The Progressive Ensign

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Saving Democracy: In the Next Recession Government Stimulus Will Not Be Enough to Help the Middle Class – Innovative Initiatives Are Needed

A recession is emerging with interest rate curves inverted, the end of the business cycle at hand, world trade falling and consumers and businesses beginning to pull back spending.  The question is: will monetary or fiscal stimulus turn around a recession?  In this post, we find both stimulus alternatives likely to be too weak to have the necessary economic impact to lift the economy out of a recession and will not help the middle class out of a stagnant financial position. Finally, we identify a new approach to government intervention based on an innovative ‘seed’ and multi-partner program to lift the middle class out of economic decline.

Our economy is at the nexus of several major economic trends formed over decades that are limiting monetary and fiscal options. The monetary policy of central banks has caused world economies to be immersed in liquidity yet resulting in limited growth. Central bankers in Japan and Europe have been trying to revive growth with $17 trillion injections using negative interest rates.  Japan can barely keep its economy growing with an estimate of GDP at .5 % thru 2019. The Japanese central bank, holds 200 % of GDP in government debt.  The European Central Bank holds, 85 % of GDP in debt and uses negative interest rates as well. Germany is in a manufacturing recession with the most recent PMI in manufacturing activity at 47.3 and other European economies contracting toward near zero GDP growth.  

Lance Roberts notes that world economy is not running on a solid economic foundation if there is $17 trillion in negative yielding debt in his blog, Powell Fails, Trump Rails, The Failure of Negative Rates . He questions the ability of negative interest policies to stabilize world economies,

You don’t have $17 Trillion in negative-yielding sovereign debt if there is economic and fiscal stability.”

Negative interest rates and extreme monetary stimulus policies have distorted financial relationships between debt and risk assets. This financial distortion has created a significantly wider gap between the 90 % and the top 1 % in wealth.

Roberts outlines in the 6 panel chart below how personal income, employment, industrial production, real consumer spending, real wages and real GDP are all weakening in the U.S.:

Sources: Real Investment Advice – 8/23/19

Trillions of dollars of monetary stimulus has not created prosperity for all. The chart below shows how liquidity fueled a dramatic increase in asset prices while world GDP declined by about 25 %:

Sources:World Inequality Lab, Thomas Piketty, Gabriel Zucman et al – 2018

There are a number of reasons monetary stimulus by itself has not lifted the incomes of the middle class. One of the major reasons is stimulus money has not translated into wage increases for most workers.  U.S. real earnings for men have essentially been flat since 1975, while earnings for women have increased though basically flat since 2000:

Source: U.S Census Bureau – 9/10/19

If monetary policy is not working, then fiscal investment from private and public sectors is necessary to drive an economic reversal.  But, will private and public sector sectors have the necessary tools to bring new life to an economy in decline?

Wealth Creation Has Gone to the Private Sector

The last 40 years has seen the rise of private capital worldwide while public capital has declined. In 2015, the value of net public wealth (or public capital) in the US was negative -17% of net national income while the value of net private wealth (or private capital) was 500% of national income. In comparison to 1970, net public wealth amounted to 36% of national income while the for net private wealth was at 326 %.

Source: Wealth Inequality Lab, Thomas Picketty, Garbriel Zucman et al – 2018

Essentially, world banks and governments have built monetary and fiscal economic systems that increased private wealth at the expense of public wealthThe lack of public capital makes the creation of public goods and services nearly impossible. The development of public goods and services like basic research and development, education and health services are necessary for an economic rebound. The economy will need a huge stimulus ‘lifting’  program and yet the capital necessary to do the job is in the private sector where private individuals make investment allocation decisions.  

Why is building high levels of private capital a problem?  Because as we have discussed private wealth is now concentrated in the top 1 %, while 70 % of U.S GDP is dependent on consumer spending.  The 90 % have been working for stagnant wages for decades, right along with diminishing GDP growth.  There is a direct correlation between wealth creation for all the people and GDP growth.

Corporations Are Not In A Position to Invest

Some corporations certainly have invested in their businesses, people and technology.  The issue is the majority of corporations are financially strapped.  Many corporate executives have made profit allocation decisions to pay themselves and their stockholders well at the expense of workers, their communities and the economy. 

S & P 500 corporations are paying out more cash than they are taking in, creating a cash flow crunch at a – 15 % rate (that’s right they are burning cash) to maintain stock buyback and dividend levels:

Sources: Compustat, Factset, Goldman Sachs – 7/25/19

In 2018 stock buy backs were over $1.01 trillion are at the highest level they have ever been since buybacks were allowed under the 1982 SEC safe harbor provision decision. It is interesting to consider where our economy would be today, if corporations spent the money they were wasting on boosting stock prices and instead invested in long term value creation.  One trillion dollars invested in raising wages, research and development, cutting prices, employee education, and reducing health care premiums would have made a significant impact lifting the financial position of millions. This year stock buybacks have fallen back slightly as debt loads increase and sales fall:

Source: Dow Jones – 7/2019

Many corporations with tight cash flows have borrowed to keep their stock price elevated causing corporate debt to hit new highs as a percentage of GDP (note recessions followed three peaks):

Source: Federal Reserve Bank of Dallas – 3/6/19

Corporate debt has ballooned to 46 % of GDP totaling $5.7 trillion in 2018 versus $2.2 trillion in 2008.  While the bulk of these nonfinancial corporate bonds have been investment grade, many bond covenants have become lighter as corporations seek more funding. Some bond holders may find their investment not as secure as they thought resulting in less than 100 % return of principal at maturity.

In a recession corporate sales fall, cash flow goes negative, high debt payments become hard to make, employees are laid off and management is trying to hold on.  Only a select set of major corporations have cash hoards to ride out a recession, others may be able obtain loans at steep interest rates, if at all.  Other companies may try going to the stock market which will be problematic with low valuations.  Plus, investors will be reluctant to buy stock in negative cash flow companies.

Thus, most corporations will be hard pressed to invest the billions of dollars necessary to turnaround a recession. Instead, they will be just trying to keep the doors open, the lights on, and maintain staffing levels to hold on until the day sales stop falling and finally turn up.

Public Sector is Tapped Out Too

In past recessions, federal policy makers have turned to fiscal policy – public spending on infrastructure projects, research development, training, corporate partnerships and public services to revive the economy.  When the 2008 financial crisis was at its peak the Bush administration, followed by the Obama government pumped fiscal stimulus of $983 billion in spending over four years on roads, bridges, airports, and other projects. The Fed funds interest rate was at 5.25 % at the peak, so interest rate reductions had a significant impact versus today at 2.25 %. It was the combined monetary and fiscal stimulus that created a V-shaped recession with the economy back on a path to recovery in 18 months. It was not monetary policy alone that moved the economy forward.  However, the recession caused lasting financial damage to wealth of millions. Many retirement portfolios lost 40 – 60 % of their value, millions of home owners lost their homes, thousands of workers were laid off late in their careers and unable to find comparable jobs.  The Great Recession changed many people’s lives permanently, yet it was relatively short lived compared to the Great Depression.

As noted in the chart above, public sector wealth has actually moved to negative levels in the U.S. at – 17 % of national income.  Our federal government is running a $1 trillion deficit per year.  In 2007, the federal government debt level was at 39 % of GDP. The Congressional Budget Office projects that by 2028 the Federal deficit will be at 100 % of GDP.

Source: Congressional Budget Office – 4/9/19

We are at a different time economically than 2008. Today with 80 % of GDP public debt, a Fed balance sheet with $4 trillion while the federal debt level is projected to grow to 100 % of GDP by 2028. In a recession federal policymakers will likely make spending cuts to keep the deficit from going logarithmic. Policy makers will be limited by the twin deficits of $22.0 trillion national debt and ongoing deficits of $1 trillion a year eroding investor confidence in U.S. bonds. The problem is the political consensus for fiscal stimulus in 2008 – 2009 does not exist today, or probably even after the 2020 election. Our cultural, social and political fabric is so frayed as a result of decades of divisive politics it is likely to take years to sort out during a recession. Our political leaders will be fixing the politics of our country while searching for intelligent stimulus solutions to be developed, agreed upon and implemented.

What Will the Next Recession Look Like?

We don’t know when the next recession will come. Yet, present trends do tell us what the structure of a recession might look like, as a deep U- shaped slow period over years, hurting the poor and working class the hardest:

  1. Corporations Short of Cash – Corporations already strapped are short on cash, lay off workers, pull back spending, are stuck paying off huge debts.
  • Federal Government Spending Cuts – The federal government caught with falling revenues from corporations and individuals, is forced to make deep cuts first in discretionary spending then social services and transfer funding programs. The reduction transfer programs will drive slower consumer spending.
  • Consumers Pull Back Spending – Consumers will be forced to tighten budgets, pay off expensive car loans and student debt, and for those laid off seeking work anywhere they can find a job.
  • World Trade Declines – World trade will not be a source of rebuilding sales growth as a result of the China – US trade war, and tariffs with Europe.  We expect no trade deal or a small deal with the majority of tariffs to stay in place. In other words, just reversing some tariffs will not be enough to restart sales. New buyer – seller relationships are already set closing sales channels to US companies. New country alliances are already in place leaving the US closed out of emerging high growth markets.  A successor Trans Pacific Partnership (TPP)  agreement with Japan and eleven other countries was signed in March, 2018 without the US, China is negotiating a new agreement with the EU. EU and China trade totals 365 billion euros per year. China is working with a federation of African countries to gain favorable trade access to their markets.
  • ­Pension Payments in Jeopardy – Workers dependent on corporate and public pensions may see their benefits cut from pensions which are poorly funded today. GE announced freezing pensions for 20,000 employees, the harbinger of a possible trend that will  reduce consumer spending
  • Investment Environment Uncertain – Uncertainty in investments will be extremely high, ‘get rich quick’ schemes will flourish as they did in 2008 – 2009 and 2000.
  • Fed Implements Low Rates & QE – The Fed is likely to implement very low interest rates (though not negative rates), and QE with liquidity in abundance but the economy will have low inflation, and declining GDP feeling like the Japanese economic stasis – ‘locked in irons’.
  • Unemployment Soars – workers in low wage jobs, support, non-core (HR, IT, Admin) jobs will be laid off first. Industries already weak in the economy feel the downward spiral the most: retail, materials, manufacturing, and energy. As the recession deepens, small businesses that can not get loans to get through the rough times so they close. Even medium businesses are hit hard, as they do not have the access to worldwide markets to offset declining US sales. The rate of multiple job holders is at an all time high now, it will continue to soar as workers try to sustain their standard of living in a contractor economy with no safety net for workers.

Next Steps:

A recession of the magnitude we expect will hit the middle class hard as they are the most vulnerable.  Their wages have been flat for most of the decade while the top 10 % have enjoyed the majority of income and wealth increases. Due to the private sector holding most of the positive wealth in the U.S. a new approach to simulating the economy will be necessary.

1.Corporate Stimulus

While most corporations will be cash poor, some companies will be cash rich.  Firms like Apple, Alphabet (Google), Microsoft all hold over $100 billion in cash.  Cisco and Oracle both have over $50 billion cash on hand.  These tech giants hold most of their cash overseas.  To spur spending in the right places for the economy, tax laws could be passed to reduce taxes when repatriated funds are spent on employee development, research and development, productivity and wage increases.  Google, Facebook, and Apple have taken a good first step on housing, with all three donating about $4 billion to housing programs. While housing may not seem like a ‘public good’ it has become a major issue in the San Francisco Bay Area from high growth businesses and long commutes to inexpensive housing 2 hours away. We would like to see the emergence of the ‘servant’ CEO from these companies and others in sectors of the economy with cash like banking, pharma, and health insurance.  Over 180 Business Roundtable executives released a declaration that corporations need to take responsibility for their communities, not just seeking profits. The introduction to their statement notes

“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”

Ensuring economic opportunity for all means corporate executives make investments in the future financial health of their communities.  Business leaders can take the lead by ending stock buybacks which totaled $1.01 trillion last year and investment those funds in employee development, pension plans, price reductions, productivity enhancements, maintain staffing levels and innovative research.  Otherwise the safe harbor policy the SEC approved in 1982 can be revoked to prod executives to make investment decisions to ensure the future of both their businesses and communities.

2. Transfer of Private Wealth and Income to Public Sector

Wealthy business people and individuals can take the lead in driving the passage of legislation transferring some wealth back to the public sector. In November, 2017 over 400 millionaires and billionaires sent a letter to Congress to strongly recommend against the passage of the Tax Cut bill which created a $1.5 trillion additional federal deficit while 80 % of the benefits went to the top 5%.  We will need more of this kind of active leadership across the political spectrum to make the necessary shift to finance the creation of public goods and services necessary to turnaround a recession.  Other wealthy individuals have called for increased taxes on income and wealth of the top 5 to 10 %.  Just changing the present tax laws back to 2016 levels would help to boost funding to fund fiscal stimulus programs in innovative ways. There is backing by some wealthy leaders to end the carry tax exclusion that hedge fund managers and others in the financial industry use to reduce taxes. 

Taxes as a percentage of profits has continued to fall from 1960 at 45 % to 15 % in the last year.  Corporate lobbying of Congress worked to reduce company tax rates, create loopholes and subsidies for some industries.

Sources: The Wall Street Journal, The Daily Shot – 6/29/19

Corporate taxes can be evaluated as a percentage of GDP as well where it is clear corporations were able to lower their federal tax burden from a peak of 6% in 1955 to a low of 2 % in 2012 a 66 % reduction, and is estimated to be lower with the Tax Cut Bill of 2017 lowering the standard tax rate from 35 % to 22 %.  The GAO in 2012 evaluated all the tax law benefits and deductions corporations enjoyed and found the effective tax rate was really 12.9 %.  Today, the effective tax rates is even lower as corporate federal tax receipts fell to an all-time low of $204 billion for fiscal 2018 a 31 percent decline from 2017. Some corporations are paying no federal tax at all. Amazon declared $11 billion in income for 2018 and paid no taxes.

Source: GAO – 5/13

One way corporations evade US taxes is by depositing billions in profits in offshore tax havens to shelter their profits from taxes.

Sources: Zucman – UC Berkelty, Torslov & Wier – University of Copenhagen, The Wall Street Journal, The Daily Shot – 11/13/17

Clearly the use of tax havens needs to end, as our federal government is losing billions of dollars of receipts to invest in the public goods this country so desperately needs.. Corporate taxes raised and loopholes plugged make sense to begin shifting the necessary funds over to the federal government.

The tax legislation process is critical for long term success and support.  Bringing corporate taxes back to levels seen over a decade ago would go a long way toward reducing the federal deficit and fund public services at necessary levels to create more economic opportunities for all. Multiple points of view across the political spectrum need to be sought out and brought together in a special congressional committee focused on writing a fair tax bill to get the federal budget on a firm foundation and fund Medicare and Social Security programs.

3, Deploy Innovative Multi Partner Economic Innovation Programs to Solve Economic Challenges – Heartland Region Development

At the heart of political divisions in our country today is the decline of a strong middle class and economic inequality at the highest level since 1929.  Building a strong middle class that enjoys the economic benefits of a secure home, job, health care and safe community will result in people seeing a common good emerging for everyone. Monetary policy has failed to provide economic benefits to the middle class, while boosting the values of financial assets largely held by the top 1%.  If a recession comes, what will happen to the middle class, and vulnerable people in our economy?

It is unlikely given the present financial structure of our economy that monetary policy alone which has failed the middle class with stagnant wages will somehow turn the economic status around for the middle class.  The decline of the middle class is happening in parallel with a fall in  GDP to 1.9 % forecast for the 3rd quarter of 2019.  Part of the decline in GDP is associated with a declining labor participation rate. There were 7.6 million job openings, last January with more than 8.6 million unemployed for a gap of 1 million jobs.  This gap started in the spring of 2018 for the first time in 18 years.  Part of the reason for the gap between job openings and job seekers is the imbalance in our labor force by skills and regional limitations. Millions are not working due to lack of education, skills, health, lack of child care or limited work opportunities in their area.  For the core workforce between ages 25 – 54 the participation rate recently has been declining since the peak in 2000.

Sources: Federal Reserve – St. Louis, The Wall Street Journal, The Daily Shot – 6/10/19
Sources: Bureau of Labor Statistics, CBO, NBER, Morgan Stanley – 8/9/19

The most vulnerable regions are in non-metro areas of our country where the economic boom on the coasts and big cities has passed them by. Research indicates a key contributing factor to the decline in participation of 18 – 24 years old group is the lack of young workers in non-metro regions.

Source: USDA – 2017

Poverty remains a major issue in rural areas of the country, Midwest and South.  These areas have lost millions of manufacturing jobs due to automation and moving factories offshore.  Lack of economic health, forces supporting businesses to leave, closing of hospitals and support services.  The opioid epidemic is highest in rural regions of the country.

Sources: US Census Bureau, The Economist, The Wall Street Journal, The Daily Shot – 10/18/19

Many of these rural, Midwest and Southern counties have been left out of the economic mainstream for decades as noted by the darkest purple areas of the chart. While, there single factor programs like enterprise zones with reduced taxes, or innovation institutes at major land grant universities we have not seen multi-factor programs that give a ‘focused force’ of economic impact necessary to turnaround these regions.  The Heartland was chosen for the first implementation in addition to the reasons above, there are additional cultural, health and education issues that need to be addressed. 

The Heartland is where: (1) mobility to take new jobs is the lowest in rural and small cities in the Midwest and South (2) there is the highest concentration of young people without a 4-year degree (3)  the lowest concentration of entrepreneurs is holding back business formation and development to create new higher paying jobs with a future (4) the largest number of people without health insurance are found in the South and rural areas of the Southwest and West  (5) slow speed Internet connections are the norm leaving many heartland regions way behind in the digital revolution where new jobs, opportunities for education and quality health are being developed and accessed (6) accounting for births, deaths and migration rural population has declined for five consecutive years.  It is deplorable that a complete socio-economic region of the country has so many factors that have not been addressed to extent necessary to transform people’s lives toward good health and fair share of prosperity.

Rural and small town America enjoyed a renaissance of increasing jobs and prosperity into the mid 1990s. During this time rural counties were home to more than one-third of all net new businesses establishments fueling the job creation engine. Yet, in the past ten years the economic conditions have changed dramatically, leaving these regions out of robust growth in coastal areas since the Great Recession.  For more details and research please read our blog: The Hallowing Out of Heartland America.

We think that the multi-partner program outlined below besides working in rural regions will work as well in economically depressed neighborhoods of our inner cities on the coasts or major cities of the Midwest with local modifications to take into account cultural, ethnic and societal differences. 

The Multi-Partner Economic Innovation Initiative

The Silicon Valley innovation process is a multi-organization model used as a base for the Multi-Partner Economic Innovation Initiative (MPEII).  Universities working as incubators, with investors, local and state government support, investors, highly educated workforce, and immigrants all contributed to making the Silicon Valley model successful in giving birth to Google, Facebook, Apple, LinkedIn, Twitter, and hundreds of other companies. We have added other necessary elements to jump start a slow growth economic regions like non-government organizations  providing training or recovery services, health providers to take on major issues like opioid addiction, faith-based organizations for counseling and financial assistance. Finally, federal government agencies will need to play a key role in turning around a slow growth region vulnerable in a recession to a spiraling down turn. We introduce the idea of a Federal Reserve Labor Bank, organized much like the present Federal Reserve for monetary policy yet with a charter to constantly build and renew our labor force for unimagined new jobs.

The MPEII would be structured as a non-profit corporation with representatives from all the organizations necessary to drive the coalition to success in meeting the economic objectives of the region.  The federal government rather than building a large bureaucracy would seed the development of the MPEII entities called Development Centers with $25 – 50 million, joined by corporate foundations, local and state government and social entrepreneurs. In our first imitative The Heartland Development Center (HDC) is the central innovative entity bringing all the partners together and taking leadership to drive solutions in rural regions. The HDC is formed as an investment organization, putting out a call for business plans from local social entrepreneurs to solve a local regional problem with the help of the MPEII organizations. The economic goals could be achieved by profit making companies or non-profit organizations where making a profit is not appropriate or not fitting within the development goals.

The People – At the center of this economic imitative are the people. The voter participation level during the 2018 – mid-term election hit a 50 year high at 47.5 % with 110 million Americans voting in congressional races. This engagement in the political process at the local, state and federal is crucial if we are to develop the consensus moving forward to solve our economic problems.  Voters need to demand that corporate, private investors, government and related organizations needs to change polices to focus on building the middle class, protecting our environment, cutting the costs of education and ensuring equal opportunities and a level playing field for all that participate in our economy. In our Heartland example implementation to bring our rural and southern regions into the economic mainstream, local communities, and leaders from multiple institutions need to be involved in making the changes necessary to bring a lasting economic boost to the Heartland.

Universities – The HDCs in selected rural and southern regions would be located in nearby universities for support to be forward looking with local students and professors – consultants as core staff along with local leaders to solve major challenges. The Heartland Development Center acts as a catalyst creating an innovation ecosystem to jumpstart local economics and social structures. HDCs would focus on all the key issues that a region needs to address to rebuild their economy and people’s lives: business formation, education and training, digital infrastructure, affordable housing, engaged local innovation media and health care. There already is an imitative by Congressman Ro Khanna, to fund a modern version of the Morrill Act, that funded the development of land grant universities to support agricultural development in the U.S in 1862. Fifty universities would receive grants of $50 – 100 million to fund technology centers to focus on training and development programs for 21st century jobs. This bill is a good start, the HDC is extension of this imitative to provide a ‘focused force’ on solving regional economic problems and create an innovation ecosystem that is self-renewing.

Federal, State, Local Government – Federal government funding is necessary for a cross regional program with multiple components along the scale of the Marshall Plan after WWII for re construction of Europe.  State and Local governments have the local knowledge, leadership and links to local universities, health providers and non-government organizations that will be helpful in forming the consensus required to focus people and resources on the key problems with workable solutions. The Federal Reserve has analysts who have completed research and continue to monitor the economic health of the 12 Federal Reserve districts that will be helpful to base programs on patterns in the facts.  We propose that a pilot ‘Federal Labor Reserve Bank’  (FLRB) be created in the 12 districts to focus on the labor issues, composed of governors in the 12 areas with labor expertise in corporations, universities or labor leaders.  The FLRB would set minimum wages for key regions conduct studies like the Fed beige report, called a ‘lavender’ report on the health of the workforce in each region.  The report would identify key labor trends, wage issues, and obstacles to creating a thriving workforce. The FLRB would offer loans to key entities with assistance from the Federal Reserve to providing of key training and development initiatives, in a timely manner. The FLRB’s mission is to build a thriving labor force and take on major challenges like identifying why the labor participation rate is so low compared to pre – 2008 levels and implement programs accordingly to increase the rate. Every month the FLRB would review how well it is doing in achieving goals of increased labor participation rate, increasing wages for the middle class and other goals as established by the Governors.

Corporations & Investors – Companies in these slow growth regions need support in multiple areas that are unique to the economics of each area.  Major employers should be included in the steering councils of the HDCs to provide valuable local guidance to HDC leaders on where to focus resources, training for job candidates and the product and sales direction of their businesses. Many corporations have investment groups and can be invited to participate in the HDC program, to achieve results for their business that they are willing to share with the community. Venture capitalists, angels and private equity firms will be encouraged to participate and may be invited to be on the HDC steering council. Telecom firms need to be invited to bid on digital infrastructure projects which may be funded by government grants. It is likely that some of these Internet projects may not be profitable for telecom companies or they would have already laid the fiber optic cables and setup the links to homes in these areas. Like the Rural Electrification program in the 1930s, the digital infrastructure must be in place for rural areas to gain fast access to the Internet.  Plus, high speed Internet access is a requirement to build innovation centers and create businesses with 21st century high technology jobs.

Non-Government Organizations, Foundations & Health Providers – Health services in many rural regions has deteriorated along with companies leaving the loss of jobs.  Unemployment rates are often twice the national average.  The lack of health service providers and hopelessness of not having a job is driving disease and death rates higher.  The CDC reports deaths due to cancer, heart disease and respiratory illness are 15 – 35 % higher in rural areas since the Great Recession. A number of communities have no hospital closer than 2 – 3 hours away.  Doctors setup a practice based on government rural doctor incentive programs, then leave after they have put in their required tenure.  Opioid overdoses are concentrated in rural states and Midwest region.

Source: CDC – 2017

A health services revitalization plan needs to be developed by region which includes hospitals, clinics and incentives for doctors to come, stay and build a practice in reach region. Often, the lack of high speed Internet limits the opportunities for health providers to shift to electronic records, services and even use of tele-medicine which would be helpful to reach out over long distances. Health and job candidate support are related as one research organization found that for many manufacturing employers in Indiana that for factory floor jobs as many as 45 % of the workers tested positive for drugs.

Training, career development, and apprenticeship working closely with universities can make a major contribution in a coordinated effort to put unemployed workers to work. NGO groups like the Opportunity@Work program are one approach to attack the job training challenge.  The training group started in the Obama White House focuses on providing Internet economy job training to workers in the heartland to gain digital skills for jobs in fields like programming and information technology.

Colorado has invested in its CareerWiseto bring businesses, colleges and vocational training groups into partnerships providing all Colorado high school juniors and seniors with a dual career path leading to a community college associates degree plus key skills.  Students can begin working on the factory floor as juniors learning key company job skills, and are guaranteed full time employment at the end of their apprenticeship along with financial support to earn a community college degree. 

Faith Based Organizations – many faith based organizations provide counseling services, welfare, foods services and other resources to those in need.  Working closely in the HDCs with their steering councils programs can be coordinated and focused in areas where churches, synagogues or mosques are located.  FBO groups often have been in neighborhoods for many years, with a deep understanding of the needs, trends and social issues that are unique to their area.  Leaders and staff in the HDC would do well to establish good connections with these groups to gain insights into which programs, services and resources are needed to turnaround the economic situation in their community.

In the end, Americans have always pulled together, solved problems and moved ahead toward an even better future. After a reversion to the mean in our capital markets and an economic recession things will get better.  A reversion in social and culture values is likely to happen in parallel to the financial reversion. The complacency, greed and selfishness that drove the present economic extremes will give way to a new appreciation of values like self-sacrifice, service, fairness, fair wages and benefits for workers, and creation of a renewed economy that creates financial opportunities for all not just the few.

Saving Democracy: Economics – Corporate Stock Buybacks Imperil Corporate Viability

Goldman Sachs just completed an analysis of corporate payouts and found that dividend and stock buybacks were 103.8% of their free cash flow. Meaning that they were paying more out in cash than they had on hand!  Free cash flow has dropped to – 15 %, while debt is up 8 %.

Sources: Goldman Sachs, Marketwatch – 7/29/19
Sources: Goldman Sachs, Marketwatch – 7/29/19

This squeeze is unprecedented, it is the worst cash flow crisis since 1980, and is unsustainable.  Corporate executives have turned to extremely high borrowing levels to keep this financial merry-go-round going. While, turning to stock buybacks to hype the price of their stock and keep earnings per share high to the tune of $1.5 trillion by S & P 500 companies in the last year.

If sales and profits drop due to the trade war and consumer spending declines as it has in the last four months, corporations will default on their debt. A downward economic spiral will be triggered. 

Maybe this is another reason the Fed announced a cut in interest rates and shift to an ‘inflation averaging framework’.  JPMorgan recently commented to Marketwatch they believe Fed economists are shifting to a position of not worrying about inflation but instead on keeping money flowing to corporations at low interest rates possibly to zero.  By keeping rates super low the Fed is enabling executives to waste profits on stock buybacks to hype their pay and stock price. We need strong companies making investments in research, development, innovation, productivity improvements and raising wages for workers. When the economy works for all then democracy is strengthened.

The financial music will stop when sales and profits decline, an already desperate cash flow position becomes untenable putting company viability in doubt.  Looking out a year or two, we expect the Fed to come to the rescue after possible zero interest rates have panned out. Last March, former Fed Chair, Janet Yellen recommended that the Fed be authorized to purchase corporate stock and bonds to keep the economy going if a recession hits.

Saving Democracy: The US Needs to Lead in Building Global Bridges Not Walls

(Saving Democracy Series:  this post focuses on how our POTUS has agreement by agreement ripped up the post WWII integrated global world that provided most of the people in the world with peace and prosperity that is unparalleled in history.  He has replaced peace with random acts of impulsiveness, doubt, uncertainty and threats which have caused major economic, cultural and societal damage to both emerging and developing countries.  A more dangerous world of nationalism along the lines of the 1930s is now emerging with all its possible horrible results.  First economic loss, then war. It is time to establish a new global order fair to labor and capital in a world order of respect, freedom of thought and speech with economic opportunities for all to establish global stability and peace.)

On July 2nd, the US Trade Representative announced possible $4b in new tariffs on the EU for subsidizing of Airbus, responding to Boeing concerns. Another episode of impulsive threats happened last May when POTUS threatened Mexico with a 10 % tariff on all imported goods if the flow of immigrants across the border did not stop by June 10th.  The action against Mexico threatened support for the just recently announced new trade treaty with Mexico – why sign a treaty when the US is just going to do whatever it wants. He backed down on the threat after the Mexican government made a commitment to redouble efforts at stopping the wave of immigrants from Central America. We can add these trade attacks to a long list of treaties, agreements or international organizations that our POTUS has taken the US out of (or renegotiated):

  1. Nuclear Arms Treaty – Russia
  2. Iran Nuclear Treaty – EU joint signators  
  3. Trans Pacific Partnership – TPP – with 10 emerging countries, Mexico, Canada and Japan
  4. NAFTA – replaced by two bilateral agreements under consideration by Congress
  5. UNESCO – UN cultural program
  6. UNHRC – UN Human Rights Council
  7. UNRWA – UN Refugee and Works Agency – supports 5M Palestinian refugees, when the US pulled out riots broke out for a week
  8. Paris Climate Treaty
  9. Global Arms Treaty
  10. G7 – developed countries council – POTUS wants Russia added back in, they were barred after annexing the Crimea
  11. Brexit – US has been cheering the UK leaving the EU, offering a ‘big agreement’ if the UK leaves the EU

POTUS has continued to bash NATO, a long standing military organization uniting Europe and the US against an aggressor. The constant undermining of the group opens a divide that adversaries may see as a crack to drive division and move ahead with probes or territorial gains.

The president has also focused on economic agreements – taking a unilateral approach around the provisions of the World Trade Organization and standing economic agreements on tariffs. He calls himself the ‘Tariff Man’ and has implemented with the acquiesce of Congress tariffs on allies like Canada & Mexico (new separate agreements under Congressional review), competitors like China, and cancelled a favorable import agreement for India.  Businesses are worried:

Source: Moody Analytics, The Wall Street Journal, The Daily Shot – 5/28/2019

Consumers have been hurt already in nine different product classes with increases in prices of over 10 %, as consumers or the importer pay the increase tariff on an imported goods including appliances (washer and dryer tariffs 12 months ago), furniture, bedding, floor coverings, auto parts, motorcycles, sport vehicles, housekeeping supplies and sewing equipment:

Sources: Department of Labor, Department of Commerce, Goldman Sachs, The Wall Street Journal, The Daily Shot – 5/13/19

The United States and China have been sparing since July 2018 in an escalating trade war, which seemed to be coming to a conclusion as recently as last April.  Then, the President announced in a tweet that China a reneged on commitments it had made and was ending negotiations.  The Chinese sent a delegation to try and restart negotiations but it was fruitless. For two months tensions escalated until a truce with a restart in negotiations was called as a result of a summit between President Trump and Chairman Xi at Osaka on June 29th.  The US relented on planned additional tariffs on all China imports up to $325b, and eased restrictions on Huawei sales by American companies in return for a vague promise by the Chinese to purchase more farm goods and to negotiate.

Sources: The Peterson Institute, for International Economics, BBC, The Wall Street Journal, The Daily Shot – 5/15/19

The Chinese have dug in for a long haul, threatening to cut rare earth shipments to the US and curtail further purchase of US Treasury bonds, with additional $60 B in tariffs at 25 %. We must remember the Chinese form of capitalism is really not ‘state based capitalism’ as the financial media likes to label in a benign way. The China economy is really ‘authoritarianism cloaked in capitalism’.  This is a mixed economy of state based industries subsidized with some free capital sectors kept in place by central planning. A key aspect of the this cloaking activity is the lack of transparency about who actually owns a Chinese company. In addition, the China Central Bank (PBOC) and sovereign wealth fund own about $200 B in US stocks providing insights and investment control. The Chinese government has deployed Orwellian digital surveillance to keep the people loyal to the state and not thinking or speaking freely. Internet news and social media sties are heavily censored by the state. That’s not democratic based capitalism. Another twist in the relationship with China, is Wall Street leaders have been instrumental in assisting the Chinese government in gaining approval to join the WTO years ago, and still make billions of dollars from fees and investments. The recent Chinese overture to open financial markets maybe a way for the Chinese to win over Wall Street and blunt the trade war of the GOP administration. The Trump Trade war with China is a failure, because it misses the true character of authoritarian government and economics how it uses the economy and capitalism to placate the masses to increase state control. Central government loyalty is the prime directive. Trust is missing between the people and the state – yet the people give up freedom for money when we here the Hong Kong protesters who vandalized the legislature building in late June criticized by mainlanders with comments like ‘they need to quit protesting and get a good job and buy things’. This is a bargain with manipulative leaders resulting in an unhappy ending, as people’s hearts and minds are imprisoned for money, the benefits with be fleeting and the costs dear.

Farmers in the Midwest, growing soybeans have seen their market collapse, other crops like corn, sorghum, wheat have seen huge price drops as China stopped buying from US suppliers. As soybean prices have fallen farm income has dropped almost 20 % and Midwest bankruptcies of farmers have risen above levels seen in the Great Recession.

Sources: Bloomberg, The Wall Street Journal, The Daily Shot – 7/15/18
Sources: The Federal Reserve Bank – Minneapolis, US Courts – 11/28/18

Since last fall when this Federal Reserve report was filed, bankruptcies have continued to increase at an accelerated rate, as farmers cannot get loans from banks to buy seed when prices are so low. The Administration has promised subsidies to farmers totaling $16bn yet the president of Soybean Farmers Association says he has not been able to see Agriculture Secretary Perdue or any of the subsidy money nor farmers in his group. Many farmers believe that when the money does come from the government it will not be enough and not replace the contracts for farm goos lost to Brazil, Russia and other countries.

Next Steps:

World War II was catastrophe for the world, millions of people killed, whole societies wiped out, along with an aftermath of starvation and depressed economies.  World leaders did not want to see a repeat of the WWII disaster.  They knew if they built a set of world-wide agreements and regional organizations to sustain and enforce those agreements there might be a better chance to prevent war from happening again.  The United Nations was founded in October of 1945 in San Francisco to provide a forum for discussion and implementation of world community building programs. The NATO alliance was founded by 29 countries who were WWII allies by approving the North Atlantic Treaty in Washington in April, 1949.  Economic disputes were to be settled by adhering to the General Agreement on Trade and Tariffs approved by over 100 countries in 1948. The World Trade Organization charted in 1994 succeeded GATT, headquartered in Geneva, Switzerland. Thus, many treaties and organizations were founded by most developed countries and many emerging countries to give economic, cultural and governmental support toward building a world community.  Presidents from both parties through the years since WWII have supported the uniting of diverse people around the globe so they all have a piece of the economic pie and security.

Now, our POTUS seems to think that ripping up global treaties and organizations, undermining them, and going it alone will somehow be better for the US.  Maybe things will get better for a few companies or sectors for a little while. However the trade deficit continues to trend worse since the January 2017 term of POTUS to the highest deficit ever with $55 bn last May,

Source: Department of Commerce,, Federal Reserve of St.Louis, Marketwatch – 7/2/19

Some soybean contracts have returned, yet the US still imports more from Europe, Mexico and Canada than we export, the tariff war is just making the deficit worse.   Already, we have seen with retaliatory tariffs from China, threats of reunification to take Taiwan – as a national publication likened to Lincoln unifying the United States. Today countries are going after their own goals spiraling downward into economic wars and eventually military action.  The lessons of the Great Depression, the Smoot-Hawley Tariff Act, harsh reparations on Germany and nationalism (rising today in a hideous way) led to WWII. When other countries see the US leader of the free world embrace ‘America First’ ambitions, why should they sit back and let America get ahead, the fight is on.  We should work with the capitalism elements and businesses in the China that are largely free of state control, building bridges to them, empowering them so country leaders see that the only path to lasting prosperity is when the people’s minds are free to innovate and create.

Yes, it is true, there were unbalanced agreements, the US did lose jobs to overseas countries, and maybe a few emerging countries took advantage the US.  But, we need to be thinking about helping people build their economies, or they will want a piece of the economic pie by force from the US. Job safeguards for American workers should be in place in all agreements, and fair levees and access to markets, protection of intellectual property, yet we need to work within the world order to make structural changes supported by all countries.

Saving Democracy: Elect the President by Popular Vote

(Saving Democracy Series:  this post focuses on how unfair, and undemocratic the minority vote of a President can be. Two ideas are summarized on how to reform the Electoral College which are most often proposed by scholars and political leaders, electors allocated by congressional districts or, The National Popular Vote Interstate Compact)

With the kickoff of 2020 presidential campaigns by 23 democratic candidates and one GOP president, we are reminded of how our democracy failed to elect the popularly voted candidate, Hillary Clinton in the last presidency contest.   The 2016 presidential election results were: Donald Trump receiving 290 electoral votes to Hillary Clinton’s 228, yet she won the popular vote by almost 3 million votes.  That event continues to cause protests, fear, anxiety and sense of injustice across the country.  The Electoral College was developed by the foundering fathers as a way to make the Office of the President a powerful branch of government, not beholding to the majority of representatives in Congress. They developed a state based election system where presidential electors were allocated by state for each senator and congressional representative.  Including the 2016 election, there has been 6 times in U.S. history that a president was elected who did not receive the most popular votes.  A minority elected president is viewed by many people as illegitimate. While the minority candidate has been constitutionally elected, the candidate does not have the majority mandate necessary to execute the responsibilities of the office outlined in the Constitution.

This author asked his mother when he turned 18 years old, ‘how do you vote for President?’ she replied, ‘I think of the President like a child with a hammer, how much damage can he do, so I vote for the least damage.”  Our POTUS 45 must have listened to her as he is hammering away at a variety of democratic institutions, alliances and principles.

Why do we have the Electoral College anyway? The founding fathers had just come from a monarchy based government, so they did not want to repeat a system of a proclaimed leader (everyone wanted George Washington to be President at the time) with the leader appointing the next in succession.  Another approach under consideration was to have a national leader based on representational majority in Parliament.  Yet, they believed in balancing the powers of Congress and the Executive branch.  Plus, the founders were looking for a way to motivate the President for good behavior by allowing a second term.  If the President were elected by Congress it would have to be for one term, or he would become a tool of the majority in Congress. They did not want a direct popular vote because they were concerned that a national constituency could not be developed with so many regions and states likely to have favorite son candidates. James Madison, Constitution Convention recorder and leader, was looking for a compromise because southern states felt they would lose out in a national constituency with blacks being 3/5 of a citizen to vote.  So, a compromise was established to have a set of electors voted on by the people in each state based on popular vote. These electors that would then vote in a separate Electoral College vote in December with ballots read in a session of Congress.  If there was a tie 269 – 269 of electors between candidates, then Congress would vote on who would become President.  In our history there have been 5 Presidents who have not won the popular vote but have won by electors. 

Why is this a problem?  The popular will of the people is thwarted.   A major issue is that the Electoral College is not one person – one vote as identified in our Constitution for a representative democracy.  A vote in California with 55 electoral votes and 8,458,000 citizen votes means that one electoral vote represents 153,781 citizens.  In Wyoming, with 3 electoral votes and 230,197 citizen votes means that one electoral vote equals 76,732 citizen votes. A voter in Wyoming enjoys twice as powerful citizen/electoral vote than a citizen in California. The balance of power in the Electoral College swings to mostly sparsely populated inland states deciding who our president will be.  In the 2016 election inequitable voting power certainly is evident looking at an electoral map (right click on image to enlarge):

Source: Wikipedia – December – 2016

Voting power inequity creates great frustration and anger. In the days after the November 2016 election, there were protests in 37 cities across the country against the president elect due to the injustice of the non-popular vote. All our representative government functions are based on majority vote from local city councils to state legislatures and the US Congress.  It only makes sense to have a popular vote for president in the modern era. With growing economic inequality and divisive politics particularly between inland and coastal people a fair vote for president would go a long way toward building a united country.

Next steps:

Why not just have a direct popular vote?  This would be a good solution except that the Constitution needs to be changed in a two-step process by creating an amendment followed by ratification. The US Congress can create an amendment by a two-thirds vote of the House and Senate or two thirds of the state legislatures.  The proposed amendment then must be ratified by three-fourths of the state legislatures in a time frame approved by Congress.  This is a long and difficult process as 11,539 amendments have been introduced in Congress since 1789 and 27 have become part of the US Constitution.

How about apportioning electors by congressional district?  We already portion congressional districts by population which is updated each decade by the Census Bureau.  The congressional district approach provides some equity for citizen to elector representation – though it will not fix the inequality completely due to the two senate electors. Maine and Nebraska apportion their electors by congressional districts today, with their two senatorial electors representing a statewide vote.  The congressional districting approach would be fair and take care of 80 % of the vote inequity issue. Plus, candidates would need to focus their campaigning on congressional districts not the whole state for a winner take all result. For example, California rarely sees presidential candidates from either party for the presidential race because it has gone for the Democratic candidate in the last 6 elections.  Candidates would benefit by campaigning in key congressional districts in even majority states to gain support of electors by congressional districts which may not vote with the majority of the voters on many issues or candidates.

The best approach would be to have congressional districts mapped by an independent commission as California does to ensure that the district is open to diverse political viewpoints. By establishing congressional districts as the key representative unit with fair boundaries for inclusion of multiple points of view we might see more dialog at the local level.  The increased dialog will induce more consensus building and possibly break the grasp of incumbents who are re-elected 93 % of the time.  State legislatures can decide on their manner of apportioning electors – so we could build a national census to have the states enact changes by the 2024 election.

Professors Akhil and Vikram Amar propose a National Popular Vote Interstate Compact.  Whereby, states legislatures would agree to vote their electors for the winner of the popular vote.  This compact would take effect when at least 270 electoral votes would be in the Compact.  To date fifteen state legislatures have ratified this Compact, swing and inland statues are reluctant to make the switch because they may lose some of their power in electing the next president. Yet, an analysis of advantages to either party are even when viewed over elections back to 1880. Both major parties back the Compact with former senators and congressman on a steering committee supporting the legislation in state houses. Both approaches: congressional district electors or the Popular Vote Interstate Compact are fair to both major parties and third party candidates.

Source: Wikipedia – April – 2019

A way to get the reform of the Electoral College off of dead inertia would be to file a suit in federal court seeking a finding that the present system violates one man – one vote provision of the Constitution, thereby forcing the states to redistribute their electors by another method preferably by congressional district with independent commission mapping or Compact.  Persuading additional states to pass the Compact law where legislation is pending like New Mexico, Arizona, Oregon, Minnesota, Wisconsin, Kansas, Georgia, South Carolina, North Carolina, New Hampshire and Maine would gain the necessary 270 electoral votes for the Compact to take legal effect.

Saving Democracy: Why Wages Have Declined for 20 Years, Labor Needs Equal Role With Capital

(Saving Democracy Series:  this post focuses on what factors are causing labor to lose it rightful position as an equal partner with capital in the US economy and concludes with ideas on how to bring labor back into an equal role; from new institutions like a Federal Reserve for Labor, to corporate law reform, ending stock buybacks, and training with a powerful apprenticeship program)

Labor has been viewed as a cost for hundreds of years. Somehow the early accountants working for Middle Age Venetian families invented double entry accounting systems with debits and credits, These accountants called credited assets like money, land and equipment while labor was a debit labeled as an expense. Labor is viewed as an expense to this day because the owner-entrepreneur has to pay employees to work – in effect ‘renting labor’..  Workers have had the ‘cost’ yoke around their necks ever since.  Yet, are employees really a cost?  The staff are the ones doing the work, creating the product or service and solving the problems – money does not create the product or service only people do. CEOs are often heard to say that employees ‘are our most important asset’ but then treats them like second class citizens in making policies for the company, gaining a fair share of the profits or enjoying job hours flexibility. Today, Wall Street applauds wages being stagnant for the 80 % while profits go up while wealth accumulates for The Elite.

Over the past 20 years in particular, workers have seen their ‘economic position’ continue to deteriorate.  Labor sovereignty continues to decline on multiple fronts: wages, benefits, standard of living, job negotiating clout, choice of companies and the constant sword of Diogenes held over their job by automation.  For example over the past fifteen years wages for workers have been stagnating.  However, this declining wage trend is not new, it has been happening since the early 1980s, when President Reagan took office and ‘trickle down economics’ was promised as a way to give workers a fair share of the economic pie.  Workers have lost their wage share of business sector income ever since.

Sources: The Federal Reserve Bank – St. Louis, The Wall Street Journal, The Daily Shot – 5/3/19

Labor’s share of business sector income has dropped by 15 % since 1950.  While, this labor share statistic uses wage employment data and estimates for self- employment, some observers think the decline is largely due under estimates of the size of the ‘gig economy’.  However, separate wage data supports the declining wage trend:

Source: Global Technical Analysis – 5/3/19

When real wages calculated after inflation are allocated across all employed workers the decline is most apparent, a 34 % decrease since 1983.  The softening wage trend is not getting better, Bankrate surveyed 1,000 workers last year and found that only 27 % received a wage increase.

Why have wages continued to fall the past 50 plus years?  There are multiple factors combining to put workers at the lowest point of wage negotiating power in recent times.  Automation is one of the prime reasons for the loss in wage bargaining power.

Sources: FiveThirtyEight, The Federal Reserve, Bureau of Labor Statistics – 3/2016

Almost 5 million manufacturing jobs have disappeared since 2000, yet over the past 9 years factories have been coming back to the US by increasing employment by 5 %, but with far fewer workers. Yet, the US is taking the No. 2 position in worldwide manufacturing output with a 20 % increase in output

The reduction of manufacturing jobs in the US, automation has been a key factor weakening the worker wage bargaining position. A recent Ball State University study found that over 88 % of lost manufacturing jobs were due to automation and productivity increases not offshoring.

Automation started decades ago, as IT applications deployed in offices and manufacturing plants in the 1970s and 80s displaced thousands of workers performing repetitive manual tasks such as data gathering and reporting, answering phone calls, editing and copying documents, sending and receiving status reports, manufacturing reporting and others that were easily automated by software.  By 1995, the Internet began to impact the workplace, networking software applications so that jobs once requiring local support or data could be performed overseas for far less.  In Silicon Valley, an entry level software engineer would be paid $65 – 75 @hr., while an engineer in India was paid $20 @hr. or less. Thus, most business processes for ‘non-core’ functions like accounting, IT, customer support and benefits processing were moved offshore to reduce costs by 50 – 75 %.

In addition, major corporations have been outsourcing non-core services to US contracting companies to the detriment of worker’s pay security or benefits.  For example, in Silicon Valley starting in the 1980s until present – many core IT functions were outsourced with ‘facilities management’ agreements, where IT workers are fired, and rehired by outsourcing companies at 30 – 40 % less in salary with no benefits or health insurance. The workers were faced with no good choice – look for another job or take a pay and benefits cut for the job they had before.  In the Bay Area,  H1-B visas are often used to keep wages low by offering a worker from India 40 % of the local prevailing wage for a software engineer. The present GOP Administration has significantly reduced H1-B visas by a ratio 1 accepted of every 4 applications the lowest rate in 10 years.

Automation investments continue as software firms develop applications that automate many business activities previously thought to be difficult to automate:

Source: McKinsey Global Institute – 2/28/17

Jobs requiring skills from sensory perception fine motor activity or navigation are going to be automated over the next 30 – 50 years. All this investment in automation results in less competition for employers to find employees to do the work they need – a machine will do it.  The machine shows up on time, requires no vacation, is not absent, and does not sue the company for management miscues.  Plus, the added benefit is in well implemented automation projects costs are driven down, profits up so executives see their compensation increase.

Corporate Oligopoly

Another way corporations limit worker job options is by merging with other companies and then laying off workers in the newly combined firm.  Since 1997 the average market share for the top four firms in most of 893 industry sectors has increased from 26 % to 34 %.  For a tenth of these sectors where the top four firms have 33 % to 66 % market share their revenues have increased by 37 %!

Sources: Census Bureau, The Economist – 3/2016

The antitrust section of the Department of Justice has been asleep the past two decades. In the airline industry, there are now 4 airlines that own 80 % of the business.  In finance, just 5 banks have   50 % of $15 trillion in total assets. In the information search sector – the top 4 companies have 98.5 % of the search industry market. The wireless communications industry is dominated by the top 4 companies control 94.7 % of the market between them – Verizon, AT &T, Sprint and T-Mobile. In the tire manufacturing sector, the 4 top firms dominate the US market with a total market share of 90.1 %.  In 2012, entertainment, media and distribution markets were concentrated in 6 conglomerates with a total of 90 % market share. In 1983, 90 % of entertainment and related markets was distributed over 50 corporations, this chart sho concentration in the fastest growing streaming markets:

Sources: The Wall Street Journal, The Daily Shot – 4/22/19

The advertising industry has consolidated into a two Internet behemoths – Google (Alphabet) has nearly 50 % market share and Facebook with 16 %:

Caption: Bloomberg, Zenith Media, The Wall Street Journal, The Daily Shot – 9/25/17

From 1997 to 2017, the number of publicly listed corporations has declined by 50 % overall.  Fewer corporations for job candidates translates into fewer corporations offering good paying jobs with high quality benefits. Plus, an analysis of corporate concentration in the five year period of 2007  to 2012  in the services sector, found that where corporations control markets and reduce the number of workers to support sales wages are likely to decline.

Sources: The Wall Street Journal, The Daily Shot – 6/27/17
Sources: David Autor, Professor oF Economics, MIT et al, The Wall Street Journal, The Daily Shot – 7/23/19

Gig Economy

The ‘gig economy’ of freelancing and independent contractors has ballooned to about one-third of our workforce or 56 million workers in 2016 according to the McKinsey Global Institute.  A survey by Gallup indicates the types of gig jobs; full-time gig job, part-time gig job, two part-time gig jobs, one traditional job and one gig, or where the first job is a gig and the second job is a traditional job for 36 % of the the total workforce:

Sources: Gallup, The Wall Street Journal, The Daily Shot – 9/5/19

Workers in the bottom 80 % in income have seen their wages actually decline over the past 10 years. So, it is no surprise middle class workers need to hold at least two jobs to maintain their standard of living.  The number of workers holding multiple jobs has skyrocketed in the past few years to the highest level since 2008 (note the recessions at the peaks of multiple jobs).

Sources: Deutsche Ban, The Wall Street Journal, The Daily Shot – 9/5/19

When major corporations experience a slowdown in sales, as has occurred in the last quarter, temporary and gig workers are the first to be laid off or see their contracts cut back along with rates.

The growth of ‘shared economy’ companies like Uber, Lyft, Lime, Airbnb, VRBO and many others have provided these gig workers new flexible income opportunities without the financial safety net of traditional employer jobs.  Gig economy workers often have limited or no access to worker’s compensation, unemployment insurance, 401K retirement plans, disability insurance or health insurance. Independent workers are required to pay both the worker and company portion of Social Security taxes and worker portion of Medicare each year on their income. In the Gig Economy, 33 % of our national workforce is not organized into a union or any bargaining unit. These contract workers are at the mercy of corporations or businesses that set the terms of a work contract, and if there is a problem they quickly find another contractor with no obligation to the contract worker. Uber, and Lyft dominate the ride sharing market, pushing out taxi cab firms, car companies and shuttle businesses – many with full time employees including benefits.  While the cost of rides maybe going down for the passenger, workers are seeing their wages held steady or reduced (Uber reduced driver share of fares by 20 % a year ago) with estimates of an hourly wage ranging between $8.55 to $10.00 per/hr by Stanford researcher, Stephen Zoepf. Drivers receive no compensation for gas costs, auto depreciation, car insurance, Medicare and Social Security – paying both personal and self employment, car repairs and or financial protections. Uber and Lyft receive fees ranging from 25% to 39 % of fare totals. Drivers do receive tips. Financial protection for gig economy workers is in the infant stage, where companies are holding off any meaningful changes until class action suits are brought against them. Last March, Uber settled a suit filed by drivers from California and Massachusetts to be declared employees. The suit settled for $20 million to the drivers, without changing their employment status which stays independent yet they will be given more transparency on driver deactivation and a chance to purchase shares in Uber’s  coming IPO.

Source: Marketwatch.com

Uber’s public stock offering demonstrates the gross inequality of income and wealth, as the drivers are providing the service, yet only a few drivers were offered stock options and the founders made billions of dollars from the public offering. The IPO is a good microcosm of how the Silicon Valley economy works rewarding a few while others providing the services or making products gain very little compensation in comparison.

Productivity

In 2018, Goldman Sachs estimates S & P 500 corporations will spend over $1 trillion in stock buybacks, and they forecast a similar figure for 2019.  None of these funds are being invested in the business to develop new technology, processes, training or systems to increase productivity or cut costs. Business executives are using stock buybacks to goose the price of their stock artificially adding to their compensation packages and the stock returns of shareholders most of which are in the top 1 % in income. Essentially, management is robbing workers of increases in future wages due to the nearsighted allocation of funds to take care of them themselves and pander to the wealthy.

When productivity is anemic, offering wage increases to workers cuts into profits.  Executives are compensated well based on hitting profit targets, so wage increases are not going to happen other than low inflation level 1 – 2 % increases. Over the past nineteen years manufacturing productivity has dropped from 8.0 % to 1.0 % this past year. 

Source: Bureau of Labor Statistics – 5/2/19

Most of our economy is services based, and productivity improvements in the services sector have been slow in coming compared to the goods based sector. For example in social assistance, education, and healthcare there has actually been a reduction in productivity by about 9% since the 1980s.  Plus, hiring has centered on our services sectors so productivity increases are likely to be limited into the future. Our fastest growing sectors in the economy are among the least productive.  Artificial intelligence and software services may change this trend, but the results are still to be seen.

Sources: Brookings Institution, The Wall Street Journal – 10/30/16

Job changes are the lowest in the least productive services sectors, indicating work to be done to automate or implement productivity systems in these services sectors.

Sources: The Brookings Institution, The Wall Street Journal – 10/30/16

Executive Pay

Today, executive compensation at S & P 500 corporations is on average 300 times the average pay of their workers! Senior management enjoys a combination of high salaries, executive healthcare, house low cost loans, stock options and bonuses for achieving earnings targets (hyped by stock buybacks).  In 1975 CEO pay to mean employee pay was 25:1, in 1995 112: 1 and in 2017 312:1.

Sources: Adam Grant, Professor at Wharton, Compustat, Bureau of Labor Statistics – 9/27/18

Note the ratio of CEO to worker pay soars in the 1990s as a result of the the de-regulation, trickle-down and stock buyback allowance policy of the Reagan – Bush administrations. Extreme executive compensation is taking wages from workers who would otherwise receive their fair share wage. Corporations have committed over $1 trillion to stock buybacks, according to Goldman Sachs in 2018 which only go to increase their stock compensation plans and the top 1 % who own most stocks.  That trillion dollars could be better allocated to increasing worker wages so the economy works for the 80 % in income.

Worker Compensation

One aspect of worker compensation that has increased by 12 % since 2006 is total worker compensation in the form of benefits.  While wages have increased by just 4 % in the same period.  Paid leave, health and other benefits have grown faster than wages, except in a few months. Wages as a percentage of total compensation have dropped from 70 % in 2006 to 68.3 % in 2017.

Sources: Labor Department, The Wall Street Journal – 6/9/19

The health component is somewhat misleading, while corporations have seen increased costs for medical coverage, they have reduced those costs by moving the majority of cost increases over to employees.  Corporations have done this by increasing the deductibles covered, reducing the number of plans and increasing premiums.  Worker households are caught in a cash squeeze by having to pay more for the health care coverage they had previously while corporations are holding their costs in line with inflation or slightly more.

Federal minimum wage laws are not keeping up even with inflation. Some states are making up the difference, by requiring higher minimum wages than the federal minimum wage (dark blue, blue and light blue).  Other states offer the same minimum wage (yellow) and yet in the South many states don’t have any (dark grey) wage minimum laws with others (light grey) below federal minimum wage rates like Georgia and Wyoming. Note many foreign car manufacturers have deployed plants in no minimum wage states like Tennessee, Alabama and South Carolina.

Sources: National Conference of State Legislators, Bloomberg, Quick Take – 2018

Job Market Automation

LinkedIn was designed for corporate recruiters with the features and services they wanted to speed the recruiting process.  The edge to recruiters is obvious in the design of the service. For example job seekers cannot have multiple resumes or experience sets styled toward different jobs.  Unless the candidate – user is adept at settings updates to profiles are immediately sent out to all people in their network.  Recruiters have dashboards with filtered candidate lists around search preferences and locations.  The majority of LinkedIn’s revenue is from the corporate recruiting market – candidates are promoted to meet the needs of recruiters.  The use of LinkedIn, Monster, Indeed and other Internet job search services create and sustain a powerful recruiting edge for corporations.  Businesses can identify hundreds of high quality resumes and candidates quickly from all over the world in just a few hours or less. 

Source: Zety.com – 4/7/19

Resume scanning programs (recruiting bots)  further refine the candidate list, filtering content by keywords, phrases or other text targets.  Candidates are left with the challenge of figuring out what keyword ‘hits’ the bot is looking for and entering them into their resume so their resume will have the most ‘hits’ and rise to the top of the list of 250 plus candidates. Job seeking workers try to promote their job skills and experience with workers via social media sites, but are caught between being too public in their search with their boss finding out, or tipping off other candidates to the job they are seeking. Employers use their vast recruiting power in salary negotiations (‘we can always go to plenty of other qualified candidates’) and even after hiring keep all those candidate resumes online to fill the position if the new worker does not meet expectations. Only executives get promoted by an executive recruiter paid by corporate HR departments for find the right executive for an open position, once again the executives get a powerful edge over all other workers.

HR departments often hide behind Internet screens, offer no phone contact numbers and provide few ways for candidates to follow up with key staff.  Often, the trend now is to interview a candidate and not get back to them after the interview if they aren’t interested – sending a de facto message of ‘if we were interested we would send you a message or call’. Without an inside contact, a candidate is left to be a cog in the corporate recruiting machine.

Unions

When the manufacturing sector had the majority of American jobs, union power in representing employees was paramount. Unions are still a key bargaining entity for public employees, nurses and teachers. U

Fifty years ago 33 % of all US workers were members of a union, by 2015 membership had declined to just 10 % – a greater than 66 % decline.  The decline was quite pronounced in ‘right to work’ states in many in inland regions and the South:

Source: NPR – 2/23/19 Percentage of Workers – in Unions 2014

Unions played a crucial role in working to raise wages, benefits and ensure that people worked in safe conditions. Due to automation and offshoring the manufacturing sector has lost millions of jobs, thus unions and their role will need to evolve to the new services technology based economy.

In summary, workers are faced with a daunting set of economic forces holding their wages down – diminished bargaining units, the juggernaut of automation, stock buybacks instead of wage increases, fewer jobs at merged corporations, temporary jobs in the gig economy, reduced productivity, exorbitant executive pay and corporate control of job markets.

To make our democracy work, labor needs take an equal place in our government, corporate and social structure with capital.  Democracy = capital + labor where capital and labor have an equal political, economic and societal position.

Next Steps:

Federal Reserve Bank of Labor – the Federal Reserve system of Governors represents the nation’s largest banks with the President appointing each Governor.  The system has worked well for the banking system to manage financial crisis’s  and interest rates.  The business community and national policy makers await a continuing stream of reports and the Beige book on the status of business throughout the 12 regions with baited breath. The Federal Reserve made up of 12 governors from regional banks, do not represent workers, or really have the tools, levers or policy role to solve labor problems. The Fed’s real mission is to ensure that banks stay viable and the financial system is sound. Yet, Congress charted the Fed with a dual role of keeping inflation in check and supporting full employment. Using the unemployment rate as an indicator of labor’s health is a mistake. The number does not include the millions of workers who have quit looking for work, those without the skills, or those possible workers who are suffering in the drug epidemic because of despair in part from lack of work. The miss match between the millions unemployed vs job openings is a huge challenge and needs to be undertaken by an organization lead by executives from labor focused organizations.

Source: The Wall Street Journal – October 18, 2018

Labor needs an equal organization to represent labor at the table with capital. The new organization would advocate, collect research, and make decisions to promote the welfare of workers, improve wages and lead efforts to fill U.S. job openings.  The mission of the Federal Reserve Bank of Labor (FRBL) is to ensure the United States has the most competitive, up to date skills in a labor force to fill all positions that US corporations have open. In short, the FRBL is in charge of the Labor Bank. The Federal Reserve of Labor would match the 12 regions of the Fed, would be composed of 12 Governors selected by the President from academia, corporate human resources, unions, government worker groups and worker rights group leaders to guide labor policy and programs for the country.  The Governors would meet monthly, setting minimum wage rates by state in the country, review the results of labor statistics, write a Lavender report on the status of labor in each region, with a focus on putting unemployed workers who are seeking work back into the labor force and target an increase in the national labor force participation rate.  The Governors establish interest rates and the size of allocated loans from a bank of $100 billion in labor development loans which are allocated to corporations, NGOs, Unions, universities and others to drive the development of the labor force. The Governors establish the Federal Minimum Severance rates by industry sector state, executive, manager and worker. A minimum severance rate is the proportion of salary received in severance for example 3 months salary.  The FRBL board drives research into issues like why so many workers are still unemployed even with the unemployment rate being at a 50 year low, and why wages have stagnated over the past 20 years. The FRBL is charged with upgrading our labor indicators to assist policymakers in what is really happening to our labor force by industry, job type, racial group. The Governors are chartered to establish a labor force set of goals that are updated by month to measure the results of labor force development, both qualitative and quantitative. Labor experts in the Fed would move to the FRBL, coordinate surveys and research with Census and Labor departments.  The Federal Bank of Labor Governors meet quarterly with the Fed Governors to coordinate capital and labor development plans and programs. Regional FRBL and Fed Governors meet monthly to coordinate regional programs.

In addition to building the FRBL these policy initiatives need to be implemented or similar:

  1. Place Workers on Boards – as Germany has so effectively setup, engaging management with required representation of workers on Boards, through Worker Councils or Unions if so voted by the majority of workers.
  2. End Outsourcing – corporations would pay 50 % tax on each job moved overseas making the move costly, encouraging corporations to move jobs to low cost or inland areas of the US, or innovation economic zones (special tax geographies) and to invest in worker training to receive training tax credits.
  3. End Low Cost H1-B Visas – the practice of importing inexpensive labor to drive down wages in US markets would be ended
  4. Focus Repatriated Funds on Labor – profits parked in banks overseas are invested in productivity programs, increasing wages of workers (not executives), reducing costs or innovation research. Stock buybacks or dividends would be prohibited
  5. End Stock buybacks – these funds are totally wasted, mislead investors on earnings reports and only serve to increase compensation for executives and shareholders. These funds are better allocated to increase worker wages or increase productivity so workers can receive higher wage increases
  6. Breakup Oligopolies – breakup market concentrations in key sectors: information technology, banks and financial services, health insurers, airlines, hospitals and clinics, entertainment, media and distribution and others as deemed in the public interest
  7. Balance Job Market Process– require companies over 100 employees to offer information on their website for contacts, phone numbers, job listings with identified contacts, and to let the candidate know the status of his consideration, and candidate introductions held monthly for F2F communication
  8. Balance Worker and Executive Pay– Empower Work Councils and labor representatives on Boards to approve all executive pay packages. Work Councils in industry sectors would meet and decide on executive to worker ratios of average salary to enable all companies to remain competitive within an industry yet require labor approval. End golden parachute packages by taxing 50 % of every dollar received above $1 million. Severance packages for workers would have to be in proportion to the highest executive package ie, executive receives a minimum of  X dollars in proportion to total salary then a worker receives the same portion with a minimum of 50 % of their yearly salary or the Federal Minimum Severance Rate whichever is greater
  9. Fund Worker Training related to Robots and Increase Wages – for each robot employed, the corporation would be required to offer training, skills development for the displaced worker to find a comparable job within the company or outside. Where automation software or technology is deployed 10 % of the realized cost benefit would be used to raise the wages of all workers in the company.  Tax deductions of up to a 50 % credit would be offered on the cost of training and development programs.  For individual workers, if they pay for career development training they would be able to deduct the full cost of their investment in themselves from their taxes.            
  10. Fund Education and Apprenticeship Programs – Representative Ro Khanna has introduced an idea to fund a 21st century Morrell (1862 Land Grant) Act that would grant to 50 rural and urban universities funds to establish a United States Technology Institute where students would gain technology skills needed in a technology based economy.  In addition, our country needs a stem winding apprenticeship program patterned after the German model to bring skills needed for today’s manufacturing without a college degree.  The program would be given the same prestige and recognition as college programs, companies would pay the same wages, benefits and compensation for skills achieved in this program as any college skills program.
  11. Pool Stock at Public Offering to Workers – all drivers at firms like Lyft and Uber, and workers at other new corporations should be able to receive compensation for their hard work in providing service or building a product. While, some key workers receive stock options with a strike price below the IPO price, we propose that all workers receive stock shares in a pool at the time of IPO, they can cash out or keep the stock then they receive a reward as well as founders (workers should not be forced to hold shares longer than management). Stock pool shares can be awarded based on service years, performance ratings or other recognition approach that is objective and fair to all workers. After all, isn’t it worth it to founders to build a workforce that is loyal and excited about the company, by letting go of even 10 % of their billion dollar stock reward or $100 million to workers?

Millennials Left Out of the Economic Boom

Image: fee.org

Millennials have seen the lowest level of GDP growth of three major generations since WWII.  Baby Boomers, Gen X enjoyed GDP growth rates of between 30 – 40 % in the ten years after they turned 18 years old.  While, Millennials experienced half those GDP growth rates .

Sources: Commerce Department, The Washington Post – 3/15/19

To gain entrance to good jobs, Millennials became the most educated cohort in America’s history – yet at a price.  Student debt is at an all-time high of $1.5 trillion. This debt level has caused at least 400,000 potential young buyers of homes to be left out of the housing market in 2014, according to Federal Reserve economists.  One reason students needed to take on such massive debt loads is states for the past 30 years have been drawing down their financial support of college education by between 60 – 50 %.  Universities were left no choice to fill the funding gap except by raising tuition. 

We have documented in previous posts that real wages for the 80 % in income group have been basically stagnant for the last 30 years.  As the nation’s top 20 % gains 90 %  of the income and wealth gains since the Great Recession, Millennials have been further challenged to keep up, particularly if they have no college education living in inner cities and Midwest rural regions.  The hallowing out of manufacturing in the Midwest and South has produced low wage, low benefit, limited future jobs for young people. Add the slow Internet infrastructure and lower quality healthcare makes the future look dim.  Is it any wonder that the Heartland has the highest opioid death rate in the country?

Millennials feel their lack of an economic future in other ways, delaying marriage by 8  to 10 years and having children 5 – 6 years later than other generations.

Next Steps:

A whole generation has been missing out on the benefits of the fastest growing wealth generation economy in the world.  As income and wealth goes to the top 10 % to the highest level of concentrated wealth since 1929, the education services that make for a broad based pluralistic economy have fewer student slots and extremely high tuition.  Corporate and wealthy individual taxes are at the lowest levels in 50 years.  Our higher education system is turning into a grinder for people of modest means, carrying a heavy burden of debt for young people to begin their careers and families.

The number one issue for Millennials is student debt.  We need as a country to deal with this problem.  Students did not withdraw support for state colleges and universities, taxpayers and state governments did withdraw financial support with huge consequences for our young people and our economy. There have been a variety of proposals to reduce student debt including, forgiving debt completely, or forgiving debt for service to the country (as a proposal we made in a post to focus on investing in our Midwest communities), require corporations to provide more training for employees, and corporate support of a national apprenticeship program at a funding level and quality of Germany’s apprentice program for non – college careers.

The key is we need to end the bickering between conservatives, independents and liberals and take on the economic challenge of huge debt that our young people have today.  Certainly, these people need to take responsibility for their own economic future, but we who created the present economy of winners and losers need to do better by our young people or when they gain positions of economic power we may not like the economic system they setup.

Saving Democracy: Make Voting Rights, Systems Uniform For All 50 States

(Editor Note: This is the second post in a series on renewing the institutions of our federal government and democracy to ensure that it will endure. Looking at trends today with data, analysis of the present situation and recommendations for changes. Todays post focuses voting rights being made universal for all states without state manipulation of the voting process or access for all eligible voters.)

Photo: mashable.com

Over the past ten years 23 states have passed laws to restrict voter rights.  Some states of have instituted cumbersome identification procedures, cut down pre-election day times to vote, added restrictions on mail in ballots, taken voters off the rolls for political reasons, and made voter registration more difficult.

Source: The Brennan Center for Justice – 3/5/19

Automatic Voter Registration (AVR) is a concept gaining momentum in many states, the Brennan Justice Center for Justice outlines their proposal in this way:

First, AVR makes voter registration “opt-out” instead of “opt-in”— eligible citizens who interact with government agencies are registered to vote or have their existing registration information updated, unless they affirmatively decline. Again, the voter can opt-out; it is not compulsory registration. Second, those agencies transfer voter registration information electronically to election officials instead of using paper registration forms. These common-sense reforms increase registration rates, clean up the voter rolls, and save states money.”

The plan would automatically use registration information at a state agency for eligible voters to be registered to vote: for example, when 18 year old goes to the DMV for a driver’s license their registration information would electronically be sent to the Secretary of State and their name added onto the voting rolls where they live. Citizen interactions with other state agencies where registration is required would follow a similar procedure.

The House of Representatives has just passed HR 1, a comprehensive voting rights act making voting registration, rights, procedures, identification, pre-election day voting, public funding of candidates, tax returns by candidates for President and Vice – President, election day a federal holiday and other innovations to bring our voting process into the modern age, here is a summary of the bill from the House website:

This bill addresses voter access, election integrity, election security, political spending, and ethics for the three branches of government.

Specifically, the bill expands voter registration and voting access, makes Election Day a federal holiday, and limits removing voters from voter rolls (and automatic voter registration).

“The bill provides for states to establish independent, nonpartisan redistricting commissions.

The bill also sets forth provisions related to election security, including sharing intelligence information with state election officials, protecting the security of the voter rolls, supporting states in securing their election systems, developing a national strategy to protect the security and integrity of U.S. democratic institutions, establishing in the legislative branch the National Commission to Protect United States Democratic Institutions, and other provisions to improve the cybersecurity of election systems.

This bill addresses campaign spending, including by expanding the ban on foreign nationals contributing to or spending on elections; expanding disclosure rules pertaining to organizations spending money during elections, campaign advertisements, and online platforms; and revising disclaimer requirements for political advertising.

This bill establishes an alternative campaign funding system for certain federal offices. The system involves federal matching of small contributions for qualified candidates.

This bill sets forth provisions related to ethics in all three branches of government. Specifically, the bill requires a code of ethics for federal judges and justices, prohibits Members of the House from serving on the board of a for-profit entity, expands enforcement of regulations governing foreign agents, and establishes additional conflict-of-interest and ethics provisions for federal employees and the White House.

The bill also requires candidates for President and Vice President to submit 10 years of tax returns.”

Senate Majority Leader McConnell, denounced HR1 as a ‘power grab’, which seems dismissive of a way to effectively bring our voting processes into the modern age and make voting more democratic rather than manipulated by a controlling party in the state to enhance the turnout of their voters over others in elections. 

It is about time we had universal voting rights, processes and programs across all our states to ensure that voting is accessible by all citizens regardless of ethnicity, race, religion, or wealth.

Our next post: will focus on congressional districting, crucial to fair elections.

(In a series: on key topics for renewal of our democracy; voting rights, corporate power and reform, Electoral College reform, congressional district reform, Congressional reform (not three presidents) (campaign finance reform), using the Internet and high tech (AI is a common good) to strengthen democracy, innovative government program implementation using Silicon Valley model, support of the Press (our Fourth Estate), educational reform, ethical government service, finance and stock market reform, land and home ownership, environmental stewardship, citizenship and service, civil discourse (choose our words), using evidence to pass laws and create policy, and our global leadership role.)

Saving Democracy: Renewing Our Government Infrastructure v2.0P

Source: editorials.voa.gov

“We can’t have an economy that works for all if we don’t have a democracy that works for all.” TPE, Editor, Patrick Hill

By returning political power to the people then economic opportunities can be once again be made available to all.   Why is this reform and rebuilding effort important? Because the people don’t trust their government.  If citizens don’t trust their democratic institutions to do the right things for them, they will turn to demagogues who use hate, fear, divisiveness, pride, and power to weld control over the people to gain wealth and power for themselves. Here is a poll from NPR/Marist on the trust people have in various forms of U.S. government:

Sources: NPR, Marist – 1/17/18

Congress comes in dead last of all the major institutions, with the Military first and the Supreme Court second (though as the court becomes more politicized this level of trust may change). The Presidency under our present POTUS has not helped in terms of trust, since he was not elected by the majority of people falling almost 3 million votes short and then proceeded with policies that only appeal to his minority base. People inherently believe the majority person or policy should win. In our 2016 presidency election the majority candidate did not win, so the majority opinions are not represented in the Executive branch. The Executive branch starts out with a lack of support, trust or mandate to govern. Our government by the people for the people and of the people can only survive if people have trust in their government. What is even worse is the level of confidence Americans have in their government to handle international or domestic problems has dropped significantly:

Source: Gallup – 1/31/19

One month after the 9/11 tragedy the American public rallied around their government and leaders to provide protection and bring the perpetrators to justice.  Since 2001, the confidence the public has in their government to handle problems has declined to a 18 year low.

One reason trust is so low is the government actually does not represent the people when it comes to passing laws in accordance with citizen opinions, needs and condition.  Professors Martin Gilens, at Princeton, and Benjamin Page, at Northwestern examined thousands of opinion poll surveys from 1981 to 2002, and grouped them based on the top 10 % in income versus the bottom 90 %.  Then, they reviewed 1779 policy proposals versus the opinion surveys and found the elite saw 76 % of their opinions reflected while the general public only 3%.  Special interest groups gained 56 % of their positions reflected in policies. It is little wonder that the general public is frustrated with their federal government.

Democrats, Republicans, and Independents need to step back a moment, or a year and think about our democracy first and their policies second.  The most salient aspect of politics since the 1980s is the ascendency of corporations, the wealthy and special interest groups gaining and sustaining power in Washington supported by both major parties. At the same time wages for the working class and 80 % in income have basically stagnated on a real wage basis. Our government needs to work for everyone: conservative, liberal, immigrant, native born, poor or wealthy.  We need more government processes focused on building consensus rather than the predominant government, Internet and media processes fanning the flames of division. Division is freezing our ability to move ahead and even look ahead 10, 20 or 30 years to solve problems before they become too immense to solve without great loss of life or economic damage. The fact that we cannot seem to make the right legislative, corporate decisions or encourage environmental sound citizen behaviors to save our planet is evidence enough of the breakdown of our democracy to solve real problems. Are these problems solvable? Yes, but only if we work together bringing the genius of our diverse people to focus in effective ways to solve those existential issues we face. There are so many narratives that are disconnected, people talking past each other. We need to connect the narratives and arrive a one narrative that the majority of Americans can support on each major issue.

Our next post: will focus on voting, the heart of our democracy.

The Big Myth: Stock Buybacks Boost the Economy & Create Jobs

After the recent NY Times op-ed by Senators Bernie Sanders and Chuck Schumer to require corporations share profits with workers before stock repurchases, there has been a lot of confusion about how stock buybacks work and their impact on the economy.  Let’s clarify how share buy backs work first.

Corporate stock is bought and sold in open markets between a buyer and seller. On any one day the share price moves up or down depending on the demand for shares between a buyer and seller.  Corporate executives can manipulate the price of shares by reducing the pool of shares on any trading day, according to SEC rules up to 25 % of the daily volume and not executing a repurchase within the first 30 minutes of the open or the close.  If shares are taken off the market on any one trading day, posted to the books of the company those shares are effectively taken out of the market and if demand stays the same the price goes up.  Of course, the share price can go down as well, if demand drops on the repurchase day.

Stock buybacks cause misleading reports on earnings per share.  A simple example, if Gigantic HiTech has profits of $1 million for the quarter and 1 million shares are outstanding in the market, then the EPS is $1.00.  However, if the firm purchases 100,000 shares during the quarter and takes them off the open market the total number of outstanding shares is reduced to 900,000 artificially boosting EPS to $1.11 or 11 %.  The company has not increased profits during the period they have just reduced the number of shares outstanding and report the EPS figure in non GAAP reports.  GAAP reporting requires EPS be calculated on the number of outstanding shares before repurchase.

So, the dollars spent on stock share repurchases do not go into ‘jobs, the economy or re-invested’ the money is spent on goosing stock prices. The SEC in 1982 prior to the Safe Harbor policy that allows for stock repurchases called corporate stock repurchasing ‘stock price manipulation’.  From 1982 to today the policy allowed corporations to execute market stock purchases and not be held liable in shareholder lawsuits for price manipulation.  Plus, companies only had to report open market purchases each quarter voluntarily.  Effectively, the SEC gave companies the green light to drive stock prices anyway they wanted. Just because time has gone buy that does not change the manipulative character of the stock repurchase practice.

How big a problem is it?  Goldman Sachs estimates that $940 billion stock repurchases were made in 2018, and they continue to forecast a similar figure for 2019.  Major players in FAANG stocks repurchase billions of dollars of shares supporting stock prices.  Forbes estimates that Apple spent $100 billion in share repurchases in 2018.  CNBC calculated a year ago that Apple share prices were inflated by as much as 20 %.  Between 2015 through 2017 S & P companies spent 60 % of all profits on stock buybacks, according to Forbes.

So, where else could they be spending the money instead of driving stock prices up and increasing the compensation of executives?  On employee wages, but wage increases are not happening, interestingly since 1982 when the SEC Safe Harbor provision went into effect real wages have declined.

Source: Global Technical Analysis – 2/5/19

Real wages after inflation have continued to decline when allocated across all persons employed.  Bankrate surveyed 1,000 workers at all income levels last year finding only 27 % received raises. Corporations are not increasing wages even to keep up with inflation.

What about capital expenditures are they up?  No.  With all the pronouncements of executives that they are investing in their companies to increase innovation and productivity they are in fact not performing, here is the analysis of business investment as percent of GDP since 1998:

Sources: The Wall Street Journal, The Daily Shot – 11/9/18

Note the declining business investment line in the chart from 4.5 % of GDP in 1998 to 2.5 % in 2018, a 44 % reduction.

Maybe corporations are still increasing productivity anyway so they can afford to do stock repurchases?  No.  Productivity continues to stall.  The following chart shows total factor productivity (TFP) since 1948, the long term average is the green line from 1948 to 1971 versus 1972 to today red line today, plus growth in productivity is close to zero:

Sources: San Francisco Federal Reserve, Real Investment Advice – 1/16/19

Executives have made decisions about how to allocate profits that are not increasing productivity, raising wages, hiring workers or reducing prices.  Our economy and our workers are the losers while executives and the wealthy elite who own stocks profit from these short term decisions.

Next Steps:

Do executive decisions on profit allocation really affect workers and consumers?  Yes.

GM last year announced the closing of their Lordstown plant and the layoff of 15,000 workers due to a shift in consumer buying to trucks and misallocated investments in poor selling product lines.  Yet, since 2014 GM spent $13.9 billion in stock repurchases according to the Wolf Report.  GM could have spent that money on employee training, shifts in product development, the phased closing of plants and phased in building of new plants and likely would not have had to resort to massive employee layoffs.

Mylan announced 18 months ago a 584 % increase in the price of EpiPen’s used in life – death situations to counter act food allergy shock.  At the same time Mylan executives took care of themselves first with over $1 billion in stock repurchases to drive stock prices up. Analysts evaluated the product cost of goods and assembly for EpiPens and estimated it cost Mylan about $2 billion to manufacture, so the $1 billion could have gone toward reducing the cost of the EpiPen by 50 %.

In both examples corporate executives took care of themselves first, and their employees or patients second.  This profligate management of profits from customers and patients was not allowed prior to 1982. Corporate executives have a social and ethical responsibility to allocate funds in the balanced interests of the company, employees and the community

Executives are executing stock buybacks at the cost of sound financial management as well. The debt to cash ration of S & P 500 corporations is at 18 %, a lower level than at the 2008 recession. When the economy slows corporations will be squeezed between debt loads, operating costs and low cash reserves.

Sources: Wells Fargo Investment Institute, Factset – 2/14/19

Our economy continues to decline as GDP shrinks year over year, in part by trillions of dollars being wasted on stock repurchases instead of being invested in worker training, wages, capital equipment and research and development. A trillion dollars is 5.26 % of the U.S. economy shifting buy back dollars could have a huge impact. Corporate executives have magnified the problem by borrowing money at low interest rates to keep stock repurchases going even when profits lag. Today, corporate debt is 45 % of GDP at all time high inflating the economic bubble.

Sources: St. Louis Federal Reserve, Real Investment Advice – 2/21/18 (recessions in gray)

A reduction in corporate borrowing to inflate stock prices would go a long way toward putting the economy on a more solid business foundation. A major SEC policy shift ending stock buy backs would need to be phased in as a percentage over several years to allow markets to adjust, yet if we are to build an economy that works for all we need to end this misleading, damaging and costly practice.

Hundreds of Thousands Of Lives Disrupted Needlessly Because of Lack of Evidence Based Government

Image: civilserviceworld.com

Thirty five days ago the GOP held control of both houses of Congress and the Presidency and yet an ill-advised policy based on ignorance was allowed to hold 800,000 federal works hostage.  How did this happen?  Majority Leader McConnell, Leader Schumer,  Speaker Ryan and Minority Leader Pelosi all agreed just before Christmas to extend a spending bill for a few weeks enabling the federal government to keep running while discussions were pursued on a Border Wall. POTUS went along with this plan and told Majority Leader McConnell he would sign the extension bill.  Yet, that evening POTUS started listening to commentators from his far right base – changed his mind and demanded funding of $5.7 billion for a wall or he would as he said a week earlier ‘take pride in shutting down the government’.  The Border Wall idea has no solid evidence to support that it would work to stem the tide of drugs of which 90 % come through ports of entry, drug leaders and gangs who fly over the border.  PBS sent a reporter to the border near Nogales, Arizona to gather real data on what was actually happening at the border.  He found that people on the border did not want a huge wall except for sections of see-through barriers in cities, yet wanted more border police, more access roads and surveillance technology. Speaker Pelosi made an excellent point in her press conference today, after POTUS caved when it was obvious the shutdown was causing real harm to many Americans, plus federal workers and their families.  She declared, ‘we support more border security measures, that are evidence based,’

Her focus on evidence based policy was music to our ears.  When was the last time during this GOP administration have we heard that policy would be ‘evidence based’ (with real facts not made up ‘alternative facts’)? The EPA has moved quickly to shift policy making processes to not use scientific based reports or data in making policy decisions. Immigration policy is based on scapegoating of Muslims, Mexicans, and Central Americans instead of the facts.  The facts are that new businesses are twice as likely to be started by immigrants, that when the Mexican economy thrived cross border immigration fell dramatically and that majority of immigrants fill jobs that most American workers don’t want to do.  Canada has looked at their trend of an aging population and declining workforce.  To build the size and skills of their labor force for the future they are welcoming immigrants – we should be doing the same thing. Our population is aging quickly, so without an immigrant influx of entrepreneurs and workforce we will be faced with a stagnant economy looking much like Japan’s.

The effectiveness of modern medicine was revolutionized when evidenced based medical practices and research was implemented as a standard clinical practice in the 1960s.  Businesses today use Big Data analysis, models, forecasting and innovate new products based on data, research and analysis before making investments. The dramatic increase in our standard of living is based on innovative processes in universities, businesses and financial services all insisting on ‘getting the data’ first before making proposals or investments.

We should accept nothing less than evidence based government. We are behind by 20 years on combating the effects of scientifically proven climate change. Our future will depend on making intelligent decisions based on evidence to implement sound policies and investments to ensure the existence of humanity.

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