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Team Biden clueless on China

No strategy has been defined as the CCP makes military and technological gains

By Peter Morici, Ph.D.

Sept. 21, 2021 (First Published in washingtontimes.com)

President Biden has identified China as the preeminent international challenge facing the United States, but his administration lacks a coherent policy.

President Xi has repeatedly stated China’s authoritarian system can better marshal resources than democracies, and it has accomplished remarkable social and economic progress.

Since 2000, China’s R&D spending has increased 16 percent annually. It is on track to exceed the United States by 2025 with the aim of matching and surpassing the West in artificial intelligence, microprocessors, computers, electric vehicles, and other critical technologies.

U.S. government support for R&D as a share of GDP has been falling for more than a decade. A bipartisan majority in the Senate recently passed a $250 billion bill to address the issue and provide $52 billion to boost semiconductor production.

Democrats’ new taxes

The administration and House leadership are preoccupied with the bipartisan infrastructure bill and the $3.5 trillion American Family Plan. The Democrats’ new taxes are not likely to raise the necessary funds for new entitlements like expanded Medicare, universal pre-K education, and free community college.

The actual cost is closer to $5.5 trillion, the annual federal deficit would reach $2 trillion, and the Democrats can’t match Mr. Xi on industrial policy carrying that burden.

Technology provides munitions, but the war is fought in two theaters—defense and trade.

China is building an impressive modern Navy to claim dominance in the Pacific. The U.S. trade deficit with China continues to swell—that finances Beijing’s Belt and Road initiative, which purchases influence into Eastern Europe.

Withdrew from Afghanistan

The president withdrew from Afghanistan to deliver on the promise to pivot to the Pacific but combating terrorism will cost more without a troop presence in Central Asia.

The U.S. fleet needs bolstering and reorientation toward smaller, more agile, and unmanned vessels. This is unaffordable, with defense spending falling from 4.7 percent of GDP in 2010 to less than 3 percent in the Biden budget. The Navy is faced with decommissioning large surface ships before new, more agile resources hit the water.

If China invades Taiwan, the United States won’t be able to defend it.

In Afghanistan, the United States abandoned vast deposits of lithium—the critical resource in modern batteries. Taiwan is the home of the most important global microchip foundry—the Taiwan Semiconductor Manufacturing Company.

Situation developing

This situation developing would have been akin to President Reagan handing the Soviet Union control over Middle East oil.

The Senate Armed Services Committee added $25 billion to the Biden Administration’s annual military budget request. Still, on the House side, 27 members sent a letter to Armed Services Chairman Adam Smith demanding the Committee drop that addition—it relented.

Defense Secretary Lloyd Austin, an experienced land-war general, has not articulated a strategy for the Pacific, and that vacuum in administration policy is mirrored on trade.

All we know is that U.S. Trade Representative Tai is not interested in new trade agreements — though exigencies in the Pacific might make Taiwan an exception—and trade policy must be pro-union and pro-middle class.

Japan’s urgings

She has deflected Japan’s urgings that we rejoin the Trans-Pacific Partnership. Trump’s tariffs on China remain in place, and industry leaders are becoming increasingly impatient. They need to know whether those are permanent to plan investments in China, the broader Pacific basin, and the United States.

The National Manufacture Association and an industry coalition led by the U.S.-China Business Council and U.S. Chamber of Commerce have sent recent letters to U.S. Trade Representative Tai and others in the administration asking for clarity but have received little substantive response.

Secretary Yellen says those tariffs hurt consumers, while Ambassador Tai says they provide leverage. They could at least chat on the phone to get their talking points straight.

Secretary Austin and Ambassador Tai came to their positions with impressive records for implementing their superiors’ military and trade policies. Still, neither has written nor said very much about a broad Pacific strategy.

Pacific strategy questions

For example, how exactly should American forces be reconfigured in the Pacific, and what would moving resources from the Middle East entail. How should the WTO and regional trade agreements be reconfigured to address China’s mercantilist practices? Or what should the United States offer Asian allies, if not the TPP, to resist the gravity of the Chinese market?

They exhibit a disturbing absence of ideas and vision but have initiated reviews of defense and trade policy.

If I have learned one thing in nearly half-century in Washington, when high-level political figures are in over their heads, they order top to bottom policy reviews. That’s Lloyd Austin and Katherine Tai — and Joe Biden.

 

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

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Image by Gerd Altmann from Pixabay

Bowing to Progressives, Powell Now Moving Too Slowly on Inflation

Pushed into Social Justice Causes, He Should Be Focused on Rising Prices

By Peter Morici, Ph.D.

Sept. 14, 2021 (First Published in washingtontimes.com)

Fed Chairman Powell is caught between surging inflation and progressive Democrats lobbying President Biden to replace him with someone more amenable to their social justice agenda.

As the economy reopened from COVID-19 lockdowns, inflation surged to alarming levels. Part of this was a jump in prices that were artificially depressed by the pandemic shutdown—car rentals, airline tickets, restaurant meals, and the like—which will not likely repeat.

Some prices overshot and are now receding—for example, used car prices. That may lower inflation readings for a month or two.

However, other pressures are building that represents an abrupt change from the pre-pandemic, low-inflation era.

Production disruptions

The resurgence of COVID-19 in Asia demonstrates that North America and Europe have become vulnerable to production disruptions and weak public health systems. Hardening supply chains and shrinking working-age populations in Asia are limiting opportunities to access low-wage labor.

Mr. Powell correctly observes that most durable goods—appliances, computers, and the like—became cheaper in recent decades. However, he misses that government policies to accelerate decarbonization will increase manufacturing costs in the future—electric motors and batteries are more expensive than internal combustion engines.

The bond market’s expectation for inflation—measured by the difference in the rates between ordinary and inflation-adjusted bonds—might not recognize these facts, but the folks on the ground shopping for families, producing goods, and measuring the economy do. In recent months consumers, businesses, and private economic forecasters have all raised their expectations for inflation.

Progressive Democrats in Congress, who believe easy money policies and higher inflation promote more stable growth and greater equality by tightening labor markets and boosting wages, call for Mr. Powell’s ouster. Apparently bowing to these pressures, the Chairman warned in August that the Fed had erred too often by tightening in anticipation of inflation.

History teaches otherwise.

Interest rates

Twice this century, the Fed raised interest rates, and unemployment fell—improving labor market conditions. Those statistics are facts, and Mr. Powell refuses to see them. We can only wonder how much pressure from Democrats in Congress and the West Wing is distorting his vision.

Finally, the labor market is already tight with over 10 million unfilled jobs, and vacancies in manufacturing are about double pre-pandemic levels even though the economy still has not regained millions of jobs lost in the COVID-19 shutdown.

Administration stimulus policies—well beyond the now expired supplement to unemployment benefits—are discouraging work. For example, the means-tested Child Care Tax Credit, which provides $3600 for children under six and $3000 for those under 18 but declines as family incomes rise, provides a substantial subsidy to stay-at-home parents to mind the kids especially in high-income tax states.

Expectations that will be extended by the reconciliation bill and supplemented with free pre-K education and two years of free college further enables stay-at-home moms (and dads) to not participate in the labor force.

Surge of infections

COVID-19 mutating into delta created another major surge of infections, especially among U.S. non-vaccinators and factory workers throughout Asia. This has disrupted supply chains in varying degrees throughout the world.

Now other variants, even more, contagious and resistant to vaccines, have emerged in South America and are finding their way into the United States and Europe.

The magnitude of the consequences of these economic and epidemiological factors is terribly difficult to model, but the general direction is clear. Should the economy slow again owing to further shortages of computer chips and all manner of other essential components, easy money will only further boost demand and push up prices. It won’t reopen factories, solve disruptions in supply chains or create jobs for the unemployed in public-facing jobs by sending folks with cash back to offices, restaurants, and dry cleaners.

Easy money will continue to juice the stock market and prices for new homes—impairing affordability for the very working-class workers social justice advocates want to help. And generally, push prices up faster than wages for working-class Americans.

Tragic mistake

At its September policymaking meeting, Mr. Powell will resist quickly tapering the Fed’s monthly $120 billion monthly purchases of Treasury and mortgage-backed securities, and that’s a tragic mistake.

With businesses unable to find workers and households now expecting inflation to run nearly 7 percent, a wage-price spiral could easily ignite. As Mr. Powell likes to lecture, it takes a good year for a change in monetary policy to influence inflation.

Hesitating now to taper can only fuel inflation, do workers little good and risk persistent runaway inflation that would ultimately require the kind of draconian tightening Chairman Volcker imposed during the early 1980s and a tough recession.

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

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Biden’s Shameful Exit from Afghanistan

By Peter Morici, Ph.D.

Aug. 31, 2021 (First Published in washingtontimes.com)

In Afghanistan, Americans are taking a terrible humiliation, but the United States and our allies face greater dangers if we take the wrong lessons from this debacle.

We went into Afghanistan to destroy al Qaeda and the Taliban but, in the process, took on nation-building. Before President Obama’s 2009 troop surge, General McCrystal stated, “the government of Afghanistan must sufficiently control its territory to support regional stability and prevent its use for international terrorism.”

That was transmogrified by our foreign policy elite and pressure from the feminist movement into establishing a western liberal democracy with full rights for women.

The objectives were quite similar in Iraq—where we are succeeding. The constitution requires an independent judiciary and rule of law, civilian control of the military, and that at least 25 percent of parliamentarians be women. Since 2004, the country has had four successful transitions of power.

Sectarian conflict

Both countries are rife with sectarian conflict, but in Iraq, the American-led coalition defeated Saddam Hussein. The United States maintains a permanent troop presence though its role has been redefined to a support mission to give Prime Minister al-Kadhimi political cover.

The United States maintains far larger contingents in Germany, Japan, and South Korea as part of our forward defense against Russian, Chinese, and North Korean aggression. Given the threat of terrorism projecting from the Middle East and South Asia, basing 2500 troops in both Iraq and Afghanistan would have been hardly burdensome. Especially considering the greater cost of an over the horizon presence to deal with terrorists.

Nation-building was a tougher nut in Afghanistan. The Taliban before us and the recently fallen government never accomplished full control of the nation’s territory.

In 2001, it was a medieval, illiterate dystopia. Whereas just before Mr. Biden’s blundering withdrawal, the Afghan economy was growing. Over 9 million children were attending school, 39 percent of those were girls. Women at universities studied science, law, and medicine, and more than half the population would accept a female running a large corporation or for president.

Kabul ineffective

The government in Kabul was undermined by Presidents Obama’s, Trump’s, and Biden’s intentions to leave. This encouraged corruption, which made Kabul ineffective among a population with strong tribal loyalties. That helped the Taliban to maintain legitimacy and a shadow government in the countryside.

Mr. Biden unfairly dishonored the Afghan military. It required air cover and logistical support to function, and when Mr. Biden withdrew those, its collapse was inevitable. Pakistan wanted the Taliban as a proxy against India and enabled sanctuary on its territory. The U.S. did not take decisive action to squash this.

The Taliban’s hold on power is hardly guaranteed because much of the fallen government’s budget was financed by U.S. foreign aid and contributions from international organizations. The Taliban could not raise comparable sums in exile through the opium trade, extortion, kidnapping, and bullying locals. It will only encourage regional insurgencies if it tries to find the money it needs by doubling down on those tactics—in fact, regional rebellions are already forming.

Afghanistan has untapped mineral resources, including lithium, but the Taliban must establish a non-terrorist, stable order to attract private foreign investment. For the time being, the United States has frozen access to Afghanistan’s overseas assets, and U.S. sanctions would cut off access to the U.S. dollar payment system—similar to the plight of Iran and North Korea.

China may be tempted

China may be tempted to move in, but it has its own MeToo movement and issues with Muslim minorities. Too much engagement with the new Taliban government will precipitate internal opposition.

From Europe to Taiwan, epitaphs abound about the end of Pax Americana. Do our allies really want us to withdraw our overseas deployments and bear the expense of replacing the security those provide?

President Biden hardly consulted with our allies—who risked troops and treasure in Afghanistan. He hastily withdrew U.S. forces to serve his ill-compassed political instincts. The results place him in the Pantheon of failed American presidents—Grant and Harding.

Appearing in foreign media, I was often embarrassed by the antics of Donald Trump, but Joe Biden’s behavior is worse—he makes me ashamed.

Mr. Biden and Secretary Blinken were warned withdrawing U.S. troops invited calamity, but they went ahead anyway. Congress must now bridle the president and take the reins. He is not impeachable, and even Democrats consider Vice President Harris politically inept and a liability.

The Taliban or whatever succeeds it will need access to capital and come calling. Congress must reassert itself and not leave so much to a dim-witted Commander-in-Chief.

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

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Biden Administration Seeks to Control Banking, Technology, Transportation to Serve a Woke Agenda

Beware the Leviathan: Democrats Plan a Power Grab Over Vital Sectors of the Economy

By Peter Morici, Ph.D.

Aug. 19, 2021 (First Published in marketwatch.com)

Wars, famines and pandemics elicit massive government responses. The state must marshal whatever it takes or risk conquest, violence and state entropy. An equally significant challenge is to roll back the Leviathan when the threat passes.

The U.S. government was successful in accelerating the development of COVID vaccines and despite inconsistent choices among the states and recently inept messaging regarding masks from the Center for Disease Control, we will endure the Delta variant without too much disrupting our economy again.

However, congressional Democrats and the Biden administration want to extend and make permanent temporary programs such as the refundable child tax credit and enhancements to Obamacare. And impose ever greater control over private businesses and personal choices by imposing questionably constitutional racial preferences when allocating benefits.

As Saul Alinsky said and former Chicago Mayor Rahm Emmanuel appropriated, “never let a crisis go to waste.”

Embrace Critical Race Theory

Tapping pre-COVID frustration with mismanaged globalization, income inequality and monopoly abuses, Biden administration actions and proposed policy change appear to embrace, more or less in whole, critical race theory and the policy prescriptions that follow its analyses.

The administration proposes a massive power grab through a 35% increase in federal spending over pre-pandemic levels and federal control of the plumbing under our economic and political system—banks that decide who gets credit, social media that provide the public square for political ideas, and transportation systems that move goods.

The 20th century was the stage for a great competition between authoritarian socialism, which the Soviet Union and initially China ran badly, and post-Keynesian democratic capitalism—free markets that governments supported with politically independent central banks and antitrust laws that gave priority to price competition and consumer welfare.

The latter substantially relied a lot on fast-moving technology to discipline monopolists. Remember when Microsoft MSFT, -0.52% dominated software, but smartphones and apps upended that model. IBM IBM, -0.81% accomplished a near monopoly on mainframes but was displaced by cheap PCs and then Amazon’s AMZN, -1.73% cloud.

Arbitrary Control

The appointment of more politically progressive governors to the Federal Reserve Board could mandate the steering of bank credit to progressive constituencies—euphemistically characterized as regulating consistent with our values. And the new aggressive leadership at the Federal Trade Commission and antitrust division at Justice could result in arbitrary control over technology platforms and internet commerce.

At the FTC, Chair Lina Khan has jettisoned the consumer welfare and lowest price test in favor of the vague criteria that would permit the staff to investigate any business practice she deems offensive. The Surface Transportation Board and Federal Maritime Commission are being encouraged to regulate or substantially influence prices charged by railroads and ocean shippers.

Banking, technology and transportation all rigged to woke values? But what people buy and where businesses invest is driven by too much complex information—much more than state bureaucracies can amass and process effectively. Failure too often results—missed opportunities for innovation, shortages, inefficiency and flagging incomes for workers.

The Leviathan needs well-positioned loyalists when the bureaucracy fails to deliver promised prosperity, and progressives know how to cultivate them.

Wall Street Gets a Pass

Most every new idea as it matures must run through a narrow channel of investment bankers and money managers in New York. They control access to large buyout financing and initial public offerings when startup entrepreneurs and angel investors cash out. They possess working control of proxies for the voting shares of our largest corporations and loans for workouts for flagging enterprises through private equity.

Vast fortunes are made through this concentration of financial power and the carried interest—a privileged tax status that lets these institutions pay wages to financial engineers that are subject to radically-lower capital-gains rates.

Democrats talk about breaking up Big Tech and curbing railroads, but they never seem to breathe a word about breaking up J.P. Morgan or disciplining BlackRock, because those do their bidding by promoting the progressive agenda to establish control over the allocation of capital. Democrats wax relentlessly about ending the carried interest, but one tax bill after another becomes law without addressing it.

This column would not be surprised to see Lina Kahn and congressional Democrats pursue more aggressive commitments from social media to limit conservative voices under the guise of regulating dangerous false information in negotiating “reformed” antitrust rules for Big Tech.

The feudal lords controlled the mills that turned peasants’ grain to flour. Controlling the choke points—finance, technology platforms and transportation—is how the new Leviathan will rob liberty as surely as time steals youth.

 

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

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The Politically Influenced Federal Reserve Is Decadent

No Longer Independent

By Peter Morici, Ph.D.

Aug. 17, 2021 (First Published in washingtontimes.com)

The Federal Reserve has become a decadent institution. If it does not scale back easy-money policies soon, Americans risk a deep recession or at least stagflation.

Last August, the Fed announced that it would prioritize “maximum employment” and no longer act preemptively to stem inflation. It would accept a period of inflation greater than 2% to compensate for undershooting that target in the 2010s.

Since April, the annualized pace of month-over-month inflation has been 8.7%. That cannot be attributed merely to adjustments in pandemic depressed prices for airplane tickets, rental and used cars, hotel rooms, and the like. Consumers are complaining about higher prices for houses, cars, household appliances, and other goods, postponing discretionary purchases, and expect inflation to be near 5% for the next year.

The change in the Fed’s policy framework is anchored in the view that it tightened too quickly in the past and denied workers the opportunity to enjoy a sellers’ labor market and bargain for higher pay.

That’s a “progressive” urban legend.

Interest rates

In this century, the Fed has raised interest rates in steps twice—June 2004 to June 2006 and December 2015 to December 2018. During both episodes, the unemployment rate continued to fall.

By June 2019, unemployment reached 3.6%, but Mr. Powell let President Trump bully him into stopping the process, and now Biden White House economists have a preference for accommodative policies.

The Fed has lost its political independence.

In 2013, Chairman Bernanke raised the idea of scaling back the Fed’s holdings of mortgage-backed securities. The 10-year Treasury rate jumped, a stock market rout was feared, and Mr. Bernanke proceeded to add more than another $1 trillion to the Fed balance sheet, not the reverse.

Monetary policy

Monetary policy is supposed to work by the Fed influencing interest rates through the bond market. Still, as the “temper tantrum” illustrated, financial markets dictate what the Fed can do. It’s all silly because historically, we have had much higher interest rates and thriving equity and housing markets.

The current economic recovery has reached the point that the Fed should be scaling back its Treasury and mortgage-backed securities purchases. Employers have millions of jobs they can’t fill. Issues include fear of COVID-19 among many who refuse vaccinations, federal supplemental unemployment benefits, inadequate childcare, and a mismatch between the skills and location of jobs seekers and vacant positions in the post-pandemic labor market.

Easy money and instigating more inflation won’t change those conditions, but easy money enables large federal deficits. If the Biden administration had to pay 3.5% instead of 1.5% on the federal debt, it would be more careful about what it spends.

Fed bond purchases artificially suppress mortgage rates, but that does nothing to increase the supplies of scarce building lots, materials, and skilled tradespeople.

Pulling back on those purchases would raise mortgage rates and limit bidding wars for new homes but have little impact on new home construction and employment.

Lumber prices

As lumber prices have receded owing to an unwinding of hoarding. Builders are not reducing prices because, like university masters programs with overpriced tuition, they know home buyers have cheap credit enabled by the Fed to sustain inflated prices and bloated profits.

Waiting too long to tighten monetary policy, the Fed is distorting capital markets—in particular, corporate junk bonds are being sold at terribly low rates. Bankruptcies that should have occurred have become zombie enterprises. Similarly, some of the spectacular valuations of IPOs would not be possible if the Fed were not pumping so much liquidity into capital markets.

Importantly, raising short-term interest rates and slowing bond purchase can take considerable time to affect business decisions and rein inflation.

With is permissive policies, when inflation forces the Fed to tighten, the cycles of rising wages and prices will be entrenched and difficult to break. Higher interest rates will unleash a greater wave of corporate bankruptcies and layoffs, and the pull-back in home prices will put recent buyers underwater on their mortgages.

Face a choice

Mr. Powell will face a choice between a tough, deep recession and stagflation—somewhat elevated unemployment and inflation at 3% to 5% and perhaps higher.

The longer Mr. Powell waits, the worse it will be for him, congressional Democrats, and President Biden.

This fall, as schools reopen and federal unemployment benefits end in blue states, Mr. Powell should begin raising the federal funds rate and scaling back Treasury and mortgage-backed security purchases.

That might cost him his job, but I won’t want his legacy if he caves to the preferences of the Biden administration.

 

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

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Photo by Wes Hicks on Unsplash

Does Hard Work Still Pay Off in America?

Public Schools Need to Focus Children Less on the Shortcomings of American Society and More on Math and Science Skills

By Peter Morici, Ph.D.

Aug. 11, 2021 (First Published in marketwatch.com)

Americans still believe hard work is critical to success, but is it enough when children start out in such different circumstances?

Progressives in Congress and the media firmly believe many working-class and poor children and young adults are held back by structural racism, sexism, big-tech monopolies, and whatever new ism an enterprising academic or pundit can conjure up.

The federal government, foundations and even the corporate sector have put considerable pressure on the educational establishment to redress some of those imbalances. Blacks make up 18% of the Harvard freshman class versus 13% of the U.S. population, and about 57% of new college graduates are female.

Leveling the playing field

Attorney General Merrick Garland has targeted the new Georgia election law, because 29% of Blacks use absentee ballots versus 24% for whites, but the Justice Department seems little concerned about racial and gender outcomes in education that overcompensate and can instigate resentment.

Evening the starting line does matter, and it’s not just Democrats who want to do something about it. Republican Sen. Mitt Romney has advocated a permanent child allowance similar to the expanded child tax credit the Democrats want to make permanent.

Still, so much of the national debate centers on the ideological competition between critical race theorystructural racism is irrevocably embedded into the culture making even competitive market outcomes fundamentally flawed—and conservative orthodoxy—free-markets, free-trade and limited government are the only enlightened path.

The truth lies in between, but the pushing and pulling has given rise to federal welfare and state-enforced preferences that can too much handicap children and young adults seeking a path to success.

Pushed into low-paying majors

Too much of federal educational support system and local school policy is aimed at getting all qualified—and too many unqualified—high-school graduates to college, when fully half who enroll either drop out or obtain degrees that don’t yield decent paying jobs. They end up saddled with debt into middle age and ultimately attracted to politicians who tell them they are victims and offer handouts in the name of equity.

In reality, they are too often the victim of inadequate elementary and high schools.

If teachers, like progressive politicians and activists, constantly tell young people the country is endemically racist and the disadvantaged are purely its victims, then young people can feel overwhelmed and focus too little on what they need to succeed as adults.

If we want more minority and female engineers and technicians, public schools need to focus children less on the shortcomings of American society and social justice and more on math skills, hands on mechanical puzzles, critical thinking and conceptualizing approaches to tough engineering challenges to cultivate interest in STEM disciplines.

Too few STEM graduates

High schools let the children sort, and we end up with too few college students with the math and analytical instincts for STEM disciplines and too many majoring in the humanities and soft social sciences.

High school counseling gives short shrift to the private-sector apprenticeship programs sponsored by the Department of Labor. After two years, those deliver wages greater than the average for college graduates.

The upshot is employers lack the workers they need. And the economy has too many folks making sandwiches and serving coffee, on food stamps and in Section 8 housing and not enough engineers and trained technicians.

The Biden-Harris administration sees it all another way. It is doubling down on failed policies by expanding higher education, and lacing racial and gender preferences into American Jobs Plan and American Family Plan at every available opportunitythough many of those will not likely survive judicial scrutiny.

The administration’s industrial policies and Congress are targeting subsidies for physical manufacturingpharmaceuticals, semiconductors, advanced batteries and critical materials and rare earth minerals—while seeking to dismember the high-tech giants that are doing so much of the expensive R&D that creates the software essential to the success of manufacturing.

That would be akin to subsidizing steelmaking but taxing automotive design in the 20th Century, but the president is excessively focused on factories and union cards. He has appointed antitrust officials with publicly pronounced positions against big big-tech.

Every child should have the essential resources to succeed but failing to focus on the genuine curricular shortcomings of K-12 education, repackaging the popular myth that college offers the golden ticket, and obsessing too much over social- justice issues will hardly succeed in lifting up the disadvantaged and radically address the root causes of inequality.

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

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Image by Steve Buissinne from Pixabay

How about Genuine Reform of Capital-Gains Tax Rates?

Biden would set the rate way too high, but there is an ideal way to collect some revenue without killing innovation or growth

By Peter Morici, Ph.D.

Aug. 5, 2021 (First Published in marketwatch.com)

President Joe Biden wants to raise taxes on capital gains but competing with China requires serious reforms neither party has embraced.

For virtually all of the last century, capital gains have been taxed at lower rates than wages and other income. Currently the top capital-gains rate is 23.8%—that includes the Obamacare 3.8% surtax on all investment income.

The tax system makes no allowance for inflation. An asset purchased in 2010 that doubled in nominal value and was sold in 2020 bore an inflationary loss of 18.7% plus a 23.8% tax on the nominal gain. That’s an overall burden of 42.5%.

Chinese subsidies

China massively subsidizes high-tech activities, and industries such as semiconductors and commercial aircraft have been targeted by Western governments. For example, government benefits reduce the cost of new semiconductor facilities in Korea and Singapore by 25% to 30%.

In recent decades, U.S. government support for R&D as a share of gross domestic product has been falling, and Beijing has so many ways of boosting investments in preferred activities—low interest loans, cheap land and the like—it’s difficult to adequately measure.

The World Trade Organization has proved ineffective for combating subsidies for high-tech innovation and exports, because the Chinese, with their mercurial ways, are difficult to prosecute through dispute settlement. And a subsidy-countervailing duty on imports into the United States is minimally effective when the competition in semiconductors, solar panels, airplanes and many other products is driven by global economies of scale and markets.

Many of our big technology companies started out in a garage and under the wings of angels. Engineers and entrepreneurs have promising but speculative ideas, and deep-pocket venture capitalists invest in 10 enterprises hoping one or two will succeed. Then the object is to have a lucrative public share offering or sell to big established technology companies such as Apple or IBM. Those profits are taxed at the lower capital-gains rate, and that’s how we subsidize R&D to make up for Beijing’s largess.

Might as well surrender

If we taxed capital gains at ordinary rates, we would have a lot less risk-taking, investment in new ideas and essentially abandon the fields of high tech and military innovation to the Chinese Communist Party.

Using the preferential capital-gains rate to compensate for inflation is crude—sometimes it’s too much and other times too little—and the carried interest loophole terribly abuses the system.

Regarding the latter, top corporate leaders and private-equity managers get a good deal of their compensation for managing other people’s assets in stock options. When these shares are sold, this labor income, which should be taxed as wages, is taxed at the preferential capital-gains tax rate. That is hugely unfair to ordinary citizens who don’t earn their 7- and 8-digit incomes.

What the News Means for You and Your Money

Biden wants to raise the capital-gains tax to 43.4% but continue to ignore the effects of inflation. In California and New York, on investments made 10 years ago that doubled in value, that would raise the inflation plus tax burden to about 70%. It’s going to be a lot tougher to find angels to capitalize the next Google or Advanced Micro Devices with Biden’s proposed rates.

 In addition, he wants to tax both unrealized capital gains at death and continue to apply the 40% estate tax. Biden’s double death tax would essentially destroy many family businesses and discourage older Americans from investing to create a legacy for children, but it would boost the sales of yachts and tourist trips into space.

 Sensible reform

Sensible reforms would adjust the tax bases of realized capital gains for inflation, close the carried interest loophole and require that the capital-gains rate only apply for investors with real assets at play—stock investors and those who put up their own cash to fund an enterprise. And apply ordinary tax rates to derivatives trades that do not insure the owner of a real asset against loss—for example, crop insurance.

We can set the capital-gains tax too low—a rate of zero would encourage reckless risk taking—or too high—no risk-taking at all. The statutory rate that maximizes tax revenues is 28%—as estimated by the Tax Policy Center and Joint Committee on Taxation. That would approximately maximize productive investment too.

 

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

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Photo by Sebastian Herrmann on Unsplash

Americans Don’t Want Socialism Shoved Down Their Throats

Joe Biden’s Bait and Switch: Run as a Moderate, Govern as a Woke Left-Winger

By Peter Morici, Ph.D.

July 25, 2021 (First Published in marketwatch.com)

President Joe Biden campaigned as a moderate and repeatedly tells us he is creating a government that looks like America but his hard-left program is more radical than the persona he offered and out of step with public sentiment.

Whether it is voter suppression, border enforcement, limiting police or dramatically boosting federal spending, voters are not in step with the progressive wing of the Democratic Party.

Out of the mainstream

According to recent polls, three-quarters of Americans support requiring voter IDs, about four-fifths see illegal immigration as a threat, and more than half are against redirecting resources from police to social services agencies.

In a recent Fox News poll, more respondents said the president wants to spend too much than respondents who said he wants to spend too little. Forty-nine percent see socialism as a threat whereas 26% think it is not.

Americans should be free to think and say what they wish, but the administration has been silent about Facebook FB, -0.30% and Twitter TWTR, -0.37% suppressing critical ideas, such as COVID may have been created in a Wuhan lab, and muffling conservative voices.

Kamala Harris never managed to break into the first rank of candidates in the Democratic primaries and the hard left’s ultimate standard-bearer, Bernie Sanders, was soundly defeated by Biden presenting himself as a moderate. Yet, judging from what the president is offering, this could easily be a Harris or Sanders administration.

Understandable cynicism

No wonder Americans are cynical—that’s when decent people start embracing conspiracy theories.

Americans elected a moderate but a left-leaning bureaucracy subverts their choice. Intolerant universities and left-leaning alumni fill the administration, and push agendas beyond the Constitution on racial preference and established law on antitrust without congressional ascent.

Democracy is threatened, not just by the rowdy fools who stormed the Capitol on Jan. 6 but also by the infiltration by an anointed intelligentsia into powerful institutions that enforce progressive orthodoxy, validate the cancel culture, and compel compliance at the risk of losing careers and livelihoods. And insidiously propagate to our youth falsehoods about our founders and the legitimacy of our core beliefs—the New York Times 1619 Project and critical race theory.

Capitalism—citizens not the state should own our businesses and homes—and free markets—individuals investing and offering their labor to create the greatest value—have been pillars of the American system, at least until now.

Level playing field

The New Deal, the Great Society and what followed were about elevating people so they could compete. Head Start, Medicaid, the earned-income tax credit, the expansion of our state universities and government-backed student loans were intended to ensure that while the starting line is not the same for everyone—it never is in any capitalist, socialist, feudal or tribal society—the resources to succeed should at least be adequately available to each child and young adult.

Now progressives say the government should not merely guarantee each citizen a decent chance to succeed, but free money is the new mantra—a guaranteed minimum income.

The Biden budget is a Trojan Horse and nothing more than a ruse. The refundable child care tax credit, which sends parents up to $3,600 a year for each dependent, virtually free child-care for all, universal prekindergarten, paid family and medical leave, two years of free community college, enhanced subsidies for health insurance premiums, and so much more in the American Family Plan, when set against other entrenched federal programs like food stamps and Section 8 housing, become pieces of a giant jigsaw puzzle that make a guaranteed minimum income appear the rational alternative.

Cut out the tedious eligibility criteria and bureaucracy and just give the people free money!

We hear two common refrains from the left-leaning media—virtually all the advanced nations provide these things—and from Biden—these things will strengthen America.

Europe has chronically high youth unemployment and anemic growth, and Biden’s budget projects a 25% downshift in growth from the Trump performance.

The reasons are simple. If everything is free, people won’t work—look at how excessive unemployment benefits caused so many COVID displaced workers to sit out the recovery—and high taxes stifle innovation.

France is the poster child of the left’s crusade, but it has spawned no high-tech giant, can’t even make a car competitive in North America, and was the only permanent U.N. Security Council country without a successful COVID vaccine.

Warts and all, rugged individualism and personal accountability are necessary for democracy and the human race to survive.

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

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As inflation continues to heat up, Jerome Powell is going to have some ‘splaining to do’

All that money the Fed and Congress is fueling demand without increasing supply

By Peter Morici, Ph.D.

July 21, 2021 (First Published in Marketwatch.com)

Federal Reserve Chairman Jerome Powell and many economists were surprised by how much inflation has accelerated. May and June prices, as measured by the consumer price index, were up at 8% and 11.4% annual rates over their prior months.

Powell has convinced himself and financial markets that the recent surge in inflation will moderate. The expected pace implied by 5-year inflation-indexed bonds is not much higher than the Fed’s 2% target.

However, businesses that actually make products are facing all kinds of supply bottleneckssurging commodity prices and labor shortages that are likely to last into next year and beyond. The latest Conference Board survey indicates households expect 4.8% inflation over the next 12 months and 2.9% over the next 5 to 10 years.

Rapidly changing conditions

The Fed chairman and senior policy makers are influenced by macroeconomists. They have a penchant for reducing a $21 trillion economy with supply tentacles reaching to the edges of the globe to just a few equations. But beneath those behavioral rules—like the Phillip’s Curve—are myriad real-world conditions that are changing rapidly while econometric models are estimated with historical data.

While some Fed policy makers may be considering when to slow the pace of Treasury and mortgage-backed securities purchases, Powell does not seem inclined to rein things in just yet.

Pandemics, like wars, create barriers to accustomed patterns of spending—restaurant closures this time and food rationing in World War II. When crises pass, folks go back to old ways but not completely. Hybrid work will permanently cut purchases at eateries in metro business centers and elevate demand for home office space, computers, printers and collaborative software.

Many restaurants and service jobs for working class and minority Americans are permanently lost. Meanwhile, the demand for materials like copper, chips and software to equip and enable a more distributed professional workforce will remain elevated above 2019 levels, and shortages and upward pressure on prices and wages for skilled workers in those industries will likely endure.

Over the last two decades, new-home construction has been depressed, but now millennials on the upper leg of the K-shaped job market, commuting less, are plowing into suburban homeownership. Builders are responding but have butted up against shortages of building lotsmaterials and skilled tradesmen from restrictive zoning and years of underinvestment in sawmills, factories and vocational education that the Fed can’t fix as its inflation forecasts require.

As the government only includes the implied rents homeowners pay themselves with a lag—and those account for 24% of the consumer price index—we know two things. Home prices will continue to rise, and their impact on measures of consumer inflation will continue for years.

Vulnerability of supply chains

Over the last two decades, manufactures and consumer-service providers—read call centers at Amazon and credit-card companies—have stretched supply chains into China and elsewhere in Asia in search of the lowest wages.

Pandemic shutdowns, shortages of imported components showed the vulnerability of such strategies and diversification and reshoring away from the lowest price source are the buzz words. And the lowest priced source isn’t what it used to be—China’s working-age population is shrinking. All that points to prices rising more quickly than during the 2000s.

Displaced workers in the service sector can be retrained.

Levi Strauss is retooling brick and mortar retail workers for skilled digital positions with a two-month intensive boot camp in coding and data analytics. Instead of piggy backing on such efforts, President Joe Biden wants to offer two years of free community college.

Levi’s trainees get paid and pay their rent. At community colleges, displaced restaurant workers will be subjected to general education requirements that will extend the time needed to acquire skills and must borrow for living expenses.

Pressure on the Fed

The Fed is pressured to validate that folly along with a plethora of social programs demanded by the progressives staffing the Biden administration. A good deal of the president’s $3 trillion in proposed non-infrastructure social spending would be financed by the Fed buying bonds, because congressional Democratic are not likely to approve all the new taxes his plans require.

During the pandemic the Fed printed nearly $4 trillion to buy bonds, and assets on its balance sheet are now about 35% of the national debt held by the public. While some Fed policy makers may be considering when to slow the pace of Treasury and mortgage-backed securities purchases, Powell does not seem inclined to rein things in just yet.

All that money chasing goods in short supply will ultimately leave Messrs. Biden and Powell, as Ricky Ricardo would say, with “some ‘splaining to do.”

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

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Photo by Bermix Studio on Unsplash

Democrats Will Never Let a Good Crisis Go to Waste

By Peter Morici, Ph.D.

July 20, 2021 (First Published in Washington Times)

Every great crisis elicits a massive expansion of government — wars, crop failures, financial meltdowns, and pandemics threaten security, public health, and livelihoods. The state must respond or risk conquest, chaos, and violence. The real challenge is to curb the Mandarins when threats pass.

COVID-19 required governments to step forward to accelerate the development of vaccines, enforce social distancing, and support businesses and families. The Delta variant likely will be contained by booster shots. Still, Democrats want to create a modern Leviathan by making permanent the temporary increases in the Child Tax Credit, Obamacare, and the like, and grasping massive unlegislated control over private businesses, and imposing unconstitutional racial preferences when allocating benefits.

As Saul Alinsky said and former Chicago Mayor Rahm Emanuel appropriated, “never let a crisis go to waste.”

Tapping pre-COVID frustration with mismanaged globalization, income inequality, and monopoly abuses, the Biden Administration embraces Critical Race Theory and the 1619 Project narrative to explain injustice and cultivate divisive racism and sexism that sets Americans quarreling among themselves.

Massive power grab

The chaos permits a massive power grab through a 35% increase in federal spending over pre-pandemic levels and federal control of the plumbing under our economic and political system—banks that decide who gets credit, social media that provide the public square for political ideas, and transportation systems that move goods. All to establish the theology of woke as a state religion to compel what we can think, say, and do.

The 20th Century was the stage for a great competition between authoritarian socialism, which the Soviet Union and initially China ran badly, and post-Keynesian democratic capitalism—free markets, which the government supported with politically independent central banks and antitrust laws that prioritized price competition and consumer welfare.

The latter mostly relied a lot on fast-moving technology to discipline monopolists. Remember when Microsoft dominated software, but smartphones and apps upended that model. IBM accomplished a monopoly on mainframes but was displaced by cheap PCs and then Amazon’s cloud.

The Biden Administration’s power grab will be through massive spending on social programs that makes nearly every household in America dependent on Democratic politicians for the manna to obtain health care, raise children, and essentially live decently. The appointment of left-wing governors to the Federal Reserve Board to mandate the steering of bank credit to Democratic constituencies—euphemistically characterized as regulating consistent with our values. And radicals at the Federal Trade Commission and other agencies to exercise arbitrary control over technology platforms and commerce.

Vaguest criteria

At the FTC, Chair Lina Khan has jettisoned the consumer welfare and lowest price test favoring the vaguest criteria that would permit her staff to investigate any business practice she deems personally offensive. The Surface Transportation Board and Federal Maritime Commission are directed to regulate prices charged by railroads and ocean shippers.

Banking, technology, and transportation are all rigged to woke values, but what people buy and where businesses invest is driven by complex information such as state planning always fails—useless products, shortages, inefficiency, technological stagnation, and flagging incomes.

The Leviathan needs well-positioned state loyalists as its bureaucracy fails to deliver promised prosperity, and the likes of Nancy Pelosi and Chuck Schumer know how to buy them.

Almost every new idea as it matures must run through a narrow channel of investment bankers and money managers in New York. They control access to large buy-out financing and initial public offerings when start-ups cash out. They possess working control of proxies for the voting shares of our largest corporations and loans for workouts of flagging enterprises through private equity.

Concentration of power

Vast fortunes are made through this concentration of power and the carried interest—a privileged tax status that lets financial institutions pay wages subject to radically lower capital gains rates.

Democrats talk about breaking up Big Tech and curbing railroads. Still, they never seem to breathe a word about breaking up J.P. Morgan or disciplining BlackRock because they do their bidding by shoring up the woke values necessary to sustain the hypnosis over voters. Democrats wax relentlessly about ending the carried interest, but one tax bill after another becomes law without addressing it.

And now you watch how Lina Kahn and Congressional Democrats will obtain continued commitments to censor conservative voices—read stifle criticism and dissent of their new order—in negotiating “reformed” antitrust rules for Big Tech.

The feudal lords controlled the mills that turned peasants’ grain into flour. Controlling the choke points—finance, technology platforms, and transportation—is how the new Leviathan will rob liberty as surely as time steals youth.

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

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Image by Free-Photos from Pixabay

America’s Educational System Ignoring the Skill Set Employers Need

Hard Work Still Pays Off but the Government Gets in the Way

By Peter Morici, Ph.D.

June 13, 2021 (First Published in washingtontimes.com)

Americans still believe hard work is critical to success but is it enough?

Liberals in Congress and the media are selling the idea that poorer Americans are held back by structural racism, sexism, big-tech monopolies, and whatever new ism an enterprising academic or pundit can dream up.

Granted, not every child starts in the same place. Those from higher-income families have a better shot at an education that pays off but less so for non-blacks or males.

Eighteen percent of the Harvard freshman class is black versus 13% of the U.S. population, and about 57% of new college graduates are female.

Georgia election law

Attorney General Merrick Garland has targeted the new Georgia election law because 29% of blacks use absentee ballots versus 24% for whites. He should be apoplectic about what’s going on in higher education.

I’ll let the reader decide if Mr. Garland is a man hypnotized by the Theology of Woke.

Even the starting line does matter. That’s why Senator Mitt Romney has proposed a Child Allowance similar to Democrats. But so much of the national debate centers on the ideological competition between Critical Race Theory—whites have racism written into their DNA—and the 1619 Project—capitalism and America were founded to entrench slavery—and conservative orthodoxy—free-markets, free-trade and limited government are the only enlightened path.

The truth lies somewhere in between, but the pushing and pulling have given rise to federal welfare and social-police states that have handicapped children and young adults trying to succeed. And encumber working- and middle-class Americans thrown to the mat when disruptive technologies, import competition, financial crises, or pandemics destroy their jobs.

Decent-paying jobs

Too much of the federal educational support system and local school policy is aimed at getting all qualified—and too many unqualified—high school graduates to college, when fully half who enroll either drop out or obtain degrees that don’t yield decent-paying jobs. They end up saddled with debt into middle age and ultimately attracted to politicians who tell them they are victims and offer handouts in the name of equity.

In reality, they are the collateral damage of lousy elementary and high schools. Those talk to children too much about social justice and focus hardly enough on math skills, hands-on mechanical puzzles, critical thinking, and conceptualizing approaches to tough engineering challenges to cultivate interest in STEM disciplines.

High schools let the children sort, and we end up with too few college students with the math and analytical instincts for STEM disciplines and too many majoring in the humanities and soft social sciences.

High school counseling gives short shrift to the private-sector apprenticeship programs sponsored by the Department of Labor. After two years, those deliver wages greater than the average for college graduates.

Lack the workers

The upshot is employers lack the workers they need.

Virtually nothing is done to enable the army of displaced workers to enroll in those programs. Relocation assistance and income support are almost non-existent for the mid-career unemployed.

Consequently, the economy has too many folks making sandwiches and serving coffee, on food stamps and in Section 8 housing and not enough engineers and trained technicians.

If politicians, teachers, and activists constantly tell young people the country is racist beyond repair and the disadvantaged are purely victims, then they will do too little to better themselves. Other than look to the government for a program that discriminates against someone else and offers a guaranteed income.

Blind to facts

The Biden-Harris administration is blind to facts and deaf to reason. It is doubling down on failed policies by expanding higher education and lacing racial and gender preferences into American Jobs Plan and American Family Plan at every available opportunity.

The administration’s industrial policies and congress are targeting subsidies for physical manufacturing—pharmaceuticals, semiconductors, advanced batteries, and critical materials and rare earth minerals—while seeking to dismember the high-tech giants that are doing the expensive R&D that creates the software essential to the success of manufacturing.

That would be akin to subsidizing steelmaking but taxing automotive design in the 20th Century, but the president is obsessed with factories and union cards. He has appointed anti-trust officials with publicly pronounced prejudices against big-tech.

Every child should have the essential resources to succeed but giving families free money with a daily dose of victimization theology, repackaging the myth that college offers the golden ticket, and denigrating our founding heritage is the surest way to kill our prosperity, extinguish America’s beacon of democracy and hand the future to the autocrats in Beijing.

 

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