Our Ever-Ignored Deficit

The Trump Administration has announced that, in fiscal year 2018, the federal budget deficit was a staggering $779 billion.  That’s a 17 percent increase over fiscal year 2017, and the largest budget deficit in six years.

In short, we’re running enormous, historically disproportionate budget deficits — even though the economy is humming, jobs are being created, unemployment has reached the lowest levels in years, and the federal government is collecting record amounts of income tax revenue.  At a time when we should be balancing our budget, or even running a surplus, we’re farther underwater than ever.

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Nobody seems to really care about this — except a handful of old deficit hawks like me.  The Republicans who used to claim to be the party of fiscal discipline cut tax rates, but they just haven’t gotten around to making the necessary cuts to federal spending that are needed to bring the budget into balance.  No surprise there — cutting taxes and raising defense spending is the easy, champagne-cork-popping part of their agenda; actually digging into the details and deciding which federal programs to cut, and by how much, is the harder, painful part that every Republican running for reelection will happily defer.  And the Democrats, who have never cared too much about balanced budgets anyway, are too busy reacting with outrage to everything President Trump does or says to focus on the deficit.

Some people argue that times are good right now, so what’s the big deal?  Maybe the deficit really doesn’t make that much of a difference, they suggest.  But if the U.S. government can’t live within its means when the economy is strong and record tax revenues are rolling in to the federal treasury, what is the deficit going to look like when the economy turns sour, payrolls get cut, and tax revenues fall?  Just how big is this deficit going to get, anyway?

It all seems pretty ironic to me.  President Trump boasts of being tough with foreign governments on trade and international relations, and putting America’s interests first in all things — but the need to sell bonds to finance the growing deficit does exactly the opposite.  The Chinese, the Saudis, and everybody else who is buying the U.S. bonds we are selling are thereby acquiring enormous leverage, and if they start demanding higher interest payments before they make their purchases we’re in a world of hurt.

So pay no attention, folks!  It’s all boring numbers, anyway!  Let’s forget about the serious, long-term aspects of running a government, and go back to talking about the latest outrages that will dominate the news cycle for a day or two until some new and exciting outrage comes along.

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Condemned To Repetition

George Santayana famously observed:  “Those who cannot remember the past are condemned to repeat it.”

I thought of old George when I read this article reporting that some banks, amazingly, have decided to once again offer zero down payment subprime mortgages.  Apparently it’s only taken ten years for banks to forget the lessons they purportedly learned during the last subprime mortgage lending bubble, when the collapse of countless numbers of bad loans brought the economy to the brink of total disaster.

tips-for-buying-foreclosed-homes-mstAccording to the article quoted above; “Borrowers can have low credit scores, but have to go through an education session about the program and submit all necessary documents, from income statements to phone bills. Then they go through counseling to understand their monthly budget and ensure they can afford the mortgage payment. The loans are 15- or 30-year fixed with interest rates below market, about 4.5 percent.”  In addition to the “education session” and documentation and counseling requirements, recipients of the loans have to live in the houses with the mortgages.

The lending agencies think that residency requirement will keep out the investors looking to flip houses, which is one of the conditions that contributed to the prior housing bubble and subprime mortgage debacle.  Another purported protection against disaster is that the housing market is strong, there’s a shortage of homes for sale at entry-level prices, and therefore homeowners who can’t make their payments supposedly will be able to sell their houses and repay their mortgage loans.  And proponents of the lending program say it helps poor people and working families to buy houses and build personal wealth.

I’m all for people becoming homeowners if that’s their dream, but if banks think that things like education sessions and counseling are going to allow them to avoid problems when the economy turns — as it inevitably will — they are dreaming.  It’s not hard to forecast that some aggressive loan officers will push the rules, some house-flippers will figure out a way to take advantage of the programs, some bad apples will take out the mortgages and then abandon the houses when times get tough, and then we may well be back in the same perilous situation that existed in 2007 and 2008.

I hope not everyone has forgotten what happened to bring on the Great Recession.  And I hope some political leader makes it clear that banks are welcome to follow whatever practices they think are appropriate for their businesses, but this time, if it all goes to hell, taxpayers won’t be bailing them out — again.

Calling For Seasonal Workers

Go to any seaside town — or for that matter, any resort, tourist destination, or other business that does seasonal work — and you’re likely to hear the same refrain:  the local shops and restaurants just can’t find enough employees to fill their needs.

summerhelp_crop380wOn one of our first nights in Stonington, we went to an event where we rubbed elbows with some of the locals, and one of the big topics of conversation was the labor shortage.  One restaurant that the residents particularly like didn’t open this summer because it just couldn’t find enough workers, and another had to cut back its meal service.  And as you walk around town, you see the same young people working at multiple places.  The young woman taking your order behind the lunch counter today is likely to be working at the local hardware store tomorrow.

There are two primary causes for this situation.  The first is the unemployment rate, which is at its lowest level in years.  In June, the unemployment rate was 4.0 percent.  Some economists think, practically speaking, that’s as close to “full employment” as America is likely to get.  That’s good news for workers, who have lots of bargaining power and who can command higher wages.  But it also means that some of the Americans who might otherwise gladly fill seasonal jobs waiting tables on the seashore or working at gift shops are already working full-time in other positions, leaving seasonal employers without the pool of labor they had drawn on in the past.

And the second cause is the H2-B program, which allows employers to obtain visas to bring in “guest workers” from overseas.  The problem, though, is that the program is capped at 66,000 visas each year — a number that hasn’t changed since 1992.  This year, more than 5,600 businesses applied for more than 142,000 such visas, and the Department of Labor had to allocate the visas by lottery.  If you weren’t one of the lucky winners — as was the case with some of the businesses here — you’re out of luck.

And it’s particularly tough for labor-intensive businesses like restaurants.  Owners can man the cash registers and restock the shelves at gift shops, but they can’t really serve as cook, waiter, busboy, and dishwasher all at the same time.  As one of the restaurants here realized, the only alternative is to not open for business.

A lot has changed in the American economy since 1992.  Maybe Congress should take a break from its constant fundraising and look at updating a program that provides a useful safety valve for small businesses who are dependent upon recruiting seasonal workers.

Cashless

Sweden is generally viewed as the most cashless country on the planet — so cashless, in fact, that authorities are getting a little worried about it.

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In that Scandinavian land to the north, fully 36 percent of the people never pay for anything with cash — in Sweden, the currency is called the kronor — or use it only once or twice a year.  In 2017, only 25 percent of Swedes pay with cash at least once a week, down from 63 percent in 2013.  The amount of cash in circulation, generally, has fallen precipitously.  Some restaurants and shops don’t accept cash under any circumstances and post “no cash” signs in their windows, and even some bank branches don’t carry cash.  (Bank branches without cash?  What do tellers do?)

So, what’s the concern?  It centers on the elderly, who are accustomed to paying with cash and who might not be comfortable with paying with plastic or their cell phones — or even have access to those payment methods.  The decline in cash acceptance and cash use generally is being examined by Swedish government and the Swedish central bank to determine whether steps should be taken.

Will America eventually reach a similar point?  I hope not.  I like the idea of having a little cash in my pocket, in case the technology breaks down.  Sometimes it’s just easier to pay with cash, too.  And if you are an advocate for personal privacy, cash is a nice option because of its anonymity and untraceability compared to, say, a credit card swipe.  And there are some things that are always done with cash, and presumably always will be:  how would people looking for a handout or bus fare get along in a cashless society?

On The Roller-Coaster Ride

If you’ve got some of your retirement savings invested in the stock market, as many of us do, the last few days have been unnerving.  The market had an historic run up, and then it went down again.  Yesterday, where the Dow Jones Industrial Average at one point had dropped 1600 points, was an especially wild ride.

704254-001When the market behaves like this, what’s a normal investor, who’s not an insider or a financial kingpin, supposed to do?  You can get dizzy just reading all of the different views of what is “really” going on.  Some people say it’s just a predictable correction after years of historic gains.  Some say the Trump tax cuts have overheated the economy and the market is reacting to that.  Some say we’re long overdue for a bear market.  And some say the Federal Reserve Board hates President Trump and his focus on the stock market as a proxy for his presidency and just wants to bring him down low.

(The last theory, in which the Fed would be intentionally manipulating the market for overt political purposes, is especially troubling — and even in these conspiratorial times, seems pretty unbelievable.  To buy that theory, you’ve got to conclude that the Fed’s dislike for President Trump is so powerful that they are perfectly willing to take actions that torpedo the retirement portfolios of millions of individual investors just to give the President a black eye.  Could bureaucrats really be so disdainful of average Americans?  Call me naive, but I find that incredibly hard to believe.)

So what’s really happening here?  Beats me!  My guess is that the run-up has been so significant that there are lots of people out there who thought it was time to take their profits, and the downward movement caused by those sales then triggered some market-decline benchmarks that automatically produced further sales and caused the sharp fall — but that’s just a guess.  Maybe somewhere on Wall Street somebody knows the real answer for sure, but I doubt it.  The stock market is so complex, so huge, and so prone to human reaction that it’s difficult to explain these downward spikes.

So, to put the question again, what’s a little-guy investor to do?  If you think saving money for retirement is prudent — if you don’t, you probably wouldn’t read this post in the first place — and you need to find a place to put your money until the retirement day comes, there really aren’t many alternatives to the stock market that can produce a meaningful return.  Most of us aren’t offered opportunities to invest in real estate deals or development projects, and we probably wouldn’t be comfortable having a big chunk of our money invested in such illiquid things, anyway.  Bond yields are low, and banks pay next to nothing on CDs.  So where else are you going to put your money?  This reality suggests that basic, brute economic forces are going to continue to make the stock market a preferred investment option for people and businesses, not just in the U.S. but also abroad.

But you’ve got to recognize that the stock market is a long-term investment, and it’s going to be a roller coaster ride.  When you’re on the coaster, it’s pretty hard to get off on the highest hill, and you don’t want to exit the car and move onto the tracks at the bottom, either.  You just hold on, scream when the cars start that big downward move, and feel your pulse racing until the end.  Or, you can simply close your eyes, recognize you’re on the ride and there’s not much you can do about it, and focus on other things until your circumstances make you a short-term investor and there are true decisions to be made.

Who knows what this current jittery period will bring?  It’s time to hang on tight.

Happy New Tax Year! (Time To Move?)

With the turn of the calendar page to January, it’s not only a new year, it’s a new tax year, too.  And since Congress enacted, and President Trump signed into law, a host of changes to the federal tax code at the end of 2017 that take effect in 2018, people are starting to take a close look at what the tax law changes will mean — and whether they should move to a different state.

hg-salt-blog-finalYes, you read that right:  the new tax laws might cause people to move.  Why?  Because one of the things the law changes is the rules that apply to deductions for payments of state and local taxes.  Before, there was no limit on the deductions for state and local tax payments; now the deduction is capped at $10,000.  Advocates of the recent tax changes argue that the unlimited deduction had the effect of minimizing the impact of higher taxes in certain states.  Now, higher income residents in the high-tax states will feel more of the true impact of the state and local tax bite in their states.

According to CNN, the deduction for state and local taxes primarily helped taxpayers who earned more than $100,000 a year, who received almost 90 percent of the benefit of the deduction.  Moreover, the impact of the deduction was focused on high-income residents of high-tax states.  California and New York residents alone received about one-third of the benefit of the deduction, and more than half of the value of the deduction was focused on tax filers in just six states:  California, New York, New Jersey, Illinois, Texas, and Pennsylvania.  California’s top marginal state income tax rate, incidentally, is 13.3 percent.  In contrast, some states, like Florida, have no state income tax at all.

This difference in state incomes taxes — and the financial consequences it produces — is what is causing some people to forecast that the change to the deduction taxpayers might cause some taxpayers to vote with their feet and flee the high-tax states for tax-friendlier destinations.  And some politicians in the higher-tax states, such as New Jersey, have taken notice and are reconsidering their taxing strategies as a result.

Is changing the deduction for state and local taxes a good thing?  Of course, you’ll get different views on that issue, but some economists argue that anything that muddles the ability of a consumer to determine the true cost of an item interferes with the “invisible hand” and the optimal functioning of the economy.  Will bearing more of the brunt of high state taxes cause Californians to pick up and move next door to Nevada, which has no state income tax?  This year we might begin to find out.

Many Americas

Recently I was up in Detroit, gassing up the car at a service station at an exit just off one of the freeways, when I noticed this provocative sign on a tire business across the street.

Commerce doesn’t lie.  The business owner obviously thinks that theft of wheels from parked cars is a sufficiently widespread problem that advertising about the ability to help victims of the thefts will generate additional sales and revenue, and you have to assume that there’s a factual basis for that belief.  I thought:  “Really?  Wheels on cars parked on public streets are being stolen, and police haven’t caught the perpetrators of such brazen criminal activity?”  The sign, and the real message it was sending, made me uneasy.

The sign was just one more bit of tangible evidence that we don’t live in one America any more, if we ever really did.  Instead, there are lots of different Americas, dealing with lots of different issues.  Where I live, we thankfully don’t have to worry about coming out to our car and finding all of the wheels taken by wheel theft gangs.  In this particular neighborhood of Detroit, however, there is obviously a different reality.

This shouldn’t be a revelation, of course.  Read the news and you quickly understand, intellectually, that there are pockets of the country where the heroin epidemic is raging and leaving families devastated, where the local economy has been bottomed out and there are no jobs to be had, and where the relations between police and the local populace has been poisoned, and there are parts of America where people are concerned because housing values are too high, where companies are concerned because they just can’t hire enough high-tech workers, and where people are lining up to spend a thousand dollars on a new cell phone.  And don’t get me started about how different places like Hollywood, or Washington, D.C., seem to be from the rest of the country.

And yet, when you live in your own world, it’s easy to view everything from your own personal experience, and wonder why people could possibly have different perspectives on the issues of the day.  The next time I feel that kind of self-absorbed conceit, I’ll think about that unsettling sign in Detroit and try to remember that there are a lot of people in this country dealing with lots of issues and problems that I’m not even aware of — much less affected by.  America is a diverse place not only in terms of its population and demographics, but also in terms of personal experience.  We shouldn’t forget that.