as they aged through the 1980s and 1990s. Since 2002, however, the median household incomes of the same groups have declined, stagnated or grown much more slowly, depending on their demographics.
I also examined the income progress of three age cohorts under each of the last five presidents, tracing the income paths of households headed by people who were 25 to 29, 35 to 39, and 45 to 49 at the beginning of each president’s administration. (For these income records by president, I began in year two of each administration and ended in year one of the following administration, because economic conditions and income results in the first year of any presidency are set by the preceding administration.)
As expected, the new 2014 data improve Barack Obama’s record. Over his presidency thus far, income growth across the three age cohorts has averaged 1.2 percent per year, as people aged from 2010 to 2014. That’s a big step up from George H.W. Bush and George W. Bush: Income progress across comparable age groups averaged 0.2 percent per year under Bush I and 0.3 percent per year under Bush II. The income progress under Obama is also a big step back from annual gains averaging 2.6 percent under Bill Clinton and 2.4 percent under Ronald Reagan. Nonetheless, income growth in 2014 roughly equaled the strong, sustained gains under Clinton and Reagan.
The question is, why did this happen? First and probably foremost, employment accelerated sharply last year: The United States created 2.95 million net new jobs in 2014, compared to an average of 528,000 net job gains per year from 2002 to 2013; and 1.78 million per year from 2010 to 2013.
Strong job creation can have powerful effects on incomes, especially for people working near the margins of the economy. This effect is evident in the 2014 income progress by people without college degrees. Across the three age cohorts, incomes increased 4.8 percent among households headed by high school educated graduates and by 2.6 percent among those headed by people without any diplomas. In stark contrast, the median incomes of comparable households decline substantially from 2002 to 2013.
Beyond jobs, U.S. businesses also enjoyed relief in 2014 from fast-rising health care and energy costs, which allowed them to attract and retain employees by raising wages and salaries. Spending by employers on health insurance for family medical coverage, for example, rose less than 2 percent in 2014, as compared to increases averaging nearly 7 percent per year from 2002 to 2013 and nearly 5 percent per year from 2010 to 2013. Similarly, energy costs for industrial and commercial businesses, which rose by an average of more than 6 percent per year from 2002 to 2008, virtually flat-lined in 2014.
Yet, even with 2014’s strong gains, years of flat or falling incomes for many Americans have left us with stark inequalities within the middle class. Across our three age cohorts, the median income of households headed by men averaged $71,382 in 2014 — 25 percent greater than the $56,946 median income of households headed by women.
Inequalities based on race and ethnicity are much larger, even though 2014 was a very good year for minorities. In 2014, the median income of households headed by whites across the three age cohorts averaged $74,149, or 85 percent greater than the $40,049 level for the households headed by African-Americans and 56 percent greater than the $47,440 average for those headed by Hispanics.
Finally, the vast income disparities based on education keep expanding. Across the three age cohorts, the median income of households headed by college graduates averaged $101,298 in 2014 — 113 percent greater than the $47,560 average for households headed by high school graduates and 269 percent more than the $30,146 average for households headed by people without any diploma. With such gaping differences, it is no surprise that many of this year’s would-be presidents, especially among the Democrats, have plans to reduce or eliminate tuition burdens at public colleges and universities.
This post was originally published on Dr. Shapiro's blog.
This year’s presidential hopefuls all agree that America has serious problems, with each party blaming the other. As readers of this blog know, the Number One problem in my view is the end of strong income growth for a majority of American households since 2002. However the candidates define the problem, they all have answers (of sorts) ranging from sweeping tax cuts to major initiatives for training, higher education and infrastructure. None of them will say how to pay their agendas; but as it happens, they’re all in luck: A new book by Swedish economists Dag Detter and Stefan Foster, titled immodestly The Public Wealth of Nations, has found hundreds of billions of dollars, even trillions of dollars, hiding in plain sight.
It begins with two facts. Governments own more assets that all of their richest citizens put together; but unlike wealthy people, governments don’t manage their assets. The U.S. government owns more than one million buildings, vast networks of roads, military and space installations, public utilities and railroad facilities, and 25 percent of all the land in the country (including 43 percent of all forest land). No one in government even knows precisely what all of those assets are worth, because there is no standard or systematic accounting of public assets, much less professional management to enhance their value, like private assets.
Professionally managing a country’s public assets is an idea associated mainly with the national wealth funds created by Norway, Saudi Arabia and a few other countries that found themselves with more energy revenues than they could handle. The Swedish economists make a good case that the United States and other countries should apply this model to their physical assets.
Here’s what it could mean if we tried it. The Bureau of Economic Analysis estimates that the federal government’s non-financial assets are worth about 20 percent of GDP, or about $3.5 trillion today. (The physical assets of city and state governments, including their networks of schools, hospitals, prisons, roads, and so on, are worth some $10 trillion.) Detter and Foster reviewed the evidence and the literature, and conclude that the professional management of public assets can raise their returns by 3.5 percentage-points, which by any measure is a lot of money.
Let’s be conservative and say it would raise those returns in the United States by just 2 percentage-points. At that rate, the professional management of federal assets would generate an additional $70 billion per-year without raising a dollar in taxes or cutting a dollar in spending. With a reasonably growing economy, 10 years of such professional asset management should produce more than $800 billion for the government and its taxpayers, and 20 years would produce $1.9 trillion.
And if the Swedes are right that professional management could raise those returns by 3.5 percentage-points, it would generate more than $120 billion per-year, $1.4 trillion over 10 years, and $3.3 trillion over 20 years. That would cover about 40 percent of the projected funding shortfall of Social Security.
There also are models on how to do it, since versions are in place today in the United Kingdom, Norway, Finland, Sweden, and Singapore. First, establish an independent enterprise with the authority to manage the government’s nonfinancial assets, overseen and operated by independent, publicly-accountable directors and executives. The closest domestic model we have is the Federal Reserve, and like Janet Yellen and her colleagues at the Fed, senior executives and board members would be appointed by the president and confirmed by the Senate. The executives and board would hire platoons of professionals in every area, all outside the civil service, to competently manage our public wealth.
It could mean, for example, that the Postal Service might use its assets as deftly as UPS or Fedex, or at least close enough so that its productivity gains were half those of UPS and Fedex instead of less than 30 percent. Or consider the Bureau of Land Management (BLM), which oversees 260 million acres of federal lands. Those holdings include the “Green River formation” in Colorado, Utah and Wyoming, which happen to be the world’s largest known sources of shale oil and gas. Unlike the BLM, professional asset managers could lease some of those lands for shale production. And in another division, managers could weigh the case for moving various military facilities currently cited on some of the country’s most expensive land, like the barracks for dress Marines on Capitol Hill in Washington, D.C., and leasing such desirable facilities to commercial tenants.
Most people would fire their investment managers, if they didn’t know what their clients held and had done nothing for decades to increase the value. If we applied the same standards to federal assets, we could find the means to carry out the ambitious initiatives the country so badly needs.
This post was originally published on Dr. Shapiro's blog
America has a big incomes problem: The incomes of most Americans largely stopped growing around 2002. Wide public resentment over that hard fact already dominates the 2016 debate. On the Democratic side, income issues have been conflated with concerns about inequality, and every plan to cushion the impact on middle-class is financed by taxes on the unworthy wealthy. From the right, where the uber-wealthy, unworthy or otherwise, fund a flock of would-be presidents, income issues have been mixed up with the party dogma that most problems come from the corruption of liberal government and the pollution of foreigners. So GOP plans for restoring rising incomes usually boil down to tax cuts, especially for the uber-wealthy, that tacitly blame the people who liberal government traditionally help, and especially undocumented workers.
Both approaches have had only limited success. Hillary Clinton understands that today’s inequality is the result, not the cause, of broad-based income stagnation and decline. So she can never outflank Bernie Sanders, who brings to their debate the fervent (if quirky) enthusiasm of a genuine socialist. The GOP faces a tougher challenge, since much of the party’s base blame their economic problems on a corrupt establishment that includes big business as well as big government, and on the foreign labor that big business and big government need or protect. On this front, Bush, Rubio, Walker and even Cruz and Paul will never outflank a self-assured¸ self-financed xenophobe like Donald Trump, or not unless they can change the subject.
These half-baked responses are tailored for the base voters already fully engaged in the partisan wars. They won’t be enough when the candidates have to address the majority of Americans, who care more about their jobs and their personal lives than about party posturing. For the Democratic candidate, winning will depend on maximizing the support of women, minorities and young voters, while containing the disaffection of working class white men. The Republican faces the opposite and tougher challenge – energize the support of working class white men while attracting more support from women, minorities and millennials.
My recent report from the Brookings Institution laid out the basic facts that will be in many voters’ minds. Let’s consider households headed by people in their mid-to-late 30’s when each of the last five presidents took office. Among such households that were headed by women, for example, annual average income gains of 3.9 percent under Reagan and 5.8 percent under Clinton have been followed by much smaller progress, averaging 1.0 percent per-year under Bush and 2.0 percent per-year in Obama’s first term.
More tellingly, consider households headed by people without college degrees, which account for 70 percent of all American households. For example, among those headed by people in their mid-to-late ’30s when each president took office, and with only a high school diploma, annual income gains averaged 2.6 percent under Reagan and 2.4 percent under Clinton. Under Bush, however, comparable households experienced income losses averaging 0.3 percent per-year, followed by even greater losses averaging 1.8 percent per-year in Obama’s first term.
Similarly, households headed by Hispanics in their mid-to-late 30’s when each president took office made annual income progress averaging 2.2 percent under Reagan and 3.1 percent under Clinton, followed since then by barely any gains at all, averaging 0.3 percent per-year under Bush and 0.1 percent per-year in Obama’s first term.
The country’s broad economic disappointment has energized the Tea Party and the Occupy movement, and it now animates the bases of both political parties. The challenge for those who would be president is to bypass popular anger and partisan simplifications and present a serious agenda that can restore normal income progress.
This post was originally published on Dr. Shapiro's blog
In chaos theory, the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world. This week, Greece, a nation with a GDP smaller than the Philippines, became that butterfly – and its ongoing economic struggles could cause storms that would upend the financial stability of Europe and wreak serious collateral damage on our own economy.
Greece has flirted with sovereign debt default for more than three years. The latest talks for another bailout from the European Union and the IMF broke down this week, with Greek Prime Minister Alexis Tsipras calling the EU proposal “humiliating and the IMF’s conduct “criminal.” Normally, the debt troubles of a country with an economy barely one percent the size of our own wouldn’t matter much to us. But as a member of the EU and the Eurozone monetary union, Greece’s problems can reverberate deeply throughout Europe. Global investors already are nervous that the EU and IMF may be unable to head off Greece’s looming insolvency. If the worst happens, Greece’s default could trigger runs on government bond markets in other Eurozone countries seen at risk, including Italy and Spain. Since Europe’s large financial institutions hold more than $1 trillion worth of those bonds, a Greek default could spark a financial meltdown rivalling even the 2008-2009 crisis,
This crisis has unfolded in fits and starts for a long time, and the EU and the European Central Bank (ECB) have spent hundreds of billions of Euros trying to support those bond markets and strengthen the banking system. No one knows if it will be enough to stave off the worst-case scenario. But if a genuine crisis unfolds over the next month or so, everyone does know that European voters will never accept another bank bailout. And if Europe’s economy falls into a tailspin, the ECB will have little room to support and stabilize it by cutting interest rates.
Greece’s default also would trigger its exit from the EU and the Eurozone. No country has ever done so before, so no one knows precisely what would happen next. Inevitably, the consequences would be destructive. To begin, if Greece has to abandon the Euro and revive the drachma, its economy would come to a halt. The government could not pay its employees, vendors or issue pension checks; and untold thousands of Euro-based contracts across Greece and between Greek and foreign concerns would have to be renegotiated. So, on top of an unfolding financial crisis, the balance sheets of those foreign firms would suffer further, and a rapidly-deepening recession would spread across much of Europe.
These prospects explain why President Obama made the Greek crisis a top priority in his talks at the recent G-7 summit. The EU is America’s largest trading partner; and perilous times there would quickly affect U.S. jobs and investment – and those costs would increase as the fast-falling value of the Euro would drive up the foreign prices of U.S. exports. Even more serious, our financial institutions and multinational companies have thousands of deals involving European banks. In a crisis, that becomes bad news for U.S. stocks: If cascading events threaten the solvency of those banks, many of those deals will become problematic, depressing the value of our own banks and companies. The results here at home could be a credit crunch, falling employment, and a new recession – and this time, the Federal Reserve could do little to help.
The United States needs a prosperous Europe for not only the obvious economic reasons, but also as our geopolitical partner from the Middle East to the Korean peninsula and the South China Sea. A weakened Europe, consumed by recession and facing the possible unraveling of a half-century of economic union and political collaboration, won’t be there for us the next time a U.S. president needs support to advance American and western interests and influence.
What are the odds? A scenario in which everyone loses usually inspires steps to head off the terrible reckoning. Yet, events in coming weeks may demonstrate how domestic politics in Greece and across much of Europe put the two sides at such cross purposes that everyone will needlessly suffer. At this point, calming this butterfly’s wings will require uncommon statesmanship and a real willingness by leaders in Greece, the EU and Washington to take measures that will cost them popular support. So far, we’ve managed to side-step a serious crisis, and we could see another deal that papers over the problems for a while. But if Greece and the EU do run out of options this time, your retirement accounts could lose a third of their value over the next year.
This post was originally published on Dr. Shapiro's blog
The condition of most American households, and of the country as a whole, is set largely by people’s income – both the levels, and the income progress that people make as they age from their 20’s to their 30’s, 40’s and 50’s. For generations, most Americans have believed that if they work hard, they’ll have real opportunities to earn steadily rising incomes. Such broad based upward mobility is one of the reasons that Americans have been generally optimistic and willing to extend opportunity to successive minority groups. But is that the way America really works? One common view argues that wages have stagnated and most Americans have made, at best, modest income progress since the 1970s. This view is based on a time series of a single statistic, “aggregate median household income.” In fact, the true picture is more complex.
Today, the Brookings Institution issues a new report which I worked on for the past year. Using new Census Bureau data, I analyze household incomes by age cohort – say, people age 25 in 1980 or in 1990 –and then follow those age cohorts as they age. The results revise what we thought we knew about incomes. The data show that broad, strong income gains were hallmarks of the 1980s and 1990s. Moreover, the steady progress of the Reagan and Clinton years covered just about everybody -- households headed by men and by women; by whites, blacks and Hispanics; and by those with college degrees, high school diplomas, and no degrees at all. This broad upward mobility, however, simply stopped under Bush and has not recovered under Obama. Moreover, this dramatic turnaround, including declining incomes from 2002 to 2013 for a majority of American households, affects every demographic group.
I’ll be writing more about what’s really happened to income, why, and what we can do about in coming weeks and months. If you want to read the report for yourself, click here.
This post was originally published on Dr. Shapiro's blog.
The sharp fall in worldwide oil prices is a silver lining with a silver lining, even if the linings are a bit tarnished. The price of the world’s most widely-used commodity has fallen sharply over the last five months, from a spot market price of $115 per-barrel in late June to $77 last week. For consumers everywhere, that means major savings that will mainly go to purchase other goods and services; and those boosts in demand should spur more business investment. So, if low prices hold for another six months, analysts figure that growth in most oil-consuming and oil-importing countries could be one-half to a full percentage-point higher than forecast, including here in the U.S. and in the EU, China and Japan. It’s a blow to the big oil-producing and oil-exporting nations; but the global economy will come out ahead. After all, the U.S., EU, China and Japan account for more than 65 percent of worldwide GDP, while the top ten oil exporting countries, led by Saudi Arabia and Russia, make up just over 6 percent.
The hitch for this rosy scenario is that much of the revenues that OPEC countries now won’t see would have gone into financial and direct investments in the U.S. and EU. That means that new investments in American and European stocks and bonds could be reduced by some $300 billion per-year. The upshot may be slightly higher interest rates and slightly lower equity prices, which would dampen the growth benefits of lower oil prices.
The lower prices are driven mainly by supply and demand, but market expectations and some strategic maneuvering by Saudi Arabia play a role, too. Yes, worldwide oil supplies are up with rising production from U.S. and Canadian tar sands and shale deposits, and Libya’s fields are fully back online. Moreover, these supply effects are amplified by softness in demand for oil, coming from economic stagnation in much of Europe and Japan, China’s slower growth, and our own increasing use of natural gas. Oil prices also are influenced, however, by the prices that buyers and sellers expect to prevail months or years from now. Last week, when the “spot price” of crude oil was about $77 per-barrel, the price for oil to be delivered next month was almost $10 lower. In fact, the world’s big oil traders see crude prices continuing to decline not simply into 2015, but for a long time: The price for oil to be delivered in mid-2016 is less than $72 per-barrel and, according to these futures prices, not expected to reach even $80 per-barrel until 2023.
Don’t count on a decade of cheap oil. Yes, technological advances have brought down the cost of extracting oil from tar sands, shale and deep water deposits, as well as the cost of producing and transporting natural gas. But the economics of these new energy sources work best at prices higher than those prevailing today. A long period of low oil prices would slow the growth of supply from those sources -- and so drive oil prices back up. The Saudis are counting on it. They’ve refrained from cutting their own production, which could restore higher prices, in hopes that another year of low prices will slow down investments in all of those alternatives sources.
The truth is, oil prices will rise again whether the Saudis’ tactic works or not. While the outlook for much stronger growth remains slim for Japan and much of Europe, an extended spell of lower energy prices will support higher growth here, in China, and across many of the non-oil producing countries in Asia, Latin America and Africa. Stronger growth and energy demand will bring on line more alternative sources of energy -- so long as oil prices are high enough for the alternatives to be competitive.
This is an old story. Oil prices fell, and as sharply as they did this year, in 1985 and 1986, in 1997 and 1998, and in the aftermath of the 2008-2009 financial upheavals. Each time, oil prices marched up again after one, two, or at most three-to-four years. Of course, that volatility also makes some people billionaires. To join them, what you’ll need is patience and a hedge fund’s access to credit. With that, all you do is go out and purchase a few billion dollars in contracts to take delivery of crude in 2018 or 2020 at today’s futures prices, and then dump the contracts when oil prices once again head north of $100 per-barrel.
This post was originally published on Dr. Shapiro's blog.