Rising Tide.

In the 1840s, two republics contended for power in the southwestern quadrant of North America.  In 1846, Mexico and the United States went to war over the issue.  The United States inflicted a catastrophic defeat on Mexico.  As prize of war, the United States got California, Nevada, Arizona, and New Mexico.  Plus the Republic of Texas was allowed to join the United States.  In 1853, the United States “purchased” the Gadsden Strip from a chastened Mexico.

Until 1924, the United States pursued a policy of “open borders.”[1]  That meant millions of Southern and Eastern Europeans could migrate to the USA.  Big industrial cities in the East and the Midwest filled up.  It also meant that there were no restriction on cross-border movements in the Southwest.  Many Mexicans migrated northward toward the more dynamic economy of the United States.

Then came the Depression, which decreased wages in both Mexico and the United States.[2]  When the United States entered the Second World War, the American economy began a long boom.  Between 1944 and 1966, 5 million “braceros” (Mexican temporary workers) came to the United States.  Not all of them went back.  By 1969 an estimated 540,000 illegal immigrants were working in the United States.  That number increased markedly in the 1970s and 1980s.  The economy of Mexico slumped far more than did that of the neighboring United States.  By 1986, perhaps 3.2 million illegals were living in the United States.  Mostly they were doing work that ordinary American citizens would not do.  Hard, dirty, and for long hours.

In 1979, the Carter Administration (1977-1981) proposed building a border wall.  In contrast, inn1986, the Reagan Administration supported an Immigration Reform and Control Act that granted amnesty to 2.7 million of the illegals.

Under the Bill Clinton and George W. Bush Administrations, it was back to “get tough.”  From a dozen miles of fence between San Diego and Tijuana, the amount of fence grew to 560 miles after 9/11.  In 2000, 1.6 million illegals were caught at or near the border.  Then the Obama Administration added 137 miles of fence for a total of 697 miles of fence on the 1,954 mile-long Mexican-American border.  Purportedly, improvements in the Mexican economy then reduced the migration of Mexicans.[3]  In 2017, the Border Control arrested only 310,000 illegals.   So, triumph without a—full–wall!

The recent border “crisis” arises from different sources.  Many Central American countries are collapsing under the weight of gang violence and mis-government.  Whole families are migrating and presenting themselves as “refugees” at US points-of-entry.

However, people crossing the Sonoran desert is a peripheral issue in so far as illegal immigration is concerned.  In 2017 alone, 700,000 people obtained US tourist visas and then over-stayed their visas.  They just disappeared into the American hinterland.[4]  That is better than half of all the illegals.

Why should Central Americans get priority while Asians, Africans, and Muslims wait?  “It’s a serious question.”  https://www.youtube.com/watch?v=vInFuLgwR1U

[1] From 1882, the United States did try to limit immigration by Asians to the Pacific Coast.

[2] “A history of the southern border,” The Week, 8 February 2019, p. 11.

[3] The huge slump in the American economy—the “Great Recession”—may also have had something to do with it.

[4] This was basically the story with the 9/11 hijackers.

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Just the Facts, Ma’am 2 11 February 2019.

Second, three tax proposals have been offered to raise more revenue from the rich.[1]  Congresswoman Alexandria Ocasio-Cortez has suggested raising the tax on incomes above $10 million from the current 37 percent to 60 or 70 percent.  This would return upper-income tax rates to the level that prevailed during the 1970s.  In the regime of the 1970s, many deductions and exemptions existed which do not exist today.  The effective tax rate on high incomes under the Ocasio-Cortez proposal would be much higher than the one of the 1970s.  However, the top rate in the 1970s applied to the contemporary equivalent of $800,000.

Senator Elizabeth Warren has proposed a “wealth tax,” not merely an income tax.[2]  People with a net worth between $50 million and $1 billion would pay 2 percent per year[3]; people worth more than $1 billion would pay 3 percent per year.[4]  According to the calculations underlying Senator Warren’s proposal, this tax would generate $2.75 trillion over ten years.

The Warren proposal may not be constitutional.  The 16th Amendment to the Constitution created a tax on income, not a tax on all assets.  Apparently, the courts have held that taxes on estates and gifts are excise taxes on the transfer of assets, rather than a tax on the assets themselves.  The tax also might be a logistical nightmare to apply.

Senator Bernie Sanders has proposed revising the estate tax.  Until 2009, the tax applied to estates of more than $3.5 million.  A 2017 tax change raised the threshold for individuals to about $11 million and the threshold for couples to about $22 million, with a standard tax rate of 40 percent.  Senator Sanders would return to the 2009 level of $3.5 million.  In addition, he replaces a single tax rate with multiple rates.  From $3.5 million to $10 million, the rate would be 45 percent; on estates of $1 billion or more, the rate would be 77 percent.

[1] Paul Sullivan, “Taxing the Rich Sounds Easy.  But It’s Not,” NYT, 2 February 2019; Sydney Ember, “Sanders Unveils a Plan To Increase Estate Taxes,” NYT, 1 February 2019.

[2] Senator Bernie Sanders also supports the idea of a wealth tax, if not necessarily Senator Warren’s version of such a tax.

[3] Apparently, there are 39,735 people worth between $50 million and $1 billion in the United States today.

[4] Apparently, there are 680 billionaires in the United States today.

Just the facts, Ma’am 1 11 February 2019.

The Congressional Budget Office (CBO) reports that spending on people aged 65 and older[1] has increased as a share of federal spending from 35 percent (2005) to 40 percent (2018) and is projected to rise to 50 percent (2029).  The federal budget deficit is projected to exceed $1 trillion a year from 2022 to 2029.  Proposals recently offered by Democrats intending to run for President in 2020 or to shape the party’s policy for that race may have an effect on this situation.  None of the proposals claim to aim at deficit reduction.  Instead, they target reducing income inequality and/or financing expanded programs.

First, it is proposed to reform Social Security.[2]  As originally designed, Social Security enhanced private preparation for retirement by adding the resources from a tax on currently working people to individual savings and/or pensions.  Today, however, there appears to be a savings crisis among working people.

There is also a financing crisis for Social Security.  The actuaries at the Social Security Administration report that outlays (payments) will soon exceed income (withholding tax revenues).  Thereafter the payments will be paid from an accumulated surplus held in the form of U.S. treasury bonds.  When that trust fund is exhausted by 2034, benefits will have to be reduced.  Currently, about 63 million people receive Social Security benefits.  The number is expected to rise to 89 million by 2030.  The total current cost is about $1 trillion.  The maximum amount of income subject to Social Security tax is $132,900; the current withholding tax on payrolls is 12.4 percent.

Democrats propose to increase the minimum benefit to help lower-income people who have saved less than have higher income people; increase benefits by an average of about two percent; raise the annual cost-of-living adjustment to payments to respond to the reality that retirees consume goods and services in a different pattern than do still-working people; cut the tax on benefits for middle-income recipients while increasing them on upper-income recipients; and increase the payroll tax rate from the current to 14.8 percent by 2040, and the payroll tax would be imposed on incomes above $400,000 a year, while incomes between $132,900 a year and $400,000 a year would not be subject to taxation.

This proposal would permanently fix the financing problem.  It would also increase benefits paid out to some Social Security recipients.  An estimated three-quarters of the extra income would go to covering the looming deficit; the rest would go to increased benefits for lower-income recipients.

[1] Social Security, Medicare, Medicaid.

[2] Robert Pear, “Democrats Push First Major Social Security Expansion Since 1972,” NYT, 4 February 2019.

I am running for President in 2020 1.

I believe that life begins at conception.  (If it didn’t, then women wouldn’t want abortions.)  Let me state plainly: I would never have an abortion.  OK, I’m a 64 year-old guy, so that’s an easy position to take.  At the same time, I’m not willing to shove my personal opinion down the throat of a fifteen year-old black girl in West Philadelphia, living with her mom and grand-mom in some tumbledown row house, and attending what the City of Brotherly Love is pleased to call the public “schools.”  Moreover, with Prohibition and the War on Drugs having been such great successes, I don’t see how a War on Abortion is any more likely to succeed.  Unless, you know, heart-break and misery across multiple generations is what you really want to produce.  Then go ahead, knock yourself out.

 

The same goes for a War on Guns.  Yes, there are things we can do.  We could strictly regulate the sale and possession of all firearms through the Defense Department.  This is what our friends in Mexico do.  Virtually no one in Mexico is allowed to own a firearm of any sort.  This step would could reduce our gun-death rates to Mexican levels.  Furthermore, many deaths are linked to the drug trade.  We should forbid the use of or trade in drugs.

OK, sounding like the mayor on “The Simpsons.”  More realistically, we could end the War on Drugs and we could try to revise the National Firearms Owners Protection Act.  The former promotes a “war for the corners.”  It also promotes a macho “step to him” code of behavior that leads to violence not directly related to the drug trade.  The National Firearm Owners Protection Act restricts the ability of the Bureau of Alcohol, Tobacco, and Firearms to closely regulate federally-licensed gun-dealers.  While the vast majority of such dealers are responsible and honest people dealing in a Constitutionally-protected commodity, a tiny minority facilitate straw purchases and suffer “robbery.”  So, let’s knock-off the stuff about the “gun-show loop-hole” and not allowing father-to-son gun transfers without a background check.

 

We should RICO the Catholic Church.  Pennsylvania’s attorney general recently released a report on the sexual abuse of minors by members of the clergy.  Here’s the thing, the AG got the information for the report by gaining access to Church records and then interviewing a lot of parishoners who had been abused.  Well, this scandal has been running for a while now.  Long ago, the Church could have done what the AG later did without breaking a sweat.  If they wanted to know.  Apparently, they didn’t.  Why not?

I suspect that, at some point back in the day there, the American priesthood became a place for gay Irish men to go and hide.  Fine by me.  They were doing God’s work.  If they go sylphing-off to have sex with other gay men, I don’t care.  However, given the anti-gay stance of both the Church and larger society, it exposed them to a terrible vulnerability.  They could be black-mailed by pedophile colleagues.  Pedophiles appear to be a very small segment of any sexual orientation.[1]  But they may have been just as ruthless and predatory toward their fellow-priests as they were toward their child-victims.

So, treat the Church as a criminal conspiracy.

[1] You ever noticed how few girls from Catholic schools have come forward to say “Sr. Mary Elephant copped a feel on my then-almost-non-existent tit”?

My Weekly Reader 23 July 2018.

“Globalization” means the trade in goods and services, the flow of capital, and the movement of workers across national boundaries with little or no national constraints.  This is an old story in human history, but it accelerated dramatically after 1945[1] and it has moved at astonishing speed since 1990.[2]  Globalization has spawned disruptive costs that accompany its immense benefits.  Much attention has focused on some of the costs more than on the benefits.

The political reaction against globalization commands the headlines.[3]  Examples include President Trump’s “America First” policies of tariffs and limits on migration; the British vote to leave the European Union (“Brexit”); and Angela Merkel’s suddenly precarious leadership of Germany.  The most persuasive interpretations see this reaction as rising from two sources.  One is the unequal distribution of both the benefits and costs of globalization.  The other is the resulting discrediting of the elites as leaders in the eyes of everyone else as followers.

One can point to many flaws in democratic governance.  However, part of the current problem is that democracy actually works.  Donald Trump won the 2016 election; a narrow, but real, majority of British voters chose “Brexit”; Italian voters supported the current coalition of anti-immigrant, anti-EU parties that governs the country.  Many of the reforms seem intended to blunt the responsiveness of politicians to the popular will.  These include giving the president of the United States more authority to commit the country to treaties that could not pass the Senate; extending the time between elections to buffer politicians from the public moods; raising the pay of politicians so that a better class of person will go into politics; and instituting civic literacy tests for voters.

Trends that have nothing to do with globalization, but which will rock a globalized world economy get lost in the shuffle.[4]  For example, in Western countries, robots look like a mechanical version of China: low-cost, high-productivity workers.  In developing countries, however, they are just as great a challenge.  Hundreds of millions of people in China, India, and elsewhere have been pulled out of abject poverty by industrialization.  Their jobs, too, are at risk.  Developed countries will have no incentive to off-shore production and developing countries will have to compete with their own robots.

Then soon–but possibly not soon enough–a demographic shift will occur from low birth-low death to low birth-high death.  The United States already depends upon immigration for its population growth (and the financial stability of Social Security).  Japan and many European countries (Germany and Italy for example) are in much worse shape in terms of their young workers-elder retirees ratios.  China will soon enter the ranks of countries this imbalance.  How will different societies pay for their aged, non-working populations?

[1] After the Second World War, the United States led the construction of an open “Free World” economy through institutions like the World Bank (International Bank for Reconstruction and Development), the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT).

[2] The collapse of the Soviet Union discredited centrally-planned, non-market economies in the eyes of previous true believers.  Russia, the former “captive nations” of the Soviet Empire, and the Peoples Republic of China all adopted capitalist market economies.  Many other leftist economies in the developing world (notably India) did the same thing.

[3] Dambisa Moyo, Edge of Chaos (2018).

[4] Ian Bremmer, Us vs. Them: The Failure of Globalism (2018).

Annals of the Great Recession XVI, Legacies.

In theory, the American economy is doing well.  Unemployment is at the lowest level in this century; corporations are investing, and there are signs of increasing consumer spending.  Fine.  However, there are also reasons to be concerned.  One is the “flattening of the yield curve.”[1]

The United States government borrows money by selling bonds (Treasury notes).  Basically, bonds are IOUs + Interest.  These Treasury notes run for different periods of time and pay different rates of interest.  Long-term bonds run for like 10 years, while short-term bonds run for like 2 years.  The long-term bonds pay higher interest (called “yield”) than do short-term bonds to account for inflation.  When the economy is growing strongly, prices will tend to rise.  The gap between the yield for long-term bonds and the yield for short-term bonds is called the “yield curve.”

If people think the economy will grow, then they will put their money in stocks and the Treasury will have to pay higher interest on its long-term bonds.  If a lot of people want the security of long-term bonds, rather than the risk of stocks and don’t fear inflation, then the Treasury won’t have to pay as much interest.

Then there are the banks.  They borrow money at low short-term rates and lend it at higher long-term rates.  That’s how they make a profit.  If short-term rate approach long-term rates, it pinches their profits.  If short-term rates exceed long-term rates, they actually lose money.  So, they stop borrowing and lending.

Here’s the thing.  The gap between long-term and short-term bonds has been closing.  This is called “the yield curve flattening.”  A year ago the gap was 1 percent; three months ago it was 0.5 percent; in early July it fell below 0.3 percent.  Interest rates for long-term bonds has not been rising much, while the rates for short-term bonds has continued to rise.  This suggests that bond-traders do not expect a lot of inflation, which suggests that they have doubts about future economic growth.  At some point, the yield for short-term bonds could rise above the yield for long-term bonds.  When this happens, the yield curve is said to be “inverted.”  Economists interpret an inverted yield curve as “a powerful signal of recession.”  Inversions have come before every recession and one near-recession since 1955.  However, the time lag between an inversion and a recession can stretch from six months to two years.  So, we aren’t there yet.

The huge number of bonds that central banks acquired to push down long-term rates during the period of “quantitative easing” are continuing to weigh on the long-term rates.  Now the Federal Reserve Bank is raising short-term rates to prevent excessive price rises in a strong economy.  There is mounting concern that policies being pursued by the Federal Reserve Bank could harm the economy by pinching off lending or by pushing banks to pursue riskier strategies.[2]    On the other hand, there is evidence that, in the wake of the “Great Recession,” the yield curve has lost some of its predictive power.  Moreover, a strong American economy coupled with a slowing world economy could push foreigners to buy long-term bonds.  The issue at hand is whether the Fed should continue to raise short-term interest rates as planned.  The stakes are high.

[1] Matt Philips, “A Recession Signal Is Flashing Yellow,” NYT, 27 June 2018.

[2] Nick Timiraos, “Fed Debates Signal From Yield Curve,” WSJ, 9 July 2018.

GPA+.

Ten years ago, 32 percent of graduating seniors received some form of “Latin honors” from the University of Southern California.[1]  This year, 44 percent received “Latin honors.”  Way to go Southern Cal!  Recruiting all those extra smart kids!  I bet the Ivy League schools will be taking their meals standing up after that spanking.  Oh, wait.  Turns out Harvard granted “Latin Honors” to more than half its graduating seniors.[2]

Granting “Latin honors” isn’t based on the subjective direct judgement of individual merit by the faculty members.  It’s based on the more objective quantifiable judgement of Grade Point Average.  So, Southern Cal and all the many other schools granting “Latin honors” to a growing share of graduates is just an artifact of long-term grade inflation.  According on one expert, a 3.7 GPA (on a scale of 4.0) “is just a run-of-the-mill student.”[3]

It starts in the schools.  In 1998, 39 percent of high-school seniors graduated with an “A” average.  In 2016, 47 percent graduated with an “A” average.  Over the same span, the SAT Critical Reading scores fell from an average of 505 to an average of 494; the Math scores fell from an average of 512 to 508.[4]  Students expect to continue their high-school experience in college.  Elite schools claim that they haven’t studied the trend, and don’t know how to explain it.[5]  The situation probably differs at tuition-driven, not-selective schools.  Too many schools pursuing too few students has led the recruiting effort look like feeding time at the shark tank: “Throw in another goat.”  After the admissions office has done what it can, the faculty face a heavy emphasis by their employers on retaining the students who have been admitted.

Grade inflation is like monetary inflation.

It is fueled by a weak authority in charge of controlling the volume of the unit of exchange.   In the case of the schools this could be parental pressure applied through the influence of a school’s reputation on housing prices.  In the case of colleges and universities, it is the desire to attract student dollars.  A strong authority might tell students that they aren’t particularly distinguished, or well-prepared, or hard-working.

It distorts incentives.  Thus, if you can get the same or more money for less work, then you’ll do less work.  If you can’t trust the money to have real value, then you’ll pursue other stores of value.  One form of this could be a flight to non-public schools with a reputation for greater rigor, or to home-schooling.

It favors people, better positioned to exploit the nominal value of a unit of exchange/measure and disfavors people poorly positioned to do so.  Employers, for example, lack any reliable means to evaluate the educational attainment of potential employees.  High GPAs fog over individual differences in both ability and work ethic.

The historical record shows that breaking an inflation is very painful and politically difficult.  People are willing to try this only after conditions have become intolerable.  We aren’t there yet.

[1] That is “cum laude,” magna cum laude,” and “summa cum laude.”

[2] Down from 91 percent in 2001.

[3] Melissa Korn, “You Graduated Cum Laude?  So Did Everyone Else,” WSJ, 3 July 2018.

[4] See: https://blog.prepscholar.com/average-sat-scores-over-time

[5] See “Captain Henri” in “Casablanca.”