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Below, please find several samples of my syndicated writing on economics. Each article is designed to be a great source of quick, easy-to-read content that helps you make sense of the economy and that you can share with others. If you are interesting in subscribing, and I hope you are, please contact me for pricing.

Automotive Activity

In 2018, automakers sold 81.8 million vehicles and 4.2 million light commercial vehicles, down 400,000 from 2017, the best year ever. 2019 looks to be slightly weaker than 2018. The biggest market is China, with sales of 28.1 million vehicles. The US is a distant second at 17.3, followed by Japan at 5.2, India at 3.9, and Germany at 3.7. Collectively these five nations account for 67.7% of all sales. 

Muddling Millennials

Despite being better educated, in 2016 Millennial households had average net worth of $92,000; 40% less than Gen Xers and 20% less than Boomers (adjusted for inflation) at the same point in their respective lives. 33% of Millennials are homeowners, compared with 50% of Xers and just under half of Boomers. Marriage and birth rates are similarly depressed. Massive Boomer retirements and the strong economy will hopefully improve these numbers. 

High Storage Levels, Low Oil Prices

After almost reaching $55 per barrel (bbl), oil prices are again falling. What makes this decline particularly baffling is that in late 2016, after seeing prices languish for two years, the Organization of Oil Producing Countries (OPEC) announced that it, along with non-OPEC members such as Russia, would collectively reduce production by 1.8 million bbl/day, or 2% of global supply, starting January 1st. Many observers thought that removing that much supply would stop inventory growth and put upward pressure on prices. After the decision to curtail pumping was announced, oil prices, as expected, quickly jumped from about $43/bbl to close to $55/bbl. Recently, however, oil prices have again started falling. The question is why, and is this decline more likely to be temporary or permanent?

There are four main reasons why oil prices are again declining. Firstly, the decision to cut global production set off a flurry of buying by hedge funds, which pushed up prices. However, the rise in prices also encouraged American shale producers to ramp up drilling and production. To wit, the number of oil rigs in operation has more than doubled in the past 12 months. Since OPEC announced that production cuts were coming, US production has increased by almost 500,000 bbl/day. Moreover, the number of wells that are drilled but uncompleted (DUCs) has risen from 1,250 to 1,750. As oil prices recover, DUCs, which can be quickly completed, are likely to flood the market with yet more supply.

Second, several OPEC nations, including Iran, Libya, and Nigeria, were, for any number of reasons, not asked to cut production and have instead all increased production dramatically. Further complicating matters is that many of the nations that have been called upon to make cuts do not have a great history of compliance. In addition, Canada and other non-OPEC nations that are in no way involved with OPEC are also increasing production.

The third factor is that in the months leading up to January 1, 2017, when the above-mentioned production cuts were to commence, most OPEC nations sharply raised production levels and exports to maximize short-term revenues. And, after weeks of transatlantic travel, this oil is now finally reaching US shores.

The final factor is the shape of the curve of futures prices, which is closely related to inventory levels. Inventory levels continue to rise and are now at a record 540 million barrels. With inventories so large, near-term prices for oil are lower than long-term prices, a relatively infrequent situation known as a contango. When the contango is sufficiently large, such that storage costs are less than the long-term price of oil minus the short-term price, which is currently the case, investors and speculators buy oil and store it. In the process, the near-term price of oil is driven lower still.

To break this cycle, OPEC will have to convince markets that inventories will soon decline and thereby raise near-term prices. The best way to do this would be to promise to extend the current production cuts that are set to expire on June 30th and perhaps promise additional production cuts. The only problem is that as prices rise in response those actions, American shale drillers will drill more wells and the cycle will continue.

Tax Reform Done Right

With elections right around the corner, tax proposals are surfacing like mushrooms after a rainstorm.  While we can all agree that the current tax code is a disaster, the most recent proposals regrettably range from just bad to positively dreadful.  Why?  They are political documents designed to attract voters — not tax policy experts and economists!  With this in mind, I offer several key principles that should be generally followed in any successful tax reform.

The primary goal of taxation is to raise revenue while causing the least economic damage possible.  This means broadening the tax base.  Think about it; if the only thing we taxed was oregano, we would all stop buying oregano.  If however, we taxed all spices equally, there would be no reason to avoid oregano, but there would be a strong incentive to eat bland food and smuggle in spices.  But if we tax everything equally, then you have no incentive to alter your behavior as you cannot reduce your taxes.  Better yet, as you broaden the base, you will be able to lower tax rates and still collect the same amount of revenue.  Of course, this means doing away with most deductions, credits, and exclusions, including tax breaks for charitable donations, employer-provided health insurance and state and local income taxes.

The next step involves simplification.  Most taxpayers resent the fact that the rich hire clever accountants and lawyers, thus reducing their tax payment to nothing or next-to-nothing.  This is corrosive behavior, creating distrust of the entire system across the political spectrum.  Moreover, simplifying our 75,000-page federal tax code would cause entrepreneurs to think harder about how to make more money and grow their businesses, not on which lobbyists and lawyers to hire and how many racehorses to buy, all of which are unproductive activities.  Tax simplification means doing away with the corporate income tax and all the insane rules regarding investment expensing, depreciation schedules, repatriation of profits, tax-deductibility of debt, R&D tax credits and so on.

Third, tax consumption — not savings.  When the government taxes savings, income, interest payments, dividends, capital gains, wealth and even inheritances (but we can argue about that one), it reduces the incentive to save, invest in new plant and equipment, and, most critically, take financial risks.  Recognizing this, the government already allows for health-savings accounts, IRAs, life-insurance exemptions and a multitude of trusts that the rich use to shelter wealth and avoid inheritance taxes.  Why not let everyone do it without having to jump through any hoops?  While consumption taxes such as sales taxes or value added taxes may sound regressive, they need not be.  Consumption by the wealthy can be taxed at a higher rate than consumption by the poor.  In this way, the tax code can remain progressive.  Moreover, as the consumption tax will be based on the difference between what you earn and what you save, this plan will discourage hiding assets offshore, giving our economy yet another boost!

The last time the tax code was reformed was during President Reagan’s second term; roughly 30 years ago!  We are clearly overdue.  While reaching a compromise that both ends of Pennsylvania Avenue will agree to will be tough, if done as outlined above, it will boost GDP growth and improve living standards.  Congress, get going!

Driverless Cars

At present, there are 240 million cars and light trucks in the USA, most of which are parked 23 hours a day or more. This idleness makes owning and driving a car expensive. If cars could just be used more, automobile transportation costs would fall. That is the promise of Uber, Lyft and all the other assorted ride-hailing services. But, what about the next step, driverless cars? With no driver to pay, travel becomes even cheaper. What does the promise of cheaper transportation mean for cities, commutes, sprawl, and more generally how we live? I suggest it will encourage sprawl by increasing the distance of our commutes. Here’s why:

As goods and services get cheaper we generally consume more of them. For example, long-distance phone calls were once prohibitively expensive and we made them rarely. Today, they are free and we make lots of them. Televisions used to be very costly; a house had just one. Now, every room has a TV. Several years ago, gasoline was $4/gallon and owning a Prius was a status symbol. Now, with gasoline at $2.25/gallon, we are buying gas guzzlers by the gross and driving more too. In short, as something gets cheaper, we generally consume more of it.

Returning our attention back to driverless cars, as new technologies and roads are built to specifically accommodate these vehicles, their transformative potential will become apparent. They will not only be safer than existing cars but will travel faster and get much better gas mileage. And, shared self-driving cars are expected to easily take 50% of existing cars off the road. Suddenly the cost of conveying a passenger is likely to be not much more than double or triple the cost of public transit. Better yet, hailing such a vehicle from the permanent circulating fleet will take little time and no more than a swipe or two on your smartphone. As a bonus, on-street parking and most off-street parking would completely disappear.

In short, we are on the verge of faster, safer, and cheaper travel. Add to this the twin observations that people generally are willing to commute about 30 minutes to get to work, and that (possibly as a result), urban population densities have generally been declining by about 1%/year since about 1890, and you have a strong likelihood that the cost and time savings these new modes of travel promise will result in longer distance commutes, and thus continued sprawl. In short, the easier it is to get from “Here” to “There”, the farther away from “There” people are apt to live.

Moreover, this outcome is highly likely no matter how things turn out. If we enthusiastically embrace ride-sharing technology, something Americans have never done, we will all be whisked speedily to our now ever-distant places of work and sprawl continues. By contrast, if few of us ride-share and we instead use our own self-driving cars, which is probably more likely, it would mean more cars on the road and thus slightly slower speeds than what could be achieved via mass ride-sharing and thus longer commutes. But we would all be watching TV or reading so who cares!

Government Assistance Increases Wages!

All too frequently the argument is made that government assistance programs subsidize low wage employers. That is, firms like Wal-Mart, McDonalds and Target, to name just a few, are able to pay very low wages precisely because management knows that their low paid employees will qualify for Medicaid, food stamps (officially known as the Supplemental Nutritional Assistance Program) and other such public assistance. As a result, it’s assumed that these public programs allow firms to pay lower wages than would be possible were these programs not to exist. To be blunt, this position is completely wrong.

Rather than subsidizing low-wage employers, public assistance programs generally reduce the supply of low-skilled workers who are willing to work for low pay and poor benefits. This is because in many cases, benefits are more generous when family incomes are very low or zero. As family income rises, benefits are frequently cut back or eliminated entirely. By reducing the pool of workers willing to take poorly paying jobs, Medicaid and most public assistance programs tend to increase, rather than decrease, wages at the bottom of the pay scale. Were these programs not to exist, the unemployed would be more eager to work than they currently are, and thus more willing to work at a lower wage.

Again, the availability of health insurance, food stamps, and other assistance when work is not a requirement means that paid employment is somewhat less attractive than would otherwise be the case. Moreover, the fact that in many cases benefits are reduced as earnings rise means that work is financially less rewarding to these households than it is to unsubsidized households. In short, programs that offer more generous payments to those with no earnings than to those with higher incomes reduces the supply of workers willing to work at very low pay. This is quite the opposite of a subsidy to low-wage paying firms.

Two programs that are exceptions to the above are the Earned Income tax Credit (EITC) and childcare subsidies targeted at working families with low incomes. Because benefits are only paid to families with a parent who is employed, these programs encourage work. By boosting the supply of low-wage labor, these programs increase labor supply and thus decrease wages. However, these programs are not really subsidies to low-wage employers. Rather, they are programs that offer inducements for low-wage workers to enter the job market and take jobs that do not offer adequate pay by making it financially advantageous to do so. The goal of the EITC is to improve the standard of living of low-income families and encourage work, without fear that as a result of a rise in earned income, public benefits will be lost. In this way the EITC makes work pay.

In conclusion, public assistance programs that offer benefits to non-working Americans reduce the incentive to work, thus boosting wages. Similarly, programs that dramatically reduce benefits as household income rises also boost wages by making work less attractive. There are no subsidies here. While programs that incentivize work, like the EITC, increase the supply of workers and thus decrease wages slightly, calling such programs employer subsidies is essentially mistaking the bathwater for the baby.

Reservations About The Dollar

Since the start of the Great Recession of 2008 and the Fed’s decision to inject trillions of dollars into the banking system, there has been constant talk of the US dollar losing its position as the world’s reserve currency, the position it has held since the end of WWII. After all, our debt is huge and growing, DC is thoroughly dysfunctional, our share of the world economy is shrinking and China is increasingly pushing for a post dollarcentric financial system. Despite all the concerns above, the dollar’s position as the reserve currency of the world is safe for a long while.
First, which currency can realistically unseat it? The British pound is simply too small to do the job as the British economy is about 1/7th the size of the US economy. As for the euro, while it is large enough, there are too many structural problems including weak growth, over taxation, an inflexible central bank and the outside possibility of the collapse of the monetary union to entice many central banks to significantly increase their euro holdings.
As for the Yen, Swiss Franc or Chinese renminbi, you have got to be kidding! With a debt to GDP ratio greater than that of Greece, Japan makes the US look downright fiscally responsible. Moreover, Japan and Switzerland are both pushing down the value of their respective currencies making them that much less appealing to hold. Lastly, the renminbi does not freely float and there are significant foreign exchange controls in place. As a result, it will take at least a decade before China has the necessary legal framework and deep and open financial markets that are a necessary prerequisite before the renminbi can become a credible reserve currency competitor.
Second, because of increased capital flows between nations due to increases in trade and investment, central banks have been repeatedly told by their respective governments to hold larger quantities of safe and easy-to-sell assets which can be easily liquidated in time of crisis. As a result, total foreign reserves have nearly quadrupled in the past decade and this has dramatically increased the demand for dollars. For example, when foreign capital suddenly flees a developing nation, it puts downward pressure on the local currency. By selling some of its dollar holdings to purchase its own currency, a country can stabilize its currency and avoid large currency swings. Moreover, simply holding a large supply of highly liquid foreign assets, like dollars, discourages speculation and demonstrates that a nation has the necessary reserves to pay foreign creditors for things like oil and wheat.
Lastly, with large holdings of dollars the last thing foreign nations want to do is harm the dollar as that would reduce the value of their holdings and that, in and of itself, reinforces the dominance of the dollar and thus improves its stability. That is at least partly why for the past 15 years 60% of world foreign exchange reserves have consistently been in dollars. Were that percentage to slowly fall to 50% over the next few decades, it would matter relatively little.
To sum up, despite lots of talk, there exists no strong competitor to the US dollar and one is unlikely to appear anytime soon.

Regulation and Its Unintended Consequences

Looking around the United States there are cities like Boston, Los Angeles and Washington, DC that have very high house prices. Yet there are equally successful cities like Austin, Dallas, Louisville and Oklahoma City that have much more affordable home prices. Why the difference? Of course the surf is better in L.A. than in Dallas, but it has always been better, and 40 years ago L.A. was not an expensive city. The reason for this disparity is regulation.
Simply put, each piece of legislation that becomes law, and each regulation promulgated by the bureaucracy, regardless of how well-meaning, increases home prices. Sure, having a 30-foot setback looks nicer than a 20-foot setback, but it makes lots more expensive. And while requiring a brick façade may add gravitas to a house, it too raises its price, and the list goes on. Worse, as housing prices are artificially pushed up, distortions are introduced that have negative unintended economic consequences.
Imagine yourself new to town and looking to buy a house. Happily, you quickly find your dream house, but it costs $205,000 and all you can afford is $200,000. Turns out the house you love was built in 2009, the first year houses were required to have cement driveways and picket fences, which raised the price of those houses and all subsequent ones by, you guessed it, $5,000. The solution, look for a house built before 2009. But just like you, everyone else in your situation is doing the same thing. As that happens, the price of homes built prior to 2009 rises. After all, demand for them is suddenly up, way up. And presto, the house that used to sell for $200,000 now costs $203,000.
An alternative is to look for a house in a neighboring town where asphalt is still allowed and picket fences are optional. And as luck would have it, you find a beautiful $200,000 house and move in. The only problem; your commute to work is now twice as long as it would have been if you had been able to buy that original house. And that increases CO2 emissions, causes needless wear and tear to roads and infrastructure, requires you to buy a new car more often, and hire a sitter for your kids, as you are all too often caught in traffic driving home.
But wait, it gets worse; suppose your uncle owns a huge parcel of land and planned to build entry-level houses on it for $200,000. He can’t now because of the cement driveway and picket fence rules which force the price up to $205,000. The problem is folks like you can’t afford those houses, so he goes upscale and builds $225,000 houses, and in that way does well, but contributes to the affordability problem.
To review, forcing anyone to do something they otherwise would not have done makes whatever it is more expensive. In this case, it raises the price of new entry-level houses. In addition, it raises the price of houses built prior to the law, which in turn pushes home construction into neighboring areas which adds to sprawl and boosts CO2 emissions.
The moral of this sad tale, think twice before reflexively solving problems through regulation and legislation. The consequences can be quite far-reaching and unintended.

Economic Forecast for 2nd Half 2013: Sunny with Cloudy Periods

Looking ahead at the second half of 2013, the economic news is pretty solid. The US economy is on the mend, the labor market is slowly healing and house prices are up about 10% from year-ago levels. In addition, Europe (while in recession) appears to be holding together, DC budget brinksmanship is fading, car and light-truck sales along with consumer sentiment are rising, and new home construction continues its steady ascent. The only serious domestic fly in the ointment is the significant fiscal drag from Washington as the result of sequestration and year-end tax increases. The biggest foreign drag is Europe’s recession is hurting US exports.
With all this in mind, I expect Q3 GDP to be about 1.75% and Q4 GDP to come in slightly higher at 2.1%. As for housing starts, in Q3 they should, for the first time in years, exceed a million units (seasonally adjusted and annualized) with single family starts coming in at 675,000 and multifamily starts reaching a pace of about 340,000. In Q4 single family starts should hit to 700,000 with multifamily starts unchanged.
Inflation will remain benign. The combination of weak global growth, flat to declining energy and commodity prices, and flat to mildly rising food prices will keep CPI growth well below 2%. Moreover, the combination of tiny rises in import prices, producer prices, consumer prices and anemic wage growth means that personal consumption expenditure inflation, the Feds preferred inflation measure, will barely exceed 1%, giving the Federal Reserve ample room to continue its program of quantitative easing.
As for jobs, despite an improving labor market, the unemployment rate at the end of the year will remain above 7%. And combined with an annual inflation rate of well below 2%, it makes me think Bernanke and the rest of the voting members of the interest rate-setting Federal Open Market Committee will continue purchasing $85 billion/month in Treasuries and mortgage-backed securities at least through September 2013. Any tapering of QE3 will not commence before that and possibly as late as December 2013.
Another reason why QE3 will be maintained is that due to weak wage growth, consumer spending is rising quite slowly and is being fueled, at least in part, by a decline in the personal savings rate which now stands at a scant 2.5%. Of course rising stock prices, improving home values and easing credit market conditions are also aiding the rise in consumer spending. But a sudden rise in interest rates could derail these positive developments and weaken manufacturing, which is currently neither expanding nor contracting. As such, the risk is simply not worth the return, at least for now.
What would change my thinking about QE3 would be consistent monthly non-farm payroll job growth of greater than 187,000. If we manage to achieve that, the Fed would likely reduce the amount of its monthly bonds purchases and interest rates would rise. However, given a growing economy, the rate rises would not be growth-sapping and I put the chances of a new recession at no more than 10%. In the meantime, I look forward to continued, slow and steady improvement the rest of the year.