14 October 2017

What Your Fellow Americans Are Making - And What That Suggests About Minimum Wage Law

13 October, our Social Security Administration released data on last year's wage earners.

An income of $95,000 put you in the top 10%, made you 1 out of 10.
An income of $250,000 put you in the top 1%, 1 out of 100. 
$500,000 put you in the top 0.1%, or 1 out of 1,000.
$50,000,000 - fifty million - put you in the top 0.001%. It made you one in a million. 143 people reported incomes of over $50 million and those 143 people had average incomes of $100 million.

Here's another remarkable stat. Merely having an income put you in the top 50%. When I write, "top 10%," above, I'm writing about the top 10% of wage earners. Social security has data on 163 million wage earners. There are about 325 million Americans, so only about half of Americans reported incomes. Some were too young. (My wife's second grade class is full of slackers who haven't earned a dime in their life.) Some were too old. Some are too rich to work or make their living from investments rather than wages, property or stock owners. Some are too handicapped. Some are working jobs without wages, jobs like caring for their kids or parents. Some depend on family or friends for food and housing, some are in school, some recovering from injury, some permanently disabled, etc.

Now let's get into the normal people, the wage earners who don't make six figure salaries but still work. The 90%.

If you make $15,000, you make more than 30% of all wage earners. $15,000 a year works out to $1,250 a month. Median rent for a one-bedroom apartment in the country's most expensive 22 cities is higher than $1,250 a month. Assuming that you have to eat, buy clothes, get transportation, etc., what nearly a third of Americans make is not enough. 

If you made $30,557.71 last year, you made more than half of all wage earners. You have as many people who would trade wages with you as you would trade wages with. In some sense, you are the representative American, someone fellow Americans are as likely to pity as envy.

$30,000 a year works out to $15 an hour. Half of wage earners make less than this. Half.

Seattle is a wonderful city. It's both home to two of the richest men in the world and to many liberals who folks in the Midwest would consider more liberal than Scandinavians. They've recently passed a $15 an hour minimum wage. 

I have a problem with that.

I don't have a problem with places like San Francisco and Seattle - places where median wages are $90,000 to $100,000+ a year - saying to employers, "If you want to hire our people you have to pay more than you would elsewhere." That makes perfect sense to me. 

What doesn't make perfect sense to me? Choosing to make that minimum wage $15 an hour - an amount MORE than what half the people in this country make. 

Average wages in Belarus and Armenia are about one-tenth the average wage in the US. You can't just pass legislation requiring all businesses to pay Armenian employees the same as American employees. It's a noble and proper aspiration to lift wages but the way you get there is complicated. Better education. Easier access to foreign markets where they can sell their goods and services. More capital investment that makes their people more productive. 

Minimum wage seems to work as a prod to businesses or industries that aren't keeping up. It can force the folks in the bottom of 10% or 25% of labor productivity to either go out of business, go overseas or to up their game and make their employees more profitable even at a higher wage. What it can't do is force wages up for half the workforce. You need more complicated policies than that.

Policies that make it easier to live when you make only $15,000 a year or less - something that 30% of the workforce is doing - are good, humane and necessary. Minimum wage laws that ignore what the market says about the value of half your workforce seem, by contrast, bad, silly and doomed to backfire. 

12 October 2017

What is Likely to Trigger the Next Stock Market Downturn

Watch for legislation that cuts capital gains tax. Once that happens, people with equities will be able to sell with lower tax penalty. If you have a 401(k) that lets you sell without paying taxes, you might want to sell off, say, 20% of the more volatile stocks before the legislation is signed because shortly after it is likely that the market will begin its correction.

Unemployment Rate: What is Next After the Longest Drop in History?

We have data on monthly unemployment rates in the US from January 1948 - shortly after World War 2 - through September of 2017. During that time it has never been lower than 2.5% (which it was in May and June of 1953 at the peak of the post war recovery) and never been higher than 10.8% (which it was in November and December of 1982 in the depth of the Volcker-induced recession during Reagan's first term).

Half the time it is below 5.7% and half the time it is above 5.7%.

Unemployment rates of 3.8% or lower put you in the top 10%; rates of 7.9% or higher put you in the bottom 10%. 80% of the time, unemployment rates have bounced between 3.9% to 7.8%; that range defines normal. Outside of that range things are great or awful.

At the depth of the Great Recession - in October of 2009 - unemployment hit 10%. That's among the worst 1% of all months. (Well, in the worst 1.2%.) Since then it has steadily come down during the longest uninterrupted streak of job creation on record. Last month - the end of the streak - unemployment hit 4.2%, a value in the best 17%. We're in the top 20% but not yet top 10%, really good but still not great.

One simple answer as to whether unemployment will drop further is to say that it's only been lower than its current rate of 4.2% 15% of the time. Again, unemployment rates bounce between 4% to 8% most of the time; it doesn't seem to last long outside of that range. That alone suggests that the unemployment rate will soon stabilize or even rise.

Another interesting thing to note is that this is an exceptionally long recovery. Unemployment peaked 8 years ago this month - in October of 2009. A steady drop in unemployment has never lasted longer. The next longest improvement, the drop from the 10.8% high in December of 1982 to its low of 5% in March of 1989, took just over 6 years before beginning to rise again. Unemployment rates steadily drop for a time and then steadily rise, and steady improvements usually last just a few years, not 8 yerars.

At the start of a recovery people are well aware of all the reasons things can go badly. After all, they are just coming out of a period in which things did, indeed, go badly. Remember how early in the recovery people were anxious about Greece, China's stock market, deficit spending, the mortgage market, Greece, etc. People were looking for reasons that things could go wrong. Now? Now they're looking for reasons that the recovery could continue and less aware of reasons it might not; this makes economies more vulnerable.

There are reasons the unemployment rate could drop further and reasons it won't. 

Among the reasons it could drop further is that our labor force is growing more slowly than it did a decade ago. From 1955 to 2005, US labor force (folks aged about 25 to 65) grew 1.7 percent a year. Since then it has grown about 0.5%. As companies seek to hire, they'll have fewer options; all else being equal, this would translate into lower unemployment.

Another reason it could drop further is because of a drop in immigration. Again, this lowers the number of available workers and could mean that employers will draw from the unemployed rather than the newly available. If immigration rates drop enough, the labor force might even stop growing.

Curiously, the reasons that the unemployment rate could start to rise again include a drop in immigration. Immigrants don't just find work here. They buy houses, clothes, meals and all the things that drive demand for goods and services that, in turn, drives demand for employees here. If Trump's policies are successful at slowing down the flow of immigrants, he'll actually succeed at destroying jobs.

Trade, of course, could still provide jobs for American workers. Assuming, of course that Trump does not ignite trade wars. Simply put, he wants trade wars with our biggest trading partners - threatening to blow up Nafta and trade deals with China - and if he gets his way we'll see a drop in trade with our three biggest trading partners. That will destroy American jobs.

The third reason that the unemployment rate could rise is because Trump is planning to cut spending and taxes. Tax cuts will disproportionately go to the rich. If you give a poor guy a $1,000 in tax cuts, he's likely to spend $900 of it. When you're making only $30,000 a year, you could use that extra $1,000. If, by contrast, you give a rich guy $1,000 in tax cuts, he's likely to save $900 of it. When you're already making $500,000 a year, an extra $1,000 isn't going to change your vacation plans. Government spending ripples throughout the economy in ways simple (the employees of the State Department buy coffee at that little coffee shop across the street) and complex (the Medicare recipient pays a medical bill which enables the hospital to make a down payment on a new imaging technology and the young doctor to make a down payment on a new car). If you cut $1,000 in government spending and then give a $1,000 tax cut to someone rich, you'll reduce spending, reducing demand for the goods and services that drives demand for employees.

What is the punchline? It depends on whether Trump ends trade deals. In either case, unemployment rates are likely to start rising again within 3 to 9 months. If he ends trade deals, they'll begin to rise sharply.

If Trump fails to end trade deals:
Unemployment will fall to no lower than 3.8% within the next six months, after which time it'll start to rise again. Given drops in the growth of the labor force, job creation could turn negative at least one or two more months within the next year even as the unemployment rate remains relatively stable.

If Trump succeeds in ending trade deals like Nafta:
Unemployment will - at best - hit 4% near term but may have already bottomed out at the current 4.2%. We'll have a recession and the unemployment rate will rise to 6% to 8% within a year or two.

11 October 2017

Very Good News About What Happened to Household Finances From 2013 to 2016

Great things happened to the finances of American households between 2013 and 2016. Given it is great news, it didn't get reported. So, you've come to a lowly blog to learn what happened.

In the 3 years from 2013 to 2016

Average monthly income for American families rose by $1,000 a month from the start to the end of this period. Think about what new options that gives families. 
Median income rose nearly $400 a month. A family making $48,000 in 2013 was making nearly $5,000 a year more by 2016. $5,000 a year is half the median global family income. Half. That's how much household income rose.

Breaking it down, though, we find some wonderful gains for groups who make less. This might be the coolest thing about this cool news.

Households headed by someone without a high school diploma make the least (compared to households with high school diplomas, some college, and college degrees). They make the least but their incomes rose the most. Median income for households without a high school diploma rose 15% and average income rose 25%!. (Households with college degrees saw median income rise just 2% and average income go up 15%.) That's a big - and needed - boost to the working poor.

Minority families make less than white families but their gains narrowed those gaps too. (There is still plenty of gap to close but at this rate it will close.) Average income for white families rose 14%. Average incomes for Hispanics rose 26%, for blacks they rose 22% and for other / mixed race families average incomes were up 20%. As with different levels of education, everybody gained but the gaps between groups narrowed. 

Finally, the rich did get richer. Families whose wealth put them in the top 10 percent had average income gains of 23% whereas families in the bottom half of net worth experienced gains of only 5 to 6%. I don't know how one would change that. If I have a million in wealth, my money is going to make money for me. Someone without wealth is not going to compete with that - particularly in a bull market for stocks and housing as it was from 2013 to 2016.

Net worth also rose spectacularly in this time.

Net worth fell for families from 2007 to 2010 (thanks to the Great Recession) and changed little from 2010 to 2013. From 2013 to 2016, though, average net worth rose $140,800. That's nearly $4,000 a month through this 36 month period. Median net worth rose only a tenth of that but still works out to a gain of nearly $400 a month for this period. 

To summarize, in the period between 2013 and 2016, at least half of households experienced a gain in net worth and income of $1,500 a year or more. The average of all households was an income gain of  more than $4,000 a year and a gain in net worth of nearly $50,000 a year.

I don't know how you turn that into bad economic news but somehow, sigh, we have. 

All the data for this post comes from this Bulletin from the Federal Reserve.

10 October 2017

What Trump Will Do to Continually Raise His Ratings - You Won't Believe What He'll Do Next

It is doubtful that any man has more fiercely craved attention than does Donald Trump. Throughout 2016, his ability to attract and hold our attention seemed to wax and never wane. Just when we thought he had topped himself, he found a way to outrage more. Not content merely to lead his rallies with chants of "Lock her up!" about his political opponent - a tactic more befitting to a banana republic than the world's first modern democracy - he then wound up his crowd with an indictment of Clinton that ended with, "Oh well. Maybe the 2nd amendment people will take care of it." A death threat that even banana republic leaders don't make on camera. And on it went, all throughout his campaign, an escalation of outrage that continued to get him more and more attention. Now that he's president the coverage has become even more intense.

Here, then, is a recap of his amazing ability to get higher and higher ratings. I've added four at the end of the list, forecasting simply based on his repeated ability to raise ratings.

So far (in rough order)
1. Has some success as a NY real estate developer.
2. Builds biggest casino
3. Goes bankrupt
4. Coauthors best-selling book
5. Becomes star of wildly popular reality TV show
6. Stirs up birther controversy, claiming that the nation's first black president must not have been born in the country.
7. Announces run for presidency with claim that Mexicans coming across the border are rapists and murderers.
8. During the campaign, brags about the size of his penis in a presidential debate, threatens to lock up his political opponent at rallies, is caught on tape bragging about sexual assault, asks the Russians to release illegally obtained Clinton emails, insults a series of people, including a gold star, Muslim family,  etc., etc., etc.,
9. After election claims that some neo-Nazis are good people, fires or loses a string of key White House staff (including a speaker who is fired within 10 days), insists Congress pass healthcare legislation that he calls mean, insults a series of Republicans he'll need to pass any legislation, threatens to walk away from NAFTA, NATO, Paris Climate Accords, challenges his secretary of state (who called him a f*ing moron) to an IQ test competition, etc., etc., etc.

Then (a prediction of things he'll do to continue to gain even more attention)
10. Is put on trial by Mueller and Congress for colluding with Russians to win the 2016 election
11. Is found guilty and sentenced to prison
12. Forces an armed standoff before surrendering to federal agents (the most watched TV up to that point)
13. In prison is paired with a black Muslim roommate, something that is aired each week for an hour in the world's most popular TV series ever.

08 October 2017

A Simple Proposal for Making Congress Sane and Effective

Budgets are the clearest expression of values. Right now they are negotiated slowly and if a vote comes down to just one or two senators, say, those senators can dictate terms that give their state far more power than the other 48 to 49 states.

If our goal is to have a government that actually represents all 50 states equally - from the most conservative to the most liberal to include everything in between, there is a simple way to do it, as follows.

Require every member of Congress - Representatives and Senators - submit a budget. Don't negotiate. Just submit. Those budgets will be made public to the people in their district. Those budgets will also be averaged together to be the new budget.

This would have so many advantages. One, no one district would have more or less influence than any other. Two, extremists would be marginalized rather than given more power. A person who wants to slash funding for EPA to zero and a person who wants to double its budget would cancel each other out. Three, no one person would be able to hold the budget hostage; members who missed the deadline for submitting a budget would simply have no influence on the new budget.

The result? Less drama, diminished influence for extremists, and more business-like results for the Congress. Most importantly, it would make sure that EVERY district was represented which, it seems, should be the objective of a representative government.


29 September 2017

What (New) Word Describes Trump's Administration?

It's not enough that Trump has no interest in policy and experience in governance. Today with Tom Price's resignation we're reminded of the incredibly high levels of turnover in this White House and this fact: between Trump's leadership, his lack of patience for learning, and the fact that his staff is in constant turmoil, we're destined to be led by amateurs this whole time.

And actually, amateur is the wrong word. The ama in amateur comes from the Latin word amator, or lover. An amateur does what they do freely, out of love. The Trump administration has contempt for governance and the public they "serve" so this isn't work done out of love. It's not love but contempt that seems to animate them.  It's worth remembering that a climate change denier is head of NASA and a man (former governor Rick Perry) who vowed to eliminate the Energy Department if only he could remember its name is now head of the Energy Department.

Rather than led by amateurs, perhaps we could use the term contemptuaries. Contempt, too, has Latin roots. Temnere means to slight or scorn. Temp also has the connotation of someone who is just a temp, not a real, dedicated employee concerned with the success of the enterprise but instead someone who is just there to complete some tasks and then get out. Trump's administration - with people like Betsey Devos and Ben Carson - is full of contemptuaries who have little interest in policy, are just passing through, and show contempt for the government and the people their agency is supposed to serve.

Trump's contemptuaries. Not even at the level of amateurs.

24 September 2017

What Would We Be Fixating on if Trump Didn't Control the Media Narrative?

Because Americans couldn't look away from Trump, they now can't look away from Trump. A question worth asking is What would Americans be fixating on if it weren't a topic that Trump pointed us towards?

For about a year, Americans (myself included) could not look away from the train wreck of a candidate who was Donald Trump. He offended everyone from veterans (dismissing McCain's sacrifice because he prefers heroes who weren't captured) to women (bragging about how he can grab anyone's pussy because he's a star) to anyone with a triple-digit IQ ("I know more than the generals," "I know all the words, all the best words"). He kept the country incredulous throughout his entire campaign. I honestly thought at one point that he'd made a bet with some friends about all the things he could get away with before finally dropping in the polls. (Of course now we realize he has no friends. He has only sycophants and people who fear him.)

We couldn't look away from the candidate and now the price we pay for our inability to simply dismiss him and move on with a normal campaign is that we now can't look away from the president. He might gut our healthcare. He may start a nuclear war. He might jettison an investigation that would prove he colluded with Putin to seize the White House. He might pardon any racist who has committed any crime. Now he is the most powerful leader in the world and the damage he can do is worse than any hurricane.

One of my beliefs about us is that what we fixate on we head towards. Like a little kid learning to ride a bike, we steer in the direction of the thing that captures our attention. It's worth being careful about what seizes your attention because - whether it's fear of being alone or poverty or looking foolish - what you fixate on could become your reality.

We're living towards the end of the information economy, a time when little seems capable of holding out attention. In every direction there is a new distraction and it seems shiny at first. Trump's genius was knowing how to seize and hold attention. Now, of course, what he does has very real consequences, whether it is failing to initiate aid to Puerto Rico, Florida or Texas or initiating nuclear war. Before we could not look away. Now we can't look away.

One thing we do know about Trump, though, is that he creates the biggest distractions when he has the most to hide. Talking about "fire and fury" with North Korea or tweeting about firing black athletes who protest are topics that are sure to horrify or embolden people and pundits. And as Twitter and the airwaves become full of these topics, less attention is paid to the mounting evidence that the Trump campaign colluded with Russia to steal the election.

What should the American people and pundits be angrily debating? Not taking a knee in protest. Instead, they should be angrily debating whether the same rules of the Olympics hold with our elections. In the Olympics, if they discover that the gold medal winner cheated, the silver medal winner gets the gold. Once we prove that Trump cheated to win the election, the presidency should go to Clinton. That seems both obvious to me and like a topic that Americans should fixate on. This is unprecedented in our history and, it seems to me, worthy of our focus. Let's start that conversation.


13 September 2017

Americans Were Making About $500 a Month More in 2016 than in 2014 (And How Income Growth Changes Voting)

Yesterday the Census Bureau released new data on household income from 2016. There are a variety of interesting things to come out of that and one really interesting thing about how changes in income change how Americans vote. First some data.

Incomes grew at an impressive rate. Earlier in the recovery, while unemployment remained high, income growth was slow. It has been a spectacular recovery. For 83 uninterrupted months now, the economy has created a jobs. A total of 16.4 million. But the economy started from a 10% unemployment rate. As the economy continued to create jobs, detractors continued to say, "Yeah, but wage growth ..." Well when you have 8 million people still standing out in the hallway hoping for a job, there is not much pressure to raise wages. Later in the recovery, as unemployment dropped below 5%, companies had to start offering higher wages. And they have.

Across all households, median income rose 3.2% to $59,039 and average income was up 3.6% to $83,143. Since 2014, average income is up $6,360. Think about that. That work out to $530 a month in extra income. (Median income is up nearly $400 a month.) This strikes me as a big deal. Car payments, an annual vacation, eating out, paying down debt .... $400 to $500 a month extra income makes a very real difference. This is simply great news and actually unsurprising. For years I've been predicting that the first half of the 2010s would be about lowering unemployment and the second half would be about raising wages.

One other bit of great news is that we're narrowing the gap between white men and women and minorities. Everyone's income grew but the incomes of women and minorities grew at an even faster pace. Median income for all households grew 3.2% but for Hispanics it rose 4.3%, for blacks it rose 5.7% and most impressive of all, for households headed by single women, it rose 7.2%. (For those of you alarmed at an erosion of white male privilege, rest assured that while incomes of white households rose at a lower rate - 2% - it is still higher than other groups.)

In all, this income report is great news. It also suggests the possibility that income growth can predict who Americans vote for.

The data reported goes back to 1967 and I used it to analyze how changes in income change how Americans vote. Since 1967, four Republican and three Democratic presidents have taken over from the previous party. (In 1968, 1980, 2000, and 2016 Nixon, Reagan, Bush and Trump took over from Democrats and in 1976, 1992, and 2008 Carter, Clinton, and Obama took over from Republicans.)

On average, Democrats inherit a worse economy than Republicans. The three Democrats were elected in years when median income was falling an average of nearly 1%. The four Republicans were elected in years when median income was rising by 1%. A difference of 2% is a pretty big deal.

What I make that mean is that whether households are more or less inclined to vote for someone who promises a safety net depends on whether they are feeling good about their income or threatened. When incomes are shrinking, Americans are seemingly more aware of the need for government help; when incomes are growing they are less aware. Good times are bad news for politicians who promise to help you through bad times and good news for politicians who tell you that people don't need much help. If that's right, it might not have been economic woes that caused people to pull the trigger on Trump but instead people who were feeling more secure because of higher incomes.



09 September 2017

Why Kim Jong-un Isn't Giving Up His Nuclear Arms and Trump Isn't Passing Tax Reform

Kim Jong-un of North Korea is not giving up his nuclear arms. The US demanded that Libya's Gaddafi and Iraq's Hussein give up or stop weapon development programs and then later helped their enemies kill them. Kim Jong-un isn't about to trust the US and will keep his nuclear arms in order to keep the US at (nuclear) arms length. If he gives it any thought - and it seems he has - he never give up the nuclear arms that force the US to take him seriously.

Assuming that Donald Trump is as thoughtful as Kim Jong-un, he won't pass tax reform. Why? Once Republicans have that, they will do far less to resist Mueller's investigation even if that investigation leads to impeachment. Right now the GOP doesn't want to risk losing a rare instance in which they have the House, Senate, and Presidency. At least until they get their very important tax cuts.

03 September 2017

Why Even the Experts Vastly Underestimate the Impact of Trade Wars with Developed Countries


I harp on the prospect of a trade war for a host of reasons. For one thing, like the invasion of Iraq or the deregulation of financial markets that helped to set us up for the Great Recession, few people appreciate just how devastating this can be. A trade war has the potential to be as devastating as the Great Recession.

Expert economists worry about the magnitude of this. As someone who regularly works with product development teams in this and other countries, I think even they underestimate it.

A chip maker I worked with this year at a facility in Scotland represents the sort of trade reality that  a simple number like "China represents 4.4% of our trade" does not capture.

This chip company makes chips for cars - everything from the chips that help to control your air conditioner to chips used in self-driving cars. Chips in cars have become ubiquitous and every new car uses more than 100 chips. So what I'm about to describe could be multiplied by 100.

First, a single chip is designed with inputs from design and marketing people from Austin, TX, Germany, Scotland, China, India and Malaysia. Perhaps other sites I was not aware of.

Second, when the chip is physically made it literally travels around the globe in its production process. Value is added in Singapore, Austin, Tianjin, and then Kuala Lumpur.

Third, once the chip is made it still isn't a final product. For that it has to be integrated into a car. The cars it will be incorporated into are assembled in places like Bavaria, Detroit, Seoul, and Puebla.

Fourth, the cars these chips are incorporated into are not made at just one place. A tiny chip that is put into a car comes from half a dozen places. The same is true of the fuel injector, the axle, the pistons, the seat belts, etc. Final assembly just represents a final step in a series of complicated assembly steps for raw materials, intermediate products and final units that are then assembled into a car. Some variation of what I described for the single chip has occurred with most every discrete component in that car.

If you say that 4% of our trade is with China, that may naively refer to the fact that 4% of our products come from there. And that might accurately capture it but I suspect that reality is more like 8% of the value in 60% of our products have some input from China. What I believe the average person wildly underestimates and even expert economists probably somewhat underestimate is the massive complexity in product development and manufacturing and the extent to which any one finished product sitting in your garage, hand or kitchen has design inputs or parts that come from dozens of countries. One of the simplest examples of surprising complexity often used in introductory economics classes is the No. 2 pencil: at one point the lead for the graphite, the rubber for the erasure, and the wood for the pencil came from three different continents.

A trade war would disrupt millions or billions of complex product and design flows that result in the thousands or millions of products that we can buy here in the US. Even disrupting 4% of our GDP would be devastating but a ban on trade from China is likely to impact more than 4% of our GDP. (And of course China is not the only country that trades with North Korea.) If we ban trade with, say, a less developed nation like Cuba an estimate of our trade with them would probably be roughly accurate. Cuba is exporting cigars rather than complex technology made with inputs from knowledge workers scattered all around the globe. But if we ban trade with a country like China that has a complex trading pattern, the ripple effect is incredibly difficult to calculate and could quickly grow beyond casual, initial estimates.

We can only hope that Trump will be less effectual at implementing trade disruption than he was with the Repeal and Replace of Trumpcare. And given that most of Congress is less deluded about how independent we can be of other countries than Trump is, it is unlikely that a trade war will break out. That said, the probability is not zero and the probability is higher than it should be simply because so few people realize how complex are the trading patterns that define even some of our simplest products. It's good that people were outraged at Trump's comments after Charlottesville, but his ignorance there isn't going to cost millions of jobs. A trade war easily could.