This is a repost from Forbes.

Some economic laws are not political: markets won’t work if prices are distorted. A group of farsighted Republicans is making the case that carbon prices are artificially low, and a big carbon tax would set them right. No, it is not April Fools Day (it’s July, after all).

In 2017, the bipartisan Climate Leadership Council endorsed a carbon tax that would collect over $200 billion annually, with increasing rates and revenue over time. The group includes older Republican leaders who served Ronald Reagan in high-level positions: James Baker, as Secretary of the Treasury; George Shultz, as Secretary of State; and Martin Feldstein, as Chairman of the Council of Economic Advisers; as well as Janet Yellen and other Democrats. And last week active Republicans, led by Florida Congressman Carlos Curbelo, Republican co-chair of the bipartisan House Climate Solutions Caucus, outlined a significant carbon tax that hasn’t been costed out yet. The tax would likely generate billions in annual federal revenue.

A carbon tax adds a fee to carbon-based fuels such as coal, oil, and gas. Every economist predicts a carbon tax would reduce the use of fossil fuels by raising its price. The market price of carbon is lower than the full price of carbon because other people and future generations who do not enjoy the immediate benefit of using carbon fuel nonetheless pay the cost of released carbon dioxide (CO2) into the atmosphere. Paying the full price of carbon motivates consumers to switch to non-carbon fuels and, most importantly, to reduce energy use.

The chemistry is straightforward. The amount of CO2 released when fossil fuels are burned is proportional to the fuel’s carbon content, which means the carbon tax can be levied on the fuel when extracted or imported.

Bipartisan movement on carbon tax proposals has moved away from the divisive goals of raising revenue toward its core efficiency: to correct market failures. The bipartisan Climate Leadership Council’s proposal aims to be revenue neutral by rebating the tax revenue to households.

Curbelo's proposal may be revenue-positive when it is eventually scored by Congress’s Joint Tax Committee, but he may want the revenue used to replace the federal gasoline tax. The form of the carbon tax is irrelevant; raising the price will correct the market failure of underpriced carbon.

While long-term efficiency matters, so do short-term politics. Curbelo is under electoral pressure in his south Florida district in part because rising sea levels and the Trump Administration’s anti-climate change actions have caused his 2018 poll numbers to fall. Democrats are targeting Curbelo’s district as one of their “red to blue” opportunities.

But House Republicans are divided. The House Republican Party leadership opposed Curbelo on July 19 by voting on a non-binding resolution rejecting carbon taxes. Six Republicans, including conservatives like Curbelo’s Florida colleague Rep. Francis Rooney, bucked their leadership and voted against the resolution.

On the deep blue side of the aisle, progressive Democratic carbon tax proposals go for the gold and would raise revenues to pay for projects and job creation. The progressives aim to boost economic growth, job creation and training for workers who might lose their carbon-based jobs. But although Democratic proposals might use carbon tax revenue in different ways, the news here is not the differences between Republicans and Democrats but the startling similarities. Both the red and blue carbon tax proposals recognize that carbon is underpriced for the environmental and economic damage it causes.

A bedrock principle of economics is that prices should reflect total costs as closely as possible, and carbon pricing totally fails that basic standard. Whether it’s burning petroleum in transportation or coal for electricity, or carbon emissions from chemicals and cement industries, underpricing carbon hurts the economy in the long run.

Burning underpriced carbon steers investment away from market-priced alternative energy, absorbs tax revenue through large federal and state carbon subsidies (over $20 billion annually in the US), and creates long-term costs paid by the public. Experts associate burning carbon with problems such as rising sea levels and increasing wildfires that will require more taxes and private resources to fix and mitigate.

Republican and Democratic carbon tax proposals differ and there is not much chance the Trump administration will advance the carbon tax. But the bottom line is bipartisan recognition of the problem, and a broad spectrum of economists who encourage passing the tax to reduce the economic costs of human-caused climate change.

That Republican politicians are brave enough to start recognizing the true costs of carbon and propose serious solutions is the best political news of July 2018.

This is a repost from Forbes.

Economists are pinching themselves. When demand runs ahead of supply, prices are supposed to go up. Then how can the labor market be so tight and wage growth so flat? The 4% unemployment rate we have now is about as tight a labor market as you can get, but the “prices” of workers, their wages, are not rising as once predicted in a relationship called the Phillips curve.

Real wages have been practically flat during this expansion. Wages rose 2.7% from a year earlier in June, below the 2.8% increase economists had expected. Over the last 30 years, executive and professional pay for the top 1% more than doubled. The bottom 90% of workers only got a 15% raise.

The typical worker received less than one half of one percent annual increase in real wages since the 1970s. And, no, increasing health care costs aren’t the reason. Heath and pensions are substitutes. Total labor compensation including health insurance has not kept up with labor productivity.

After being stable for decades, the share of national income received by workers fell from about 65 percent in 1974 to about 57 percent in 2017. Labor share has been falling in the Euro Zone also, but the decline is worse in the U.S.

A few months ago, the New York Times posted six reasons and the Brookings Institution had 13 why wages weren’t increasing despite the drop in the unemployment rate. In the interests of simplification,  I have reduced these to two. One reason is about measurement; the second reason is about power.

The first possible reason wages are not increasing is superficial and bypasses the capital-labor conflict. The puzzling wage stagnation could be no puzzle at all. Labor market tightness could be mismeasured and many people who want jobs are not counted. The claim is weak, though. The unemployment rate has always underreported people looking for work and we have no reason to think the mismeasurement is any worse.

The second reason is more profound: labor lost, capital won. Proof: Productivity has been running ahead of wages, which put little pressure on prices but boosted profits. Consumers and shareholders won, workers lost. From 1973 to 2013, hourly compensation of a typical worker rose just 9 percent while productivity increased 74 percent.

So, why is capital stronger than labor? Four reasons.

First, labor’s bargaining power falls as unions weaken. Between 1979 and 2013, the share of private sector workers in a union fell from about 34 percent to 10 percent among men, and from 16 percent to 6 percent among women. A 60-year-old so-called “Right to Work” movement has won policies that weaken labor bargaining power in states across the nation. The movement lobbies states to ban voluntary union security clauses, which reduces union revenue, making it harder to organize and even function. This strategy also attacked public sector unions. Last month the Supreme Court, in Janus v AFSCME, voted 5 to 4 to hobble those unions as well.

Unions also help pass minimum wage laws. The real minimum wage of $7.25 today has lost real value since the 1968s when it would have been over $10.90 today.

Second, worker fear is on the rise, even with a very low unemployment rate. Former Fed chief Alan Greenspan keenly watched for labor power indicators – he knew about the fear factor. He believed surveys about work insecurity and fear of leaving jobs to get better ones was a good barometer of actual worker sentiment. In 1997, he reassured Congress that fear was on the rise so Fed policy would not create inflation because workers were too afraid to ask for a raise.

Quit rates are up since the recession – FT columnist Sarah O’Conner calls it “the take the job and shove it” rate – but quit rates were higher in 2002 after the tech bubble recession. 67% of Americans answer that this is a good time to find a quality job, which is the highest since first polled in 2002. But, people feel just as likely to lose their jobs now, when the unemployment rate is 4%, as they did in 1991 when the unemployment rate was over 7%.

Third, super firms are achieving more and more market power. Consumers may get lower prices, but employees get lower wages. The gap is widest in the information sector where FAANG – Facebook, Apple, Amazon, Netflix, and Google—dominate. Large firms simply have more control of markets than they did before: profits rise and prices fall. When consumers and shareholders win, workers lose. The Obama Council of Economic Advisors first pointed to the rise in monopsony labor markets, a situation where workers are tied to employers and have less choice about moving to another employer. Economist Kate Bahn explains how monopsony works to lower wages.

Fourth, new jobs in demand are low-wage jobs. Low-paying jobs will dominate job growth in the next decade.  Projections are for 1.2 million new openings for personal care aides and home health aides where the average annual wage is under $24,000. Demand for health care services means the new labor supply in demand is female and older. Not the groups with lots of bargaining power to begin with. Among the ten occupations with the most employment growth, only three will pay above average: software developers, registered nurses, and managers.

All job growth is gray: employment increased by 17 million from 2000 to 2017 and the number of workers over age 50 grew by 17 million. More older workers don’t automatically mean wages fall. But, older people are getting worse jobs as they stay and enter the market in the face of weak retirement income security.

Between 2005 and 2015, the growth in older workers' unstable and low-wage jobs outpaced growth in jobs offering decent pay or stable employment. By 2015, nearly 1 in 4 older workers were in bad jobs. Bad jobs include the alternative work arrangements of on-call, temp/contract, and gig jobs (excluding independent contractors) and low-wage traditional jobs (paying less than $15,000).

Bottom line: economics is not a science of ethics and justice, but we have opinions about economic growth and fairness and justice. The justice proposition is that “inputs,” including management and labor, should get their share in the production process for markets to work efficiently. Economists are pretty much convinced that worker productivity has delinked from worker pay and that government policies tilted in favor of capital over labor. How the pay and productivity gap, growing since the 1980s, might ignite outrage and political reform is an open question.

This is a repost from Forbes.

The S&P 500 closed today down 0.71%. Analysts blame the trade wars, which accelerated while President Trump was in China. I worry. Academic economists argue that protectionism contributed to the Great Depression.

President Trump says he raised tariffs to punish America’s trading partners (including China, Canada, Germany, and the United Kingdom) for “trade abuse.” He is doing what he promised.  In a notable speech at a metal recycling plant in June 2016, Trump pointed to “massive,” “unfair” tariffs and trade barriers creating America’s large and persistent trade deficit, which was $800 billion in goods in 2017 -- proof to him that other nations and the World Trade Organization (WTO) are taking advantage of the U.S.  Ironically, after World War II, we set up the trading system that led to the WTO to prevent mutually destructive tit-for-tat or “beggar thy neighbor” spirals.

The president claims tariffs help employers and workers hurt by trade. Is he right?  Trade deals did concentrate losses on certain workers, employers, and regions, while the gains of lower prices were dispersed. However, policy tools don’t include time machines. We can't go back.

Launching an escalating series of battles with other nations now will likely hurt more employers and workers than they help.

In January, Trump imposed a 25% tariff on imported steel – primarily affecting the European Union (EU) and China —and a 10% tariff on aluminum. The EU led the way on retaliation with tariffs against U.S. motorcycles, bourbon whiskey, and soybeans. Trump, in turn, is now threatening hundreds of billions in additional tariffs, on everything from tilapia to airplane components.

The retaliatory tariffs are clues to how well U.S. trading partners know America’s complicated political election map. These tariffs are aimed at the heart of the Republican party.

U.S. motorcycle company (and exporter) Harley-Davidson is headquartered in Wisconsin, home of House Speaker Paul Ryan, and Harley has announced it will shift some production to Europe.  Bourbon exporters are heavily concentrated in Kentucky, home state of Senate Majority Leader Mitch McConnell. And soybeans come from Midwestern states, including Iowa, home to the first Presidential nominating caucuses. The politics of trade shows there is no such thing as pure “free trade.” All trade is managed and negotiated to balance economic and political interests at home and abroad.

Harvard economist Dani Rodrik sees trade agreements as solutions to  a wickedly impossible “trilemma” -- the problem that nations cannot simultaneously fulfill the demands of national sovereignty, democracy, and hyper-globalization. Rodrik views Trump’s tariffs in particular as no solution, but as “knee-jerk protectionism.” Tariffs won’t help his working class voters because they impose real costs and benefits on different industries. Tariffs on imported steel and aluminum may help U.S. producers in say, Pittsburgh, against foreign competition, but they also will raise the prices of all industries that use those metals as inputs. Neighboring businesses in Detroit may raise prices and lower overall production, which will cost jobs.  Should we be protecting a steelworker’s job or a beer brewery worker's where aluminum cans are used, and are now more expensive due to tariffs?

This issue will get more heated as the November elections approach.  For the economy, we are not currently seeing trade barriers affect overall economic performance, although fear of a growing trade war has affected the stock market. An escalating tit-for-tat trade war, without clear strategic objectives, could grow into a problem that forces the economy into recession.

Trump is not listening to women much, but the voice of economist Joan Robinson in 1937 might be quoted back to him. Banning imports and increasing exports may increase the employment of workers in your country in the short term. But, before long, an increase in the exports of one country leads to a decline in exports of other countries. At the very best “it leaves the level of employment for the world as a whole unaffected” and probably reduces it.

Reducing employment worldwide, including the United States, could be Trump’s legacy.

June 2018 Unemployment Report for Workers Over 55

The Bureau of Labor Statistics (BLS) today reported a headline unemployment rate (U-3) for workers 55 and over of 3.1%  in June, up 0.3 percentage points from May. Despite low unemployment rates, the job market is not as good it looks because 1.1 million older workers are excluded from official unemployment statistics.

In their broader measure of unemployment (U-6), BLS also includes "discouraged workers." But BLS only counts as discouraged those who looked for a job in the last year. The one-year cutoff is arbitrary, because it excludes the 1.1 million people who reported last month they want a job, but have not looked in the last year. They have not looked for the same reasons the officially counted workers are classified as discouraged - likely because they know they won’t find a job.

These 1.1 million “long-term” discouraged workers are not high-income retirees who only want to work if an attractive opportunity comes along. Instead, 38% are poor, similar to the 43% poverty rate of those included in the official unemployment tally of U-6.July Jobs Report v3click These poverty rates are higher than the poverty rate (22%) of people who say they are retired and don’t want a job.*

Older workers unprepared for retirement already face the difficult choice of working longer or experiencing 

downward mobility in retirement. Discouraged older workers do not get this choice, but instead must retire involuntarily and likely face drastic cuts to their living standard. Expanding Social Security and creating Guaranteed Retirement Accounts (GRAs) – universal, individual accounts funded by employee contributions, an employer match, and a refundable tax credit – would provide retirement income to protect workers from the effects of involuntary retirement.

* Poverty is defined as incomes below $23,240 for individuals and $32,740 for couples living in the 48 continental states, or twice (200%) the official Federal Poverty Level.

 **Arrows next to "Older Workers at a Glance" statistics reflect the change from the previous month's data for the U-3 and U-7 unemployment rate and the last quarter's data for the median real weekly earnings and low-paying jobs.

This is a repost from Forbes.

The June report was a doozy. If labor markets remain tight and wages don’t increase, profits will soar. That would be good for stock prices and your retirement plans, right? Not so fast.

Being able to save for retirement depends more on wages than rates of return, and a backlash against workers being left behind could destabilize markets. The dynamics depend on how answer to this puzzling question:

How can the labor market be so tight and wage growth so flat?

Economists are telling each other we haven’t seen rates this low (near 4%) in our lifetimes and we worry. Wages aren’t moving like we predicted. A key economic indicator to forecast stock prices and interest rate policy used to be the unemployment rate and every first Friday when the numbers came out were tense.

The inverse relationship between wages and inflation and unemployment rates is called the Phillips curve. But, real wages have been practically flat during this expansion (see clean wage data from the Brookings Institution and Economic Policy Institution). Wages rose 2.7% from a year earlier in June, below the 2.8% increase economists had expected. The increase may make little difference because inflation is also picking up and could soon outpace wages, meaning many workers have no real increase in buying power.

Should we say a prayer for the Phillips curve? Former Fed Board member and Princeton economist, Alan Blinder considers publicly if the Phillips curve is dead.

Question: Why have wages adjusted for inflation been practically flat during this expansion?

One Answer: States rights.

American governance structure is peculiar in that it gives states power in many areas including labor regulations like union rules, minimum wages, and prevailing wage laws. This control, coupled with the huge inequalities in political influence that tilt policies toward corporate interests, have worked to weaken one of the only labor market institutions that can enforce the Phillips curve: unions.

A 60 year old so-called “Right to Work” movement has led to policies that weaken labor bargaining power in states across the nation, which lowers wages as documented by the Labor Department. As revealed in a recent academic NBER paper, the pathway between state labor policies and the effective weakening of unions is through the rise and fall of the Democratic party.

The Right to Work movement is sometimes referred to as the “right to work for less movement,” writes a Loyola University professor. Right to work states ban voluntary union security clauses. These states have weaker unions which, according to the Economic Policy Institute, leads to below average wage growth. Libertarian think tank The Heritage Foundation disputes the relationship between wages and right to work laws; but not the relationship between right to work laws and a weakened Democratic Party.

Republicans have been passing laws state by state that bar unions and management from bargaining an automatic union fee collection in the private sector. This was extended to the public sector last month by the Supreme Court case called the Janus v AFSCME. When unions lose power, the Democratic party weakens, as do efforts to achieve higher minimum wages, strong  prevailing wage laws, and mandated paid leave, which are all strongly associated with union lobbying efforts.

In the hey day of the Phillips curve, when it seemed to be holding, the unemployment rate and productivity trends were all you really needed to forecast profits, monetary policy and the direction of the real economy.

I am not sure why the Fed never took up measuring labor bargaining power. Former Fed chief, Alan Greenspan, keenly watched for labor power indicators, he told Congress in 1997 about the fear factor. Surveys of workers indicated people were afraid to leave their jobs because they didn’t expect to get better ones. The presence of job insecurity made the Fed chief confident stagnant wages would continue despite rising productivity and profits growth and inflation wouldn’t increase as the economy got better.

Here is a question I don’t know the answer to and I am open to hypotheses from readers:

How long can the political environment remain stable when workers’ wages continue to stagnant, the majority of the population can’t buy things and the sense of fairness erodes as labor productivity rises?

Did the Donald Trump victory in the four Rust Belt states give us a glimpse of the relationship between weak unions and populist politics?

A backlash would likely destabilize returns to retirement nest eggs.

Stay tuned as I explore tariffs, the economy and how those economic decisions could affect your retirement savings. Every investor, I found, is fascinated by the economy. You?

This is a repost from Forbes.

A reader contacted me this week having just finished How to Retire with Enough Money. He is proud of saving a nice nest egg, gleeful tax rates are low, but worried about the stock market. How should he spend down is money?

So, you’ve done everything right. You saved enough money for retirement – at age 65 that is about eight times the amount you want to live on annually. What can go wrong? Under our do-it-yourself retirement system, many Americans worry about the same things. Many worry about the small things – like how to spend down the money to avoid taxes – when the significant ways to maximize your income are ignored.

Also, you are likely wondering how to make your money last until you die. Money puzzles involving death are complicated and personal. Having your money managed by Vanguard will supply you with a financial advisor. They won’t be independent, but you will be in good funds with low costs.

Or, you can go to a truly independent advisor, but watch for the fees and the advisor’s incentives. I agree with Professor Zvi Bodie of Boston University, an advisor who is a fiduciary; a fiduciary is the only kind of advisor you should have. A fiduciary must disclose how the advisor is compensated along with any related conflicts of interest. You can find an advisor that upholds fiduciary standards at NAPFA, the National Association of Personal Financial Advisors.

Planning how to spend down your retirement funds is easy under our crazy system! All you have to do is know when you and your partner are going to die, what Congress will do with tax rates, and what will happen to the financial markets here and abroad. Sarcasm aside, these general rules of thumb about deaccumulation will help you:

  1. Tax rates are low, so withdraw tax-deferred 401(k)s first. But rebalance your entire portfolio of taxed and tax-deferred assets and don’t forget about your debts.
  2. Delay claiming Social Security. People want to have their money last. We are less likely to be depressed and anxious if we have guaranteed income for life, like from a traditional pension or defined benefit (DB) plan. Those of us without a DB plan still have Social Security and the present value of delaying claims is much higher than you think.
  3. Don’t worry about taxes. I know you are worried about taxes reducing the income coming out of your 401(k) or IRA. Did you know that 13 states do not tax retirement income? My big picture advice is that you can’t game the tax thing very well. You got a big break on taxes when you contributed to your retirement account and you built up assets free of tax. And, as you know, the tax rate was much higher when you were getting the tax break than it is now. Assets spent outside of your tax qualified accounts only are charged the now historically-low capital gains taxes.
  4. Use indexed funds to get a diverse overall portfolio. Instead of worrying about the “IRS monster,” worry about the next economic downturn. Diversify! You may have only stocks in your account. Instead, your account should be rebalanced to about 60 percent stocks, the other 40 in safer assets, and all should be in index funds.
  5. Do your best to smooth out your consumption over your life. The best website I can refer to you are the calculators on Dinkytown. Spend down assets in your 401(k) or taxed accounts so that you can delay claiming Social Security.
  6. Reconsider early retirement. My reader told me he was only 60 and his wife is 50. If you have normal health and longevity, you should plan to live to 90. If you are a young wife, maximize your survival benefits. Consider staying in the workforce longer. I worry about aging women. Older women’s risk of poverty skyrockets after age 80.

Here is the bottom line: ignore the taxes game and the gyrating stock market. Instead, focus on a diversified portfolio, avoiding high management fees, your long life and the very good deal you have in Social Security.

This is a repost from Forbes.

There are two kinds of dads: that in-control, flat-belly dad featured on Father’s Day ads and the American dads facing real economic anxiety. Your older dad may need that tie after all, even if he is over 60. If he is an average older man, he will try to stay in the labor market and will continue to look for work if he loses his job.

The stark truth is American men have inadequate retirement balances. The average married middle-class household in the middle 40% of the income bracket – an annual income of $79,00-$115,00 – has an average of $130,000 in their retirement accounts. This would yield about $700 per month for the rest of their life starting at age 65.

Even the average high-income married household with an older worker has just $250,000 in their retirement account. This is a fraction of what Dad needs to keep the house and living standards intact.

Did you know that men are not more likely to have pension plans than women? Over one-third of men and women approaching retirement have no retirement plan (401k) or Individual Retirement Account Plan at all. And high-income men aren’t exempt from low retirement account balances; it is shocking that among the highest earning men, 15% have no retirement savings at all.

Even if they want to, men are not likely to work much past 65 to make up for inadequate retirement savings. In fact, about 40% leave their jobs before they wanted to. Studies find that a large majority of these men say they retired. But, it wasn’t because they had enough money or because they wanted to stop work. They retired because they said work became too difficult or unpleasant. They felt pushed out because of a younger supervisor or a feeling that it was time.

Being pushed out might be on the rise for older workers. Prudential Insurance is helping employers see the importance of pushing people out for fear they will stay “past their time.” Every year an older worker stays on the job, the higher the risk that seniority salaries and health benefits cost more than the value added of the employee. They reckon that on average older workers hanging on because they can’t afford to retire could cost over $50,000.

When the next recession hits, I fear older men will be more likely to be pushed out of their jobs. That tie may be appreciated after all. Though women are almost as likely to work as men, men are more attached to their jobs. Older men feel the need to earn. The feeling of being the primary breadwinner is especially true of the third or so men with college and advanced degrees.

Most older men are married. Researchers at the Census Bureau and University of Houston found marriage has different effects on men and women. Married men work longer, married women are more likely to retire earlier.

Many people thought that less educated men retired earlier because they were less likely to be married. But another reason is that their jobs have become very hard to do. Men who retire early are more likely to be represented in manufacturing, construction, and transportation and warehousing. Older men have more physical job demands than women do. In 2014, the latest data we have, 35% of men between the ages of 55-64 have physically demanding jobs.

Dad's attachment to work is not just physically demanding. If he loses his job, he may also need a therapist. Men with little wealth men tend to become depressed if they lose their jobs after age 60. That said, older men are less likely to be depressed than women. They are less likely to die with morbidities and illness. It's unlikely he will die in his boots and not have a retirement may be lower than you think. 14% of men die without retiring.

I don’t want to be glum, just realistic. Love and connection to family makes a huge difference on elderly well-being! Really, money alone does not determine happiness.

So, be kind to Dad on Father’s Day. Listen carefully to his concerns about working at older ages.


Data from the New School