The annual shareholders meeting of Berkshire Hathaway Inc. was held this weekend in Omaha. More than 40,000 people attended. Yesterday CEO Warren Buffett and vice chairman Charles Munger held a five and one-half hour question and answer session for the attendees.
Says Mr. Buffett as reported by the Omaha World Herald:
“We’ve got a big appetite for wind and solar projects.” BH Energy “borrows at taxable rates and Nebraska in terms of wind is not that much different than Iowa. We’re selling electricity in Iowa at lower rates than exist in Nebraska (with public power).”
Should BH keep working with Brazilian investors 3G Capital, known for slashing jobs at companies it invests in? Replied Buffett, “The gains in this world have come from gains in productivity. … This is why we live so well. … Government can put in place policies and programs that help workers left behind by economic shifts.”
“Trade, export and import, massive trade, should be and is enormously beneficial to the U.S. and the world.”
Medical costs are the “tapeworm of American economic growth. … Corporate taxes aren’t crippling but medical costs continue to rise. … The problem seems to transcend political party.”
Conclusion. Just these few remarks, among many others from the meeting, touch on several broad economic themes which I discuss on this blog. Private enterprise is a powerful and efficient method of generating wealth for humanity. Government should intervene to help those hurt by progress. Renewable energy is profitable and here to stay. Healthcare costs have a significant effect on business growth and need to be controlled. Neither political party has a monopoly on the truth.
In my last post I presented the argument that voters are often more reasonable than the populist leaders who are trying to appeal to them. They would rather hear something more optimistic than rage against a dangerous world. But there is a difference of opinion on how to reach these voters:
Leading Democratic presidential candidate Hillary Clinton endorses the Buffett Rule which calls for millionaires to pay a minimum tax of 30% on their income. Says Clinton, “I want to go even further because Warren is right. I want to be the president for the struggling, for the striving and the successful.”
All of the Republican presidential candidates, including Donald Trump, have tax reform plans which will grow the economy but none of which are revenue neutral. In other words, they will all add to annual deficits and therefore make our debt problem much worse than it already is.
The nonpartisan Tax Foundation has issued a new report, “Options for Broadening the U.S. Tax Base,” which proposes capping itemized deductions at $25,000 per individual combined with
i) cutting the corporate tax rate to 27%
ii) cutting the top three ordinary income brackets by 5%, and
iii) implementing a top capital gains tax rate of 20%.
Such a plan would be revenue neutral and would lead to a long term GDP gain of 2.7%, a long term wage gain of 2.2% and a ten year dynamic revenue gain of $759 billion.
The Clinton plan would bring in up to $50 billion per year in new tax revenue but would do little to boost the economy. The Republican presidential tax plans are fiscally irresponsible. The Tax Foundation plan would boost the economy and reduce deficits rather than increase them. Other specific reforms would boost the economy even more.
In other words there are clear cut ways to create more jobs and raise wages. This is a message which should appeal to the angry and disaffected voters who are attracted to Donald Trump.
An article in the Friday, August 14 edition of the Omaha World Herald, “Why are the BRT stations so expensive? Officials explain the $260,000 price tag,“ describes a new $30 million bus rapid transit plan for Dodge Street with 27 individual sleek, modern bus stop shelters along the route at a cost of $260,000 each. Half of the new $30 million plan will be paid for by the city of Omaha and half by the Federal Transit Authority which has an annual budget of $8.6 billion. The issue is not whether Omaha should spend $15 million in local funds to achieve a $30 million bus system upgrade. We can expect city officials to make a responsible decision on this matter. The real issue is why the FTA should have annual budget of $8.6 billion to begin with when it is paying for, and therefore encouraging, extravagantly designed bus transit systems all over the country. The U.S. deficit for the 2015-2016 budget year, ending on September 30, is predicted to be about $450 billion dollars. This adds to the approximately $13 trillion public debt (on which we pay interest) which, at 74% of GDP, is the highest it has been since the end of WWII (see the above chart from the Congressional Budget Office).
It is the responsibility of Congress and the President to figure out how to get the budget under better control. All aspects of federal spending can and should be tightened up, including entitlements (Social Security, Medicare and Medicaid) and discretionary spending (everything else).
The Federal Transit Administration is wasting money on unnecessarily extravagant bus transit systems. Such fiscal irresponsibility means that its budget should be cut significantly. Many other similar examples exist in the federal government. We need people in Congress who can identify these fiscal boondoggles and effectively agitate for needed cutbacks.
The unemployment rate in Nebraska is now down to 2.9% and even in Omaha, a relatively large metropolitan area of 850,000, it is only 3.2%. As reported by the Omaha World Herald today, such a low unemployment rate creates big problems for employers at all levels. For example:
In fast foods, beginning salaries are up to $10 or more per hour, well above Nebraska’s new minimum wage of $8 per hour, and raises for responsible employees are frequent. Manager’s salaries are increasing rapidly. Benefits are being expanded into such areas as tuition reimbursement.
For the predominantly minority residential area of North Omaha, with a traditional unemployment rate of up to 20%, local manufacturers are beginning to provide transportation vans to pick up and drop off workers.
The Omaha Chamber of Commerce is running an ad campaign in Seattle to appeal to soon-to-be-laid-off Microsoft workers, because there are lots of vacant tech positions in Omaha.
Both the Greater Omaha Chamber of Commerce and the Lincoln Chamber of Commerce have endorsed LB 586 in the Nebraska Legislature to ban discrimination in the workplace based on sexual orientation and gender identity. The purpose, as expressed by both chambers of commerce, is to create a more attractive work environment in order to attract more workers from other states. The neighboring states of Iowa and Colorado have passed such laws.
What more can be done? The welcoming labor market should provide a bigger incentive for both high school and college students to finish their studies and graduate. Jobs will be waiting for them! The labor shortage should also help create more interest in immigration reform. This would insure that Nebraska has an adequate number of legal guest workers to meet the needs of the agricultural and meatpacking industries.
Several months ago the Omaha World Herald reported that Nebraska has approximately 45,000 illegal immigrants, or about 2.5% of the state’s population. Nebraska’s unemployment rate has now dropped to 3.4%, the third lowest in the nation behind only North Dakota and South Dakota. Such a low unemployment rate represents a labor shortage. There simply aren’t enough Nebraskans to perform all of the physically demanding, low skill work needed in the agriculture, meatpacking and construction industries. It is this labor shortage which is attracting such a large number of illegal immigrants to Nebraska. According to the New York Times, the Tea Party has recently changed its focus from “curtailing the reach of the federal government, cutting the deficit and countering the Wall Street wing of the Republican Party to becoming largely an anti-immigration overhaul movement.” This is a very unfortunate development.
Why would it be so difficult to solve our illegal immigration problem in the following manner:
Give all businesses a limited period of time, perhaps six months, to present a list of current employees who are illegal. Everyone on this list without a criminal record would receive a guest worker visa.
Going forward, businesses would be authorized to hire additional foreign workers as needed with guest worker visas issued in their home country. This would eliminate the need for illegal entry into the U.S.
As of a certain date in the near future, all businesses would be required to periodically demonstrate the legal status of all workers on their payroll.
Guest workers would be eligible to apply for citizenship after a lengthy period of time, perhaps ten years.
Once an adequate guest worker visa program has been set up and is operating efficiently, security on our southern border with Mexico would hardly be more of a problem than is security on our northern border with Canada. Illegal immigration should be considered as an economic problem, not a law-enforcement problem.
If it were handled correctly in this way, the problem would disappear in short order!
Today’s Omaha World Herald has an excellent article, “A Window on Immigration.” It points out that 2.46% of Nebraska residents as of the 2010 census were illegal immigrants. This works out to about 45,000 illegal immigrants in Nebraska today compared to just 3,000 as recently as 1980. This is really a shocking figure. It is roughly the same as the population of Nebraska’s fourth largest city (Grand Island) or Nebraska’s fifth largest county (Buffalo). Nebraska’s unemployment rate of 3.9% is really a labor shortage. It needs these 45,000 illegal immigrant workers! Why is it so difficult for our national leaders to solve this problem? It’s crazy to think that we are going to round up 11 million illegals throughout the country and dump them into Mexico unless they are willing to “self-deport.” Amnesty and citizenship are bogus side issues. Here is the outline of a simple plan which would solve the problem:
Give all businesses a limited time period, perhaps six months or a year, to present a list of their current employees who are illegal. Everyone on this list without a criminal record would receive a guest worker visa along with all necessary legal papers. These papers would belong to the individual worker who could use them to change employment from one business to another.
Going forward, businesses would be authorized to hire additional foreign workers as needed who would automatically qualify for guest worker visas. Such visas would be granted in the country of origin thereby avoiding the need for illegal entry into the U.S.
As of a certain date in the near future, all businesses would be required to periodically demonstrate the legal status of all workers on their payroll. Penalties for non-compliance would be severe.
Guest workers would be eligible to apply for citizenship after a relatively lengthy period of time, perhaps five years or ten years.
Once an adequate guest worker visa program has been set up and is operating efficiently, allowing all businesses to hire as many foreign workers as they need, security on our southern border with Mexico would be no more of a problem than is security on our northern border with Canada.
In other words, illegal immigration is an economic problem, not a law enforcement problem. The way to solve this problem is to address it correctly!
A few days ago the Omaha World Herald ran a story, ”Manufacturers Want More Young People to Consider a Job on the Factory Floor”, pointing out that there are almost 100,000 manufacturing jobs in Nebraska paying an average salary of $55,000 per year, many of which are unfilled because of a lack of qualified applicants. Says Dwayne Probyn, Executive Director of the Nebraska Advanced Manufacturing Coalition, “Science, technology, engineering and math, that’s what we need.”
This is in fact a nationwide problem. A few weeks ago the New York Times had an article, “Stubborn Skills Gap In America’s Work Force” reporting on a recent study by the Organization for Economic Cooperation and Development assessing literacy, math skills and problem solving using information technology, for people aged 16 – 65, in the 22 advanced nations of the O.E.C.D.. Eduardo Porter reports that while the U.S. is about average in literacy skills, it lags way behind in both math and problem solving skills.
One question addressed by Mr. Porter is the much larger wage premium for highly skilled U.S. workers over unskilled workers, than in most other O.E.C.D. countries. Another question is “how can the U.S. remain such an innovative, comparatively agile economy if the supply of skilled workers is so poor?” The suggested answer is troubling. “The American economy rewards skill very well but the supply hasn’t responded.”
This situation is first of all an indictment of K-12 education in the U.S. which has a high school graduation rate of only 80% and also focuses too much on college preparation rather than career education. These two problems are likely interrelated and at least partially explain the skills gap.
Another factor is immigration. Right now the U.S. is still attracting more talented foreigners than other countries. But it is risky to our economy to depend on foreign talent which can stay home as well as choosing to go elsewhere. Immigration reform will help with this problem but improved K-12 education will help even more.
The Cato economist, Brink Lindsey, has just issued a new report, “Why Growth Is Getting Harder”. See also Robert Samuelson’s Op Ed in yesterday’s Omaha World Herald, “Economic growth potion slowing to anemic trickle”. Annual GDP growth has averaged over 3% since 1950. But for the past four years, since the end of the Great Recession in June 2009, it has averaged barely 2% annually and, as Mr. Lindsey notes, this low growth rate is widely predicted to continue.
Historically the rate of GDP growth is attributed to four factors:
greater labor force participation, mainly by women
better educated workers, as reflected in high school and college graduation rates
more invested capital per worker
technological and organizational innovation
For example, women’s labor force participation went from 30.9% in 1950 to 59.9% in 2000. Since then it has started to lag. The national high school graduation rate is stuck at about 70% and realistically can’t go much higher. Mr. Lindsey shows that both the national savings rate and domestic investment rate have been falling steadily since 1950. Productivity growth was high from 1950 – 1979, high again from 1996 – 2004 and has fallen off again since.
Mr. Lindsey concludes “In the quest for new sources of growth to support the American economy’s flagging dynamism, policy reform now looms as the most promising “low-hanging fruit” available.”
What policy changes and improvements will counteract these negative trends? Here are several more or less obvious suggestions: Immigration reform can bring our 11,000,000 illegals into the main stream economy. Education reform, especially including an early childhood emphasis, will improve the quality of education for low-income kids, and maybe even boost graduation rates. Tax reform, with lower tax rates (offset by closing loopholes) has much potential for boosting investment and risk taking, as well as for boosting innovation and entrepreneurship.
Faster economic growth is so beneficial for so many reasons, that we should insist that our national leaders make it a top priority. Ideological objections, such as providing “tax breaks for the rich” are not acceptable and must be constantly batted down!
Today’s Wall Street Journal has a column by Neil Shah, “Stagnant Wages Crimping Economic Growth”, pointing out that the average hourly pay for non-supervisory workers, adjusted for inflation, has declined to $8.77 last month from $8.86 in June 2009, when the recession ended. It has also been reported recently, e.g. in the New York Times, that U.S. medium household income, now at $52,100, has not nearly recovered from its prerecession peak of $55,500 and is even below its $54,500 level in June 2009, at the end of the recession.
Lower income for workers and households mean lower consumer spending. This is a major reason for our economy’s low annual growth rate of only 2% of GDP since the end of the recession. Of course, the high unemployment rate, currently 7.4%, as well as increasing global competition, contribute to downward pressure on wages. But there is another factor, directly under government control, which is a major contributor to stagnant and declining wages.
Washington Post columnist, Robert Samuelson, in a recent column reprinted in the Omaha World Herald, reported that, from 1999 to 2013, wages and salaries rose 50% (adjusted for inflation) while health insurance premiums increased 182%.
Most health insurance is provided and largely paid for by employers and is therefore an indirect form of compensation. The huge disparity between wage gains and health insurance premium increases in recent years means that wages are being held back by the rapidly increasing cost of health care. The U.S. spends 18% of GDP on healthcare, twice as much as any other country and this is clearly out of line.
The best single thing we can do to slow down healthcare inflation is to remove the tax exemption for employer provided healthcare (and offset it with lower overall tax rates). Employees would then pay taxes on their health insurance benefits as part of their pay. This would have the beneficial effect of making consumers far more conscious of the true cost of healthcare and therefore consumers a strong incentive to hold down these costs.
It is up to Congress to change this provision of the tax code. Let’s insist that they get this done!