The Old Remedies Won't Work

February 16, 2018



A debilitating nostalgia for the past permeates our economics today. There is a longing for simpler times and it occurs to me that it's being fueled by longer life expectancy. There are a lot more old timers out there pining for the days of American economic hegemony, and unfortunately, that isn't going to come back again, no matter what grievances, real or imagined, there are against trade policy. There are forces at work here that few people understand.


Ultimately, it was the mobility of capital that eroded the Soviet empire. It was mobility of labor that degraded the American one. And our responses to date won't rectify this. We're aiming at all the wrong targets.


So in our quest to regain past glories, we resort to every possible method of "juicing" the economy, as if madly injecting steroids in the form of excess capital will provide enough "growth" to automatically clear any slack in the labor markets. Except that's not going to work, and it doesn't begin to treat the causes of the distresses Americans have to deal with. Because even if you're employed, things are not all that rosy.


While I'm not in the "full employment" camp, (in reality, there can be no such thing) tightening labor markets aren't providing much in the way of wage growth. There are many reasons for this, worthy of a book on the subject, but one of them is the lack of anti-trust protections in this country. People have few options to compete for their services with other firms when there ARE no "other firms." This trend has been in place for years and will be practically impossible to undo. The economic term for this is "monopsony." No one is addressing this as a policy issue. They're paid not to.


But no matter what gains are made in wage growth, even if our wildest dreams were realized, it would take years to overcome the drag on people's incomes because the cost of health care and insurance has outpaced the rate of inflation for decades. Even if a 5% per annum improvement could be achieved, it would certainly be welcome, but we would still be left behind compared to where we were 20 years ago in terms of purchasing power and the ability to save. How can even the most robust wage growth overcome this:




Think the meager tax cuts the average American got will offset this? More was saved when the price of gasoline dipped below $2.50 a gallon. Small wonder why Americans have so little savings to their name. It's been drained from them by a rent-seeking medical monopoly.


There are solutions to this, but we can't be satisfied with merely "bending the cost curve." This country needs a meaningful roll back in the cost of health care delivery, and it won't be done so long as we allow massive mergers of hospitals, pharmacy chains, and a preposterously generous patent regimen for the pharmaceutical companies, many of whose products were created by taxpayer funded research, and then permitted to block any competitive products from reaching the market.


And here we are, with people cheering a handful of $1000 "bonuses." Yes, in today's context, they are "crumbs." That's about one month's health insurance premium for a family of four. One month.


And will lower corporate tax rates spur investment? Of course not. While no one with any knowledge of the subject was surprised by this, especially given recent record corporate profits with already low taxation, there is, historically, absolutely no evidence of after tax profits having any association with investment or Capital Expenditure. The whole theory is a sham. Companies respond to the needs of demand. Without that, there's no need to build out capacity.






By one account, for companies that saved $100 billion in tax cuts, $88 billion of it will be spent on share buybacks. Only 3% will go to bonuses. An analysis by Morgan Stanley says 43% of the cuts will go to buybacks while 13% will go to wages.



Hard to believe, but prior to 1992, stock buybacks were actually illegal in this country. They were considered a form of manipulation. And yet we were told corporate tax "reform" will usher in a new age of prosperity.

This is based on a rather odd economic theory that just circulating some more dollars out "there" will find it's way into more consumption, and spur the economy to new vistas of "growth." Unfortunately, when people are already on a treadmill, there isn't much of a surplus to spread around, and even so, the extra bit just might go to an upgraded cable TV package, not fueling a belching smokestack, which is how people visualize these effects. There is also a remarkable bit of cognitive dissonance about this. Juicing the economy with public spending is considered a "waste." Juicing it with private spending makes us more "prosperous." As if a dollar knew where it was going to, and acted accordingly.


There is a new obsession with GDP, as if goosing THIS metric up would make a difference in people's lives. Pick a number: 4% is the current rage, but even if it were 5% or 6%, it's not going to do a thing to ameliorate the burdens of health care expenses or tuition debt. All GDP does is measure output, but it can't tell you how that output is distributed, and just pumping out more product is not going to improve the quality of life. Especially since it takes a lot fewer people to produce a lot more stuff. Not only does GDP measure the output of "goods," it also measures the output of "bads," like expenditures after a devastating hurricane, or ramped up production of cruise missiles. It all goes into the pot. And that's the problem- it's not your pot, and the scourge of inequality will still be here.


In any case, the American people screamed for "change," not even knowing what hit them, and voted for policies that would continue to worsen their lot. But the rabble cheers the new highs in the Dow, even though they don't have a penny invested in the markets. They applaud "deregulation," even though it never cost them their job. They're cheering an uptick in GDP, while employment growth is slowing at the same time. The business community is thrilled with the "tone" of the administration, not even realizing or caring few will be better off for it.


Whatever remedies are being tried, they're as bogus as the one featured above. For years, that was once the #1 vitamin supplement sold in America. Unfortunately, as it turned out, it did more harm than good, hemochromatosis being a nasty result. One of the side effects being testicular failure. I hope we fare better once we regain our senses.







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FloMartin Securities, Inc.

Donald R. Davret, Investment Advisor Representative


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