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Acknowledging America’s Baby Drought

Without Enough Babies as Civilization Cannot Survive

By Peter Morici, Ph.D.

June 16, 2021 (First Published in Washington Times)

Policymakers rightly worry about COVID-19’s negative impacts on women in the workplace, but the pandemic has accelerated even more threatening consequences for the economy. Births have fallen precipitously, and the lifetime fertility rate is now at a record low of 1.64 births per woman — an average of 2.1 births over a woman’s lifetime is required to sustain the population without additional net immigration.

Working age Americans produce the proverbial economic pie and cut a slice for seniors. Social Security, IRAs and ordinary savings are mechanisms for determining the size and distribution of that portion.

Retirement savings vehicles do little to enlarge the pie but can make it smaller by encouraging retirement at 66 — the minimum age for full Social Security benefits — and earlier.

If workers better heeded financial planners’ advice to save more through tax-sheltered accounts, even fewer seniors would be working, the economic pie would be smaller and the burden on younger Americans would be heavier.

Ratio of working age Americans

Since 2005, the ratio of working age Americans to seniors has fallen from 5.1 to 3.6. If women continue to have fewer babies, that ratio is projected to fall to 2.4 by 2060. This phenomenon is mirrored among other economically advanced democracies and China.

Policymakers quietly tax senior benefits to compensate.

Fifty percent of workers’ payroll taxes are paid with after income tax funds but for seniors who have prudently saved through IRAs and other vehicles, 85% of social security retirement benefits are taxed. Medicare premiums rise precipitously with post-retirement income, and the dynamics of the system force seniors who can afford to purchase supplemental health insurance to do so.

Those direct and implicit taxes were not imposed as aggressively on earlier generations. As the dependency ratio becomes more onerous and seniors expect a larger slice of the pie, pressures build for policymakers to cook up new ways to deprive them of promised benefits.

Federal Reserve’s policy

Most seniors are counseled to keep a significant portion of their assets in fixed-income vehicles. The Federal Reserve’s policy to boost inflation and keep interest rates low erodes the value of those assets. The returns are often below the rate of inflation and to add insult to injury, the interest is taxed without consideration of inflation.

Easy money is great for the banks. They can borrow from the Fed at near zero cost to help finance business loans, but the Fed is effectively taxing grandma to subsidize Goldman-Sachs.

The average age of American workers is rising, but an older workforce may be less productive. They are slower to embrace new technologies and less inclined to start high-risk enterprises that generate innovations and boost productivity and incomes for everyone.

Over the decade prior to COVID-19, the annual growth in the U.S. labor force was a scant 0.7% and with that, sustaining economic growth appreciably better than 2% is virtually impossible. That makes difficult competing with China and Russia in military resources, R&D and the instruments of soft-power diplomacy.

Assimilation costs

Immigration can help but assimilation costs — such as higher social service and educational costs and the cultural friction that accompanies competition for resources — become more difficult to bear if fewer native-born Americans are in our schools and vying for jobs, especially on the lower rungs of the income ladder.

Progressives advocate federally-financed childcare, child allowances and guaranteed paternity leaves to ease burdens on working women, but those have had quite limited impacts on fertility rates in other countries.

Notable exceptions include Quebec, France and Georgia — the former Soviet Republic. Catholicism and the Orthodox Church more heavily influence culture in those places — highlighting that social norms and values can be more important than pro-natal policies.

As ethnic groups in the United States become more prosperous, middle class and educated they tend to have fewer children. Importantly, the cost of preparing children for a prosperous middle-class life has risen precipitously.

Arms race among middle class parents

University tuition has significantly outstripped inflation and family incomes for the last generation, and competition for admissions at prestigious institutions whose diplomas more likely guarantee a prosperous and influential future grows ever more intense. The latter has created an arms race among middle class parents to invest in adolescents with private schools, tutors, neat summer experiences and the like.

More importantly, as women advance in the professions, the tradeoffs between careers and child rearing become tougher for reasons having nothing to do with economics.

Economist and demographer Lyman Stone observed, “As jobs, even ‘family-friendly’ jobs, turn into careers, and careers turn into essentially religious or spiritual vocations, family is deprioritized and birth rates decline.”

Without enough babies a civilization cannot survive, and that is an issue feminism, all its benefits notwithstanding, has yet to address.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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Inflation Threatens because the Federal Reserve Is Inept and Corrupt

By Peter Morici, Ph.D.

June 3, 2021 (First Published in Washington Times)

President Biden’s budget deficits threaten to ignite the kind of inflation that followed the Vietnam War, and Fed Chairman Jerome Powell is happy to enable it.

The president inherited most pieces for a robust economic recovery.

Thanks to $4 trillion in COVID-19 relief measures enacted through December, the gap between aggregate demand and potential GDP in February was $380 billion. Only missing were additional assistance for the unemployed that would also modestly boost demand and a green light to take off masks for Americans to rev up their mighty economic engine.

Mr. Biden capitalized on Operation Warp Speed by supporting local public health agencies in distributing vaccines but ignored warnings about overheating the economy. The American Rescue Plan sent state governments, small businesses and most anyone else that looked like a prospective Democratic voter $1.9 trillion in additional stimulus — five times the output gap.

Americans are now spending more

Armed with a buildup in savings from gorging on Netflix and banking stimulus checks, Americans are now spending more than global factories can provide, bottlenecks abound on everything from copper to computer chips and potato chips — and prices are jumping.

Mr. Powell keeps telling us inflation expectations in financial markets are not rocketing but that only indicates he’s persuaded bond buyers, not consumers who are bidding up prices for homes and everyday items.

Suppose Mr. Biden stuck $100 vouchers — printed by Mr. Powell — for takeout food under the windshield wipers of every car parked at Rehoboth Beach, every week for the next several years. Do you suppose the price of hamburgers and pizza at the seaside resort would rocket?

That’s exactly what the president would do but on a much grander scale with his $6 trillion 2022 budget.

Keeping interest rates at depression levels

Mr. Powell, like an overindulgent parent, is enabling him by keeping interest rates at depression levels and printing money to purchase about $1.4 trillion in government and mortgage-backed securities this year.

Is it any wonder that prices for homes are jumping out of sight and beyond the reach of many first-time buyers and especially working-class Americans, minorities and single mothers?

Mr. Biden is proposing the biggest budget deficits since World War II even though the U.S. economy by this summer will have made up all the lost growth imposed by the COVID-19 recession.

We have had two significant bouts with inflation since World War II. The jolt caused by the Korean War proved temporary as budget restraint resumed with the end of the conflict. The Great Inflation ignited by the combination of the Vietnam War and Great Society spending during the Johnson administration and accelerated by the oil crises of the 1970s.

Policy that was grounded in overestimates

During those years, Fed Chairmen Arthur Burns and William Miller made policy that was grounded in overestimates of potential GDP and employment and the output gap. And skepticism about the potency of monetary policy to curb inflation.

Gradually inflation rose with some ups and downs and ratcheted to double digits from 1979 to 1981.

Even with millions of workers still displaced by COVID-19, the economy is again bumping up against capacity limits and skilled labor shortages. Meanwhile, changes in what Americans buy, how they shop and hybrid work patterns have made many jobs in service activities and much commercial real estate in big cities obsolete.

Now Mr. Biden is proposing a federal budget with deficits exceeding $1.3 trillion a year indefinitely. A responsible budget would instead more narrowly focus on shoring up infrastructure, boosting technology industries that indirectly create demand for front-line service workers and assisting displaced workers to quickly retrain.

Shortage of workers with digital skills

To meet the shortage of workers with digital skills, Levi Strauss is retraining retail employees with an intensive two-month program in statistics, coding, neural networks and other machine-learning techniques.

Mr. Biden needs to leverage such private sector efforts with support and relocation assistance for low-income workers displaced by the pandemic. However, such approaches are not fashionable with a woke Administration that wants to reorder American society with a $6 trillion federal budget that significantly exaggerates the social justice and inequality crisis.

Mr. Powell should stop enabling reckless federal spending by ending rock bottom interest rates and phasing-out the monetization of new federal debt with purchases of Treasuries and mortgage-backed securities. But that would put Mr. Powell out of step with his masters at the Treasury and National Economic Council who likely hold the strings on whether Mr. Biden nominates him for a second term.

We need better economics at the Fed but most of all we need more backbone — not a lawyer arguing the president’s case for big deficits.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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Biden’s Tax Policies Would Hurt Investment, Jobs and Innovation

Rising Cost of Capital Would Strangle U.S. Economy

By Peter Morici, Ph.D.

June 2, 2021 (First Published in Marketwatch)

The President Joe Biden has big plans to create jobs and raise wages by spending more on infrastructure and industrial policies and to improve conditions for ordinary folks by funding pre-K education, free community colleges and child allowances with higher taxes on corporations and on the incomes and capital gains of affluent Americans. Those taxes may appear just and political appealing but could prove jobs killers.

Raising the federal corporate tax from 21% to 28%, combined with higher personal income taxes for those earning more than $400,000 and state taxes, would raise effective taxes on profits distributed as dividends from about 47.5% to 62.7%.

That would again encourage businesses to move manufacturing, R&D and patents offshore and to perform backroom services in India and similar places. And those taxes would significantly reduce the after-tax payouts from IRAs and other retirement savings for seniors.

Tax bite

Raising capital-gains rates for those earning more than $1 million from 24.8% to 43.4% would increase their combined state-federal tax bite in California and New York City to at least 53%.

Over the decade prior to COVID, prices on stocks held for 10 years reflected an 18% loss owing to inflation. That would raise the real top real tax rate on capital gains in the Golden State and the Big Apple to at least 70%.

For family businesses, the bite would be particularly onerous. Biden wants to both tax capital gains at death and to levy the estate tax. That would impose a death tax on many businesses of more than 70%.

In most cases, it would simply be too expensive to buy enough life insurance on the founder and spouse to cover these taxes, and those would force the sale of many car dealerships, general contractors and other decent-sized businesses. Their children could be left without jobs in family enterprises and certainly wondering why Mom and Dad worked so hard to build a legacy.

In the high-tech sector, venture capitalists gamble on startups promising to solve tough engineering problems. Often the goal is a big payout from an initial public offering or by selling out to a behemoth like Google, Amazon or General Motors with the proceeds taxed at preferential capital-gains rates.

Locked in capital

Entrepreneurs are good at spotting consumer interests and solving tough design problems. They lack Elon Musk’s flair for marketing or Tim Cook’s skills at government-business and international diplomacyHigher capital-gains taxes would encourage founders to hold on to to businesses longer than their broader management skills warrant.

At once, this lock-in effect would lower the value of startups to venture capitalists, discourage investment in high-risk, high reward new businesses, and slow the dissemination of new technologies through the U.S. economy and sales in foreign markets. Those would reduce the overall contributions of new businesses to U.S. productivity growth, higher wages and international competitiveness.

The U.S. economy is increasingly reliant on high-tech entrepreneurs to drive the modernization of traditional manufacturing such as autos and create whole new industries such as cloud computing and collaboration software that power the virtual workplace.

Biden’s capital-gains taxes would smother many American inventions in the cradle and send engineering entrepreneurs looking for funding in China and innovation-friendly countries in Europe such as the Netherlands, Switzerland, Germany and the U.K.

Simply, Biden’s corporate and capital-gains taxes would stifle employment and hammer down wages both for high-tech workers and more ordinary service-sector workers in metropolitan San Francisco, New York, Boston and other high-tech centers.

This would reduce state and municipal tax revenues. Vital public services would be difficult to fund in those core cities, instigating more crime, poorly performing schools, and a host of other social problems.

Laws of supply and demand

Progressive policy analysts that populate the Biden administration and receive lots of media time read from a peculiar book of economics. They campaign for a carbon tax—after all raising the price of emissions would cause Americans to use less fossil fuels. But raising the price of capital would have no impact on risking taking or investment?

In seems the laws of supply and demand only apply when those support progressive policy objectives.

On whole, Biden’s taxes are an assault on U.S.-based manufacturing and high-tech innovation and would make lower income Americans working in our most affluent cities and middle-class suburbanites worse off.

 

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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Biden’s Woke Economics Will Lead to Disaster

By Peter Morici, Ph.D.

April 29, 2021 (First Published in Washington Times)

President Biden’s woke economic policies will ultimately summon disaster.

From Jimmy Carter to Bill Clinton, presidents may have disagreed about the boundaries, but free trade, controlling government deficits and trust in markets were the abiding ideology. This Washington consensus undergirded prescriptions for reform in Europe, Japan and developing countries in debt crises.

The free trade movement began with the 1934 Reciprocal Trade Agreements Act and the 1948 GATT but was derailed when President Trump foolishly withdrew from the Trans-Pacific Partnership, and slapped tariffs on aluminum and steel. Mr. Biden shows little interest in reversing protectionism.

President Carter initiated the Reagan revolution with the deregulation of airlines, rails and trucking, and eliminating price controls on oil and natural gas. President Clinton capped it with the 1998 repeal of Glass-Steagall.

Tight money policy

Mr. Carter appointed Federal Reserve Chairman Paul Volcker, who tamed inflation with a tight money policy. That constrained the federal government from borrowing large sums, but tight money ended with the 2008 Financial Crisis.

President Reagan may have wanted less domestic spending to pay for tax cuts and Messrs. Carter and Clinton somewhat higher taxes to pay for more domestic initiatives, but the Carter-Clinton era ended with federal surpluses from 1998 to 2001.

President Bush, having lost the popular vote and dealing with a Democratic House and tightly divided Senate, spent on Medicare prescription drug coverage, a big farm bill and the like, and bequeathed President Obama a half-trillion-dollar structural deficit.

The Financial Crisis set a new course. President Obama signed Dodd-Frank and issued a record number of pages of regulations across the whole economy. Former Federal Reserve Chairmen Ben Bernanke and current Treasury Secretary Janet Yellen were never able to end Financial Crisis-era low interest rates and massive Fed purchases of federal and mortgage-backed securities.

Fed printing money

With the Fed printing money to buy bonds, deficits were headed above $1 trillion even before COVID-19 struck. Mr. Biden’s expansive programs seems likely to put annual federal borrowing at twice that level after the pandemic is over.

Moreover, Mr. Biden doesn’t just want guardrails on markets — limits on bank risk taking, regulations to police discrimination and subsidies to reshape health care. Rather, the president wants to reprogram American capitalism and culture to address alleged sexism, structural racism and climate change.

The Federal Reserve is under pressure to fashion policy to serve that social agenda, the SEC will support progressive groups in strongarming private lenders to do the same, and Mr. Biden’s infrastructure proposals would override rather than enable sound business decisions.

Social efficacy is subjective — what criteria should central banks and private lenders use to assess a race-neutral or transgender-friendly workplace? Economic policy has become a playpen for the woke Gestapo.

Thought control

President Biden enables by his silence the cancel culture in the media and the jackboot thought control in teaching and research at American universities.

At the economic level, all of this is leading to terrible investment choices.

He promises to cut CO2 emissions in half by 2030, but Mr. Biden can’t quickly enable private investors to build out charging stations that would permit intercity travel in electric vehicles.

Left to their own devices, automakers would calibrate the transition from gas-power to EVs to emerging charging infrastructure but by subcontracting federal auto emissions standards to California’s zealous regulators, Mr. Biden will impose a Golden State utility meltdown — not enough electricity where motorists and truckers need it and sometimes no power at all — along the interstate.

Raise annual household costs

Forcing homeowners to convert to electric heat would raise annual household costs more than $4,000 a year in the Northeast. With median family incomes at about $60,000 in Maine, not much will be left after mortgages and rent, taxes and the bare essentials for travel, to buy a few luxuries or even take in a movie. Don’t complain, AOC will likely tell you reclining seats and buttered popcorn is homophobic and racist anyway.

The Fed buying all those bonds to suppress interest rates and make federal borrowing cheap is creating zombie companies — cheap loans for enterprises with few prospects for turning a profit over the business cycle — and tying up capital that should flow to high-paying, jobs-creating activities.

For a year or so, massive stimulus spending and a pandemic rebound will justify progressives in Congress and the Biden administration with strong GDP growth, but so many resources steered into foolish purposes have a way of catching up — that’s what’s been going in Europe and Japan since the 1990s.

Growth will stall, Americans White and Black, straight and gay will fight over a diminished future and that’s the stuff that ignites revolutions.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.