Sid Mittra, PhD, CFP®, is emeritus professor of finance in Michigan and the recipient of the Albert Nelson Marquis Lifetime Achievement Award 2017, for achieving career longevity and demonstrating unwavering excellence in his chosen fields.
A past member of the Certified Financial Planning (CFP) Board, Sid features in several prestigious listings, including International Authors’ Who’s Who, American Men of Science, and Who’s Who in Finance and Industry. He is also widely quoted in Money magazine, Kiplinger’s Personal Finance, Financial Advisor, and other magazines and newspapers.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
Have you ever noticed that stock market specialists routinely publish their evaluation of stock and bond market fluctuations on a daily basis? Most of these observations are lost in the noise surrounding them.
In this blog, I will present observations about five frequently discussed aspects of the financial markets. I hope you will find them of value when it comes to understanding the financial markets.
1: Long-term Record of the Stock Market
In periods of normalcy during which the economy advances at a slow, steady pace, investors tend to liquidate their positions in bonds and invest in the stock market. The reason is that over any ten-year period, and even during most five-year periods, the stock market has easily outperformed the bond market. This universal belief explains why, even during periods when the economy is growing at a very slow pace, the stock market flourishes and the bond market tanks. This appetite for higher returns pushes investors out of the safe-haven of bonds and into the higher-risk, higher-reward, of stocks.
2: True Values of Stocks
The true value of a stock is at the heart of selecting an attractive stock. Here’s how it works.
Assume you are interested in calculating the true value of ABC stock. The stock’s issuer projects that future annual net earnings will be $1.00 per share. The fair market value of any stock is the sum total of its future expected earnings. That seems easy enough, except that there is a catch. The value of $1.00 earned in the future is less than the value of $1.00 earned today. So, we need to calculate today’s value of the future earnings to determine a fair market value for the stock. This technique is called the present discounted value of future earnings. Also, since accurately predicting earnings beyond ten years is virtually impossible, generally only ten years of future earnings are included in these calculations.
Next, we must apply this theory to determine the fair market value of ABC’s stock. If the present discounted value of ABC’s $1.00 per share annual earnings over the next ten years is $8.00, and the current market price is $10.00, then the stock would be considered overvalued and not a good investment. Had the present discounted value of ABC’s future earnings been $13.00, then the stock would be considered an attractive, undervalued stock.
I’m sure you have recognized by now that applying this theory is beyond the capability of all but a selected few investors. Fortunately, another easily available alternative can be used to evaluate a stock. This alternative is popularly known as the price-earnings, or P/E, ratio. If ABC’s annual earnings are $1.00 per share and the current per share price is $10.00, then the current P/E ratio is 10 ($10.00/$1.00).
The final step in assessing the valuation of ABC stock involves the comparison of its long-term –10 year – P/E ratio with its current P/E ratio. If the long term ratio is 12 and the current P/E ratio is 10, then ABC is currently undervalued and can be considered an attractive investment. If the long-term P/E ratio is less than 10, then the stock would be considered overvalued.
Incidentally, there are caveats to both stock valuation alternatives. For instance, if Apple introduces a new product today, the contribution of the product’s sales to the company’s future earnings would most likely be excluded from any estimate of the company’s future earnings. This is because it might be impossible to accurately estimate the future success of the new product. Likewise, at the very beginning of the COVID-19 pandemic, it was impossible for investors to determine its impact on future corporate earnings.
Incidentally, thus far we have talked about only one stock. But investors usually care more about the valuation of the overall stock market than about the value of individual stocks. That’s why the current P/E ratio is routinely calculated for the 500 large companies included in the S&P 500 Index, which is a proxy for the entire stock market. At the beginning of 2021, the S&P 500 Index P/E ratio (the P/E ratios of all 500 stocks divided by 500) was 22.3, far higher than its long-term average of 16.6. As a general rule, when the stock market becomes overvalued, investors tend to shift their investment preference from stocks to bonds. The reverse is true if the stock market is undervalued. The current situation of a booming stock market with highly overvalued stocks is truly an exception. Such overvaluations have not been seen since the late 1990s and early 2000s.
3: Bond Yield vs. Bond Interest
Three important components of a bond never change: (1) the issuer of the bond (such as the U.S. Treasury or a private corporation), (2) the duration of the bond (e.g., 10 years), and (3) the bond interest rate (e.g., 3%). But there is a related component – the bond yield – that does change and can create a lot of confusion and often lead to bad investment decisions.
Assume that you are able to buy a previously issued $1,000 corporate bond paying 3% interest and maturing in 10 years for $950. Remember that all three of the above components of this bond will remain unchanged, and you will receive 3% interest for 10 years, as well as the bond’s face value of $1,000 at maturity. The end result is that you will receive annual interest of $30 for 10 years plus $1,000 upon the bond’s maturity, which represents a $50 profit on your $950 investment. As a result, your return, known as the bond yield, will be higher than the bond’s stated interest rate of 3%. Not a bad total return on your investment; but there’s more to the concept of bond yield and investing in bonds.
(1) Investors use bond yield to compare the attractiveness of different investment vehicles. For instance, if a perfectly safe 10-year bond’s yield (guaranteed interest and return of principal) is 3% and a bank’s rate on a 10-year fixed deposit account is only 2.5%, the bond is the preferred investment.
(2) If bond yields begin to rise, investors might prefer to rebalance their investment portfolios by reducing their investments in the risky stock market and increasing their investments in the virtually riskless bond market. For this reason, a rapidly rising bond yield is generally considered bearish for the stock market.
(3) Purchasing a bond at a certain price does not require you to hold it until maturity and receive its guaranteed face value. If interest rates fall, and the bond’s price goes up before maturity, you would have the opportunity to sell it at a profit, thereby increasing the total return on your investment. On the other hand, if interest rates rise, and the bond’s price goes down before maturity, you can hold on to the bond and receive its guaranteed face value of $1,000 at maturity.
(4) Many investors prefer to balance their portfolios by investing a portion of their money in bonds, even though they know that the return on their bond portfolio may be less than the return on their stock portfolio. For these investors, bond yields provide a known return on a portion of their balanced portfolio.
4: FED’s Impact on the Economy and Financial Markets
If there is one topic that is more complex than bond yields, it is the Federal Reserve Board’s interest rate, which is crucial to any discussion concerning the stock market.
The basic responsibility of the Fed is to maintain the value of the dollar at a desired level. To discharge this responsibility, the Fed uses a set of powerful tools, one of which is the authority to fix the interest rate at which member banks can borrow money overnight from the Fed and from other banks. That rate is called the Federal Funds Rate, which alone can have an impact on the entire economy. If this rate is raised, then the cost of borrowing money goes up, which in turn increases the interest rate on loans offered by banks to their borrowers. The opposite is the case when the Fed lowers the rate. Generally, the Fed raises the rate to slow down the economy when inflation begins to raise its ugly head. Conversely, the Fed lowers the rate in order to perk up a sluggish economy.
That being said, the Fed has no power to control the all-important longer-term yields on Treasury Bonds. Currently, for example, the Fed has set the Federal Funds Rate at near zero, whereas the 10-year U.S. Treasury Bond yield varies wildly from 0.5% to 3% or more. The result is that such an unpredictable relationship between the Federal Funds Rate and the long-term Treasury Bond yield makes investors seeking stability and predictability in bonds extremely nervous. This uneasiness, in turn, encourages investors to shift their money from bonds to stocks, thereby pushing stock prices higher and bond prices lower.
5: Ever-increasing Size of Big Government
The recent passage of the American Rescue Plan has brought to the forefront the never-ending debate over the extent to which the government should support the private sector. While there is general consensus that the government should step in to help all those adversely affected by the COVID-19 pandemic, there is much less agreement on whether it should also be involved in non-pandemic activities like increasing the minimum wage and financing student loan forgiveness and other programs, which would result in government expenditures far beyond the $1.9 trillion included in the American Rescue Plan. It is also predictable that expenditures of such magnitude will heavily impact our economy in general and the financial markets in particular. These are important issues that should be discussed in detail in a separate blog. For now suffice it to say that increasing government expenditure by the proposed $2-$4 trillion undoubtedly will have a huge unsettling impact on the stock market.
Bottom Line
In this blog I have presented observations about five frequently discussed aspects of the financial markets. There are undoubtedly others that deserve discussion. Space constraints compel us to postpone discussion of them to a future blog.
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.
Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
It is not news that the issue of increasing the hourly minimum wage from the current $7.25 to $15.00 has become a political football with no end in sight. Today’s blog critically examines this issue.
Birth of Minimum Wage
Adam Smith, in his classic The Wealth of Nations published in 1776, upended the mercantilist system by laying the foundation for the industrialized capitalist system. He claimed that the new system would create an invisible hand. Miraculously, this hand would help maximize economic growth by determining what goods and services would be produced, how much of each would be produced, and for whom these goods and services would be produced. Nowhere does Smith mention the issue of a minimum wage as part of the industrial capitalist system. In fact, during the rest of the 18th century, through all of the 19th century and a third of the 20th century, the issue of a minimum wage never surfaced in any economic discussions.
That changed, however, when the Great Depression of the 1930s devastated the U.S. economy. Unemployment soared to unprecedented levels, thereby creating the precondition for exploiting these desperate unemployed people. Toward the end of the Great Depression, President Roosevelt introduced the concept of a minimum wage to protect these people.
In 1938, the Fair Labor Standards Act established a federal minimum wage of $0.25 an hour ($4.54 in 2019 dollars.) Since July 24, 2009, the federal minimum wage has remained at $7.25 an hour. State and local laws can also establish minimum wage requirements, and employers generally have to pay workers the highest minimum wage prescribed by applicable federal, state or local laws. From 2018 to 2019, seven states increased their minimum wage levels through automatic adjustments, while increases in 16 other states and the District of Columbia occurred through referendum or legislative action. As of January 2020, there were 29 states and the District of Columbia with minimum wage rates higher than the federal minimum wage.
Pros and Cons of Establishing a Fair Minimum Wage
I will now present key arguments for and against the goals sought to be achieved by establishing a fair minimum wage.
1. Improvement in Standard of Living
A 2019 Congressional Budget Office (CBO) report projects that, if the minimum wage is increased to $15.00, by 2025 there will be a significant improvement in the standard of living of at least 17 million people, and an estimated 1.3 million people will be elevated above the poverty line.
In the event of such an increase, many businesses, especially small businesses, will be forced to close, lay off workers, or reduce hiring, thereby reducing employment and the overall standard of living of Americans.
2. Income Inequality
A $15.00 minimum wage will help narrow the income inequality gap between low- and middle-income workers.
Increases in the minimum wage have been shown to make it more difficult for less skilled workers with little or no work experience to find jobs or become upwardly mobile. The result is that an increase in the minimum wage is not in the best interest of these workers.
3. Federal vs. State and Local Minimum Wages
Studies show that raising only the federal minimum wage and leaving the state and local minimum wage laws unchanged does not make much difference in the overall outcome, since state and local governments are always free to establish their own minimum wage structures..
Increasing the federal minimum wage does not take into account regional cost-of-living variations. For example, an employee in New York City earning an hourly minimum wage of $15.00 will have much less purchasing power than an employee in Des Moines, Iowa, earning the same wage, assuming they both work the same number of hours.
4. Reduction of poverty
According to a 2014 CBO report, increasing the minimum wage to $10.10 would lift 900,000 people out of poverty. This trend toward lower poverty would continue if the minimum wage is increased to $15.00.
A number of reputable studies suggest that, although low-income workers experience wage increases when the minimum wage is increased, their work hours decline and their unemployment increases. The combined effect of these changes is a net decline in earned income and an actual increase in the number of people below the poverty line.
5. Reduction in Government Assistance
The Center for American Progress reported in 2014 that raising the federal minimum wage to $10.10 would reduce spending on the Supplemental Nutrition Assistance Program by $4.5 billion. Also, the Economic Policy Institute determined that by increasing the minimum wage to $10.10, more than 1.7 million Americans would no longer be dependent upon government assistance programs, thereby saving the federal government $7.6 billion annually.
According to a Gallup poll, 60% of small business owners warn that raising the minimum wage will hurt most small business owners by reducing their income and negating most of the benefits claimed by the proponents of an increased minimum wage.
6. Minimum Wage is not indexed for Inflation
Workers suffer because the minimum wage is not indexed for inflation. The federal minimum wage in 1968 was $1.60, which is equivalent to $11.16 in January 2016 dollars, which is 53.9% higher than today’s $7.25 federal minimum wage.
Two of the biggest impacts of inflation (especially for lower-income earners) are on gasoline and food, both of which are currently excluded from inflation statistics. It might become a nightmare for employers to be constantly changing wage levels to reflect the constantly changing economic conditions.
7. Labor Turnover
Many studies, including one published by Janet Yellen, former Chair of the Federal Reserve Board, claim the following: “As the minimum wage rises and work becomes more attractive, labor turnover rates and absenteeism tend to decline.” Likewise, another study found “striking evidence that . . . turnover rates for teens and restaurant workers fall substantially following a minimum wage increase,” declining by about 2% in the case of a 10% increase in the minimum wage.
If companies cannot afford to pay a higher minimum wage for less skilled service employees, they will use automation to avoid hiring people for those positions, thereby reducing overall employment.
8. Wage Increases
Studies arguing against a minimum wage laws do not adequately cover all key aspects of the national wage problem. For the sake of uniformity passage of a universal minimum wage law is essential.
Ellora Derenoncourt of the University of California, Berkeley, and Clemens NoelkeStudi and David Weil of Brandeis University published a study analyzing the operating performance of Amazon, Walmart and Target in low wage areas. The study found that wage increases by large corporate employers drive up wages with no material impact on the level of employment. Other studies with similar results prove that a minimum wage law is not required to level the playing field.
9. Impact of Absence of a Minimum Wage Law
Numerous studies claim that the labor market does not operate as well when the task of negotiating fair wage bargains is left to the workers. The reason is that employees do not always know their potential worth, or are afraid to change jobs because of the attendant risks and uncertainties surrounding such a move. Hence a national minimum wage law is sorely needed.
A minimum wage law is too difficult to successfully impose on all 50 states, partly because of the diversity of economic conditions that separates them. So it is best to leave the minimum wage issue to the free labor market.
10. Federal Deficit
Increasing the federal minimum wage would reduce government expenditures for a variety of assistance programs and simultaneously increase tax revenues from increased wages, thereby reducing the federal budget deficit. According to Sienna College Economics Professor Aaron Pacitti, the federal deficit would decline “by lowering spending on public assistance programs and increasing tax revenue. Since firms are allowed to pay poverty-level wages to 3.6 million people, which is 5% of the workforce, these workers must rely on Federal income support programs.”
According to James Sherk, former Research Fellow at The Heritage Foundation, a single mother working full time and earning the current federal minimum wage of $7.25 an hour would be over $260 a month worse off if the minimum wage is raised to $10.10. Sherk maintains that: “While the market income rises by $494, she loses $71 in earned income tax credit refunds, pays $37 more in payroll taxes and $45 more in state income taxes. She also loses $88 in food stamp benefits and $528 in child care subsidies.” A 2014 survey of the Chief Financial Officers of 400 U.S. companies by Duke University Professor of Finance Campbell Harvey found that 40% of these companies would reduce employee benefits if the minimum wage was increased to $10.00.
Do We Need a Minimum Wage Law?
Thus far, we have concentrated on the benefits and drawbacks of increasing the minimum wage from $7.25 to $15.00. We will now turn to a related but different issue: Do we even need a minimum wage law?
The federal minimum wage law was implemented in 1938 to fight the evils of the Great Depression. But today we are not facing anything like the Great Depression. In fact, by all accounts, our economy is doing fairly well. If that is the case, then should we even need to have minimum wage laws? Put another way, since at this time we do not have a real need for this law, why not benefit from letting the free market determine workers’ wages instead of letting the federal, state and local governments interfere with our free enterprise system?
My initial reaction to this question is to refer to a couple of authoritative studies that suggest that the benefits of letting free market forces determine all wages far outweigh the benefits of minimum wage laws. A survey by the Small Business Network found that 82% of small businesses agreed that “the government should not be setting wage rates.” Another study by Oklahoma State University Professor Per Bylund concluded that the federal minimum wage “disrupts the balance of the market and prohibits the creation of new jobs.” Bylund also feels that the free market should determine wages based on the value of work performed, so employers can hire the needed number of workers at wage levels that make sense for their businesses. Similarly, The American Enterprise Institute argues that government-mandated minimum wages “are always arbitrary and almost never based on any sound economic cost/benefit analysis . . . . In contrast market-determined wages reflect supply and demand conditions that are specific to local market conditions and vary widely by geographic region and by industry.” I have not found any equivalent scholarly studies or reports that rebut this argument.
That being said, it cannot be denied that minimum wage laws do protect the interests of scores of poverty level workers who are unable to bargain for fair wages. However, one should be careful in taking this state of affairs at face value because relevant statistics are grossly distorted.
A study published in The Washington Post on March 3, 2021, concluded that in recent years the number of people making less than $15.00 an hour has been dropping dramatically and represents about 39 million workers. But even this statistic is grossly distorted. In 2020, only a quarter of a million people earned the federal minimum wage of $7.25. Of those that did, a vast majority earned a lot more when tips, overtime and commissions were included as part of hourly earnings. Perhaps a more preferred alternative to controversial minimum wage laws is the organization of labor unions to protect the interests of poor workers. This idea is not as foreign as it sounds. In fact, only recently, President Biden expressed solidarity with Amazon workers in Alabama who are attempting to unionize one of the retail giant’s facilities. He also warned Amazon (without naming the company) that “there should be no intimidation, no coercion, no threats, no anti-union propaganda.” However, since that leads us to another highly complex issue, it is best we discuss this issue more thoroughly in a separate blog.
Bottom Line
In this blog I have uncritically provided arguments for and against raising the minimum wage to $15.00 an hour without revealing my personal preference. I have also raised the issue of replacing the minimum wage laws with a better alternative that should be addressed in a separate blog.
And with that, I rest my case. As always, I would like to know where you stand on this controversial issue.
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting blog titles. However, the author takes full responsibility for the contents of this blog.
Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
Part One
Nature of the Beast
Introduction
There is so much noise surrounding the current pandemic crisis that it is hard to know whose opinion is legitimate, and how much stimulus is justified. And that creates confusion the likes of which we have never seen.
A good place to start looking for answers is economic theory. Simply stated, recession raises its ugly head when a lack of consumer demand resulting from a shortage of spendable income falls far short of the current supply of goods and services. This problem, known as the output gap, is like calling for a major surgery to fix an ongoing health problem. Such a situation requires the launching of a powerful stimulus plan. Such a plan requires both the government and the private sector to finance it with borrowed money, resulting in a sizeable increase in both federal and private debt. Put differently, a significant rise in federal and private debt becomes the best policy prescription for closing the output gap.
Unfortunately, the current pandemic represents a different type of problem that can be compared to a major earthquake. To fight the current pandemic, what we need is a rescue plan that provides a variety of urgently needed assistance to people hurt by the “earthquake.” If you agree with this assessment, then I invite you to consider a plan of action in which the government, in collaboration with Congress and the Federal Reserve, creates a four-part rescue plan.
Four-part Rescue Plan
First, since the pandemic is at the heart of the problem, do everything humanly possible to permanently eradicate the coronavirus. This might require vaccinating everyone as soon as practical, thereby creating a national herd immunity, and convincing people to take all the safety measures necessary to address the problem, with the goal of safely getting back to normalcy in the shortest possible time.
Second, provide both financial and advisory assistance to small businesses like restaurants, physical fitness centers, beauty parlors, and other small businesses that depend heavily upon individual customers. In addition, create a task force to find ways of bringing back to life many of the small businesses that have gone under.
Third, extend the unemployment compensation benefits deadline to the fall, and perhaps, to the end of the year, so that people without jobs through no fault of their own are not unjustly disadvantaged.
Fourth, devise a creative strategy for directing the $1,400 stimulus checks toward the most deserving people, such as low income groups, families with small children, and people with special needs created by the pandemic. I realize that there may not currently be a method for identifying people with such diverse needs. However, an attempt should still be made to achieve the objectives stated above.
Common Concerns Addressed
The plans just presented to fight the pandemic are subject to the following three legitimate concerns.
Concern One. Infusion of trillions of dollars into the economy at any given time is bound to create inflation, defeating the very purpose for which this expenditure is undertaken.
Answer. In the past, this has been a legitimate concern of policymakers. However, for more than two decades, despite massive doses of funds being pumped into the economy, we have not witnessed any inflation whatsoever. In fact, the Federal Reserve continues to keep the interest rate near zero, and promises not to change this policy for the foreseeable future.
Concern Two. Such rapid increases in federal debt will burden future generations and are unsustainable and perhaps unconscionable.
Answer. I admit that this is a real concern. However, the time to address the bulging federal debt issue is not now, when the pandemic is devastating the economy like a massive earthquake. Instead, the government should attempt to reduce the debt burden during good times – such as we had for a decade before the pandemic – which we hope will return once the coronavirus is eradicated.
Concern Three. It’s a bad idea to add all sorts of extraneous issues like hiking the minimum wage and forgiving student loan debt to the stimulus package, which should deal only with pandemic-related problems.
Answer. Here again, there is some validity to this concern. However, it is equally powerful to argue that these issues have been neglected for so long that it is efficient to bundle them together. Perhaps this issue will be sorted out when the final stimulus plan is adopted.
Part Two
Financing the Plan
Now that we have hopefully made the convincing argument that this is not the time to worry about rapidly expanding federal debt, it’s time to lay the foundation for raising the massive amounts that would be needed to implement what I prefer to call the BBS Plan, which is named after Beg, Borrow or Steal, a 1937 American comedy film directed by Wilhelm Thiele. Outlined below is my Beg, Borrow or Steal strategy for addressing the government’s challenge in raising funds to fight the pandemic.
The First Strategy: Beg
The first strategy available to the government is to beg for money, or more appropriately, appeal for voluntary donations. This strategy has never been tried before; hence it requires an explanation.
Of the three strategies available to the government for raising funds, this constitutes the best choice, because money collected in this way will not need to be repaid. Even better, it does not have attached to it the stigma of raising taxes. Here are two examples of how this strategy could be implemented.
Example 1. The government creates a task force of billionaires by recruiting a fair number of philanthropists, like Bill Gates, Warren Buffett, MacKenzie Scott, George Soros, Mike Bloomberg and Tory Burch. In order to get them on board, the government must convince them of the vital role they can play in raising funds for fighting the current, once-in-a lifetime pandemic crisis and its incalculable negative impact on the economy. If they buy into that argument, and are willing to actively participate in this strategy, then by contacting their philanthropic peers, they could raise billions of dollars to contribute toward taming the pandemic and reviving the shrinking economy. Given that this task force would be made up of well-known philanthropists, the task might not be as challenging as it initially appears.
Example 2. During World War II, both Winston Churchill and Franklin Roosevelt rallied their citizens behind the single cause of winning the war. The government could use a similar strategy to rally support for its efforts to fight the pandemic war. If people are reluctant to participate in this effort, the government might consider providing some form of tax incentive to entice people to make voluntary donations.
These are only two examples that readily come to mind. I feel confident that there are other ways of making the strategy work more efficiently.
The Second Strategy: Borrow
In 1971 the U.S. government went off the gold standard and ceased to control its money supply by the supply of the nation’s gold reserve (see appendix below). This enabled the government to print dollars backed entirely by the full faith and trust in the government. Since then, the government’s debt has been increasing, first slowly and then rapidly, with significant increases recorded since the turn of the 21st century. Borrowing money to fund the government has the advantage of not having to raise taxes. However, before pursuing this strategy, it is important to review the nature and magnitude of our existing government debt.
History of Federal Debt. 1. We begin by reviewing the salient features of the report just released by the Congressional Budget Office (CBO), which includes its 10-year forecast for the U.S. economy. The report states that in fiscal 2020, federal spending reached $6.55 trillion – resulting in a $2.1 trillion deficit in a single year – primarily due to the devastation resulting from the COVID-19 pandemic and its resulting negative impact on the economy. Equally important, the deficit would have been far worse had it not been for the fact that government revenue fell merely 1.2% because the economy performed fairly well during the year. Overall, the budget deficit in 2020 came to a whopping $3.13 trillion, which amounted to an unprecedented 14.9% of GDP.
2. The CBO predicts that, in the next decade, federal spending will average 21.9% of GDP, and in the foreseeable future will be 26.3 % of GDP, excluding the funding necessary for several key projects currently being proposed by the Biden administration. While the key emphasis is on the $1.9 trillion stimulus package, the additional cost of other projects, like fixing our infrastructure, addressing climate change, implementing a $15 minimum wage, and converting to all-electric cars is a huge amount. In short, Bidenomics may well result in the government being unable to simultaneously finance all of these projects.
3. A related statistic of importance is the ratio of debt held by the American public (as opposed to foreigners) which exceeded 100% of GDP in 2020. This ratio will further increase to 102.3% in fiscal 2021, even without taking into account Biden administration initiatives currently under serious consideration. According to the CBO, debt held by the public has historically hovered around 40% of GDP. It reached 47.9% in 1993, and then declined until the 2008 recession. Since then, this ratio has grown exponentially to today’s level.
Scope of Federal Debt Strategy. From the overview of the federal debt picture just presented, two conflicting claims emerge. One claim is that government debt is out of control, and to avoid inflicting further pain on future generations, effort should be directed toward systematically reducing the debt ratio. The other claim is that the economy is currently devastated by the pandemic, and this is the time government borrowing needs to be used to put the economy back on the right track.
My take on this controversial issue is clear. I heartily endorse the idea of bringing down the federal debt to an acceptable level when the economy is performing nicely. However, I also believe that government deficit spending is appropriate for fighting recessions and similar devastating occurrences; hence, resorting to borrowing at this time to fight the pandemic is fully justified.
The Third Strategy: Steal
Some people view taxes as a way to “steal” money from people. While that is a stretch, taxes do represent the government’s way of funding its needs without having to obtain taxpayers’ permission. There are many forms of taxes today, the majority of which are imposed on people using various government-provided services. At this point, we will discuss only federal income taxes, corporate taxes, and taxes on investment income.
The starting point is the current tax structure. Although it is performing well, it is not designed to generate the trillions of additional tax dollars necessary to finance the projects proposed by the Biden administration. And given the concerns about increasing the federal debt, and the difficulties associated with appealing for money presented above, it is imperative to find a way to collect more tax dollars.
We therefore have little choice but to identify the taxpayers whose tax rates must be increased to make up the budget shortfall. That’s fine, but how do we select the taxpayers who should be asked to bear this burden? Examples include, but are not limited, to the following: i) top 1% of income earners; ii) top 10% of income earners; iii) taxpayers earning, say, $500,000 and up; iv) corporations; and v) taxpayers with investment income. Whatever taxpayer groups are selected for tax increases, there is still another important question: Is this a one-time tax hike or is it meant to be permanent?
My view of this matter is that there will be displeasure no matter which taxpayer groups are selected for tax hikes. Therefore, I suggest that the government adopt the following approach:
First, undertake an extensive publicity campaign to make the point that we are at war against a pandemic and it is important that everyone unite behind the government’s effort to win this war.
Second, assure affected taxpayers that this is going to be a one-time tax hike.
Third, explain that all taxpayer groups, other than the lowest income earners, will be targeted so nearly everyone will be paying higher taxes.
Fourth, remind taxpayers that everyone will stand to benefit when we win the war against this pandemic and experience the joy of a normal GDP growth.
Fifth, promise that the government will only finance those projects that are directly related to the pandemic, and that financing all other unrelated projects will be considered at a later date.
Bottom Line
By design, what I have presented here is incomplete at best and controversial at worst. Since Congress hasn’t had the time to debate any of the Biden administration’s proposed projects, it is anyone’s guess as to how things will pan out. In view of this temporary lull in the proceedings, I have taken a bold step to challenge our thinking on a matter that touches everyone.
I have clearly stated how I think this issue should be addressed. I would love to hear your thoughts, suggestions and criticisms. Won’t you please oblige?
APPENDIX
HOW GOLD STANDARD FUNCTIONS
For centuries, kings, dictators and untruthful politicians have controlled the nation’s money supply to satisfy their personal interests. In order to prevent that from happening, the gold standard was invented. Salient features of the traditional gold standard are presented below.
A country adopting the gold standard fixes the value of its currency to one ounce of gold. For instance, the U.S. can officially declare that the value of one ounce of gold is equivalent to $35.
All countries on the gold standard fix the value of their respective currencies to one ounce of gold.
All international trade (surplus and deficit) transactions are settled in gold. This implies that a country with net exports gains additional gold. That, in turn, authorizes it to increase its money supply, an action needed to finance the higher level of economic activity. The reverse happens when a country settles its net imports with gold. The reduced supply of gold requires the country to reduce its money supply, which is consistent with a currently prevailing lower level of economic activity.
In 1973, the gold standard was completely replaced by fiat money, a term to describe currency that is used because of a government’s order, or fiat, that the currency must be accepted as a means of payment. In the U.S., for instance, the dollar is fiat money, and for Nigeria, it is the naira.
The result of getting off the gold standard is predictable, if not worrisome. For instance, the ratio of federal debt to GDP, which revolved around 30%, has already crossed the ominous 100% mark, and is on its way to a whopping 120% in the near future.
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting blog titles. However, the author takes full responsibility for the contents of this blog.
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If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
In response to several requests for a blog dealing with investing in this “crazy” market in 2021, I set out to do the research needed to write the blog. During my initial review of the forecasting by professionals I discovered two conflicting forecasts:
Forecast One: In 2021 the stock market will advance 20 percent. Forecast Two: In 2021 the stock market will crash 20 percent.
The Past is the Best Guide for the Present
I was disappointed by these inconsistent forecasting, so I continued my research. During the course of this ongoing research, I remembered the blog I had posted on August 21, 2020. Political and economic conditions then were vastly different from what they are today. As a result, statistics used in that blog are no longer relevant. I was nevertheless blown away by the realization that the investment advice I gave then is the same as I would give today. Therefore, I am reproducing below the August 2020 blog (some portions of which have been deleted because of space constraints) as my investment advice for 2021.
“This market is nuts,” said Howard Silverblatt, Senior Index Analyst for S&P Dow Jones Indices.
What’s going on here? With the unemployment rate still above 10%, a relentless drumbeat of bad news, scores of small businesses going under, and the Administration’s inability to provide additional stimulus, on August 18th, the S&P 500 roared past its previous high reached only six months ago. If you are as confused by this nutty market as I am, then let’s solve this puzzle together.
Doomsayers are having a Field Day
Pessimists say the economy is in a recession, and this can easily turn into a depression. The gross domestic product (GDP), a measure of U.S. total economic output, dropped 5% in the first quarter of 2020 and a jaw-dropping 48.5% during the second quarter (or 32.9% annualized). Nearly 43 million Americans have filed for unemployment benefits since March 2020, shattering prior records. In April, the country’s unemployment rate jumped to 14.7%, the highest level since the Great Depression. The coronavirus has already killed 170,000 people and the number rises every hour. People are engaging in widespread civil protests supporting Black Lives Matter and addressing subjects like Police Brutality, Income Inequality, and Immigration Policies.
But that is not all. A second wave of the coronavirus is likely. That would compel states to implement stricter measures like major lockdowns and extended social distancing, dampening consumer spending. The $600 weekly enhancement to unemployment benefits ended on July 31 and no new stimulus package is in sight. This, too, can lower consumer spending. Finally, scores of small businesses have, or are in the process of, permanently going under, dealing a major blow to the future GDP growth.
Whew! I know you are exhausted and screaming: “Give me a break, will you?”
Okay, I will oblige. But remember, you asked for it.
The Optimists are Jubilant
Optimists do not deny any of the facts presented above. But their conclusions are vastly different, as we will now observe.
As a start, optimists have predicted that as soon as businesses were able to reopen, there would be a sharp snapback in the economy, making the current recession the shortest in history. Their conclusion is based on the fact that, far from being depressed, consumer demand is virtually bursting at the seams. It’s just unable to come out of the bottle into which it has been artificially forced during the pandemic.
John Milton said: “The mind is its own place, and in itself can make a Heav’n of Hell.” This is precisely what seems to be happening in this case.
To begin with, COVID-19, which slaughtered the economy during the spring and summer, seems to be softening, slowly but surely. Simultaneously, real-time economic data point to a slow but steady recovery. There is a strong expectation that a vaccine will be available early next year. Testing is rising again as new and faster ways of testing the masses are discovered and implemented. Some 1.8 million new jobs were added in July, and weekly state unemployment benefit claims fell below one million for the first time since March.
Fortunately, the news continues to get even better and the economy records progress on several fronts. Jefferies LLC’s proprietary U.S. economic activity index – that uses inputs including small business activity, restaurant bookings, traffic congestion and web traffic to state unemployment portals – has improved for three weeks straight. Jefferies’ Chief Financial Economist Aneta Markowska reports that the index now sits at a “fresh cycle high” and adds: “The reopening of schools and the assumed resolution of the fiscal standoff should create stronger momentum by mid/late September.”
Additional statistics confirm the state of the economic recovery. The third quarter GDP appears to be bouncing back and may reflect the strongest economic growth we’ve ever seen in one quarter. Some companies are confirming this good news. Deutsche Bank’s Binky Chadha recently wrote in a note to clients: “Freeport-McMoRan said ‘this recovery came sooner and stronger than we and others anticipated,’ while UPS ‘assumed demand would slow’ but instead saw ‘just the opposite.’”
The recovery is not limited to corporations. Michael Pearce of Capital Economics has said: “Overall, the retail sales figures are encouraging because they suggest the recovery has continued to grind on even in the face of the resurgence in virus cases.” Also, Yahoo Finance points out: “Broad measures of the economy, like the BLS’s monthly tally of non-farm payrolls, show job creation has been stronger than expected. And while Friday’s July retail sales reflected some deceleration, it still showed growth despite recent flare ups in COVID-19 infection rates.”
Finally, the Federal Reserve’s commitment to provide trillions of dollars of aid to various entities, while virtually keeping the interest rate near zero, will provide a much-needed economic and psychological boost to our fragile economic system.
What Explains Stock Market’s Weird Behavior?
Arguably, the stock market is not the economy. But still, it is assumed to broadly reflect where the economy will be anywhere from six months to a year from now. Applying this logic, it appears that the stock market is expecting that the U.S. economy will see a positive GDP during the second half of 2021. This is precisely the reason why we find the stock market’s meteoric rise so puzzling, while the economy is in a recession at the present time.
Let us look at the stock market another way. The stock market did reflect investor panic as soon as the coronavirus hit the country in February, and the S&P 500 registered a drop of 43% by March 23. But very quickly the stock market reverted to its usual performance, based on future expectations of the economy, and the result was amazing. On August 18 the S&P 500 closed at 3,289.78, easily surpassing its previous high. In fact, a recent period of 50 trading days represented the biggest rally in the history of this U.S. stock index, even amid economic carnage and widespread turmoil in the political arena.
Bottom Line
Our analysis shows the following: *The pessimists do have a few legitimate things to worry about. * Still, overall the day belongs to the optimists. * The stock market is buoyed by investor optimism about the future of the economy.
Bill Barkley, a shelf stocker at a grocery store who was living from paycheck to paycheck, was the beneficiary of his father’s life insurance policy, and received $300,000 when his father died. Bill, who had never before had money to invest, approached his neighbor, Rick Stanton, for guidance. Rick, who worked at a brokerage firm but is not a Certified Financial Planner, assured Bill that if he was given the $300,000 to invest, he could double Bill’s money in record time. Bill trusted Rick and let him invest the money.
As a novice investor, Bill was nervous and called Rick every day to find out how his investment was doing. Every time he called he received the same enthusiastic response from Rick: “The value of your investment is growing nicely, so just sit tight and enjoy the ride.”
Then, on the 100th day, Bill couldn’t take the suspense anymore. So he called Rick and demanded that his investment be sold and the proceeds sent to him right away. Rick’s response was comical, yet revealing:
“Sell to whom?”
This story should serve as a valuable lesson for anyone seeking professional advice on investing in this highly volatile stock market. In Latin, that lesson is: caveat emptor.
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting blog titles. However, the author takes full responsibility for the contents of this blog.
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If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
The Biden Administration wants to place America on a pedestal with four strong pillars:
Permanently defeat the pandemic.
Extend America’s helping hand to all those economically devastated by the pandemic through no fault of their own.
Regain America’s just place among the world’s nations.
Build a strong economic and physical structure for sustainable economic growth.
This platform, impressive though it might be, comes with a hefty price tag. I asked my comedian friend who he thinks will ultimately pay for supporting these money-guzzling pillars. His answer was right on the money: “YOU IS.”
Challenge of Finding Elusive Dollar
1. Government Borrowing. Let’sget serious. Where do we begin to look for the trillions of dollars needed to finance this ambitious platform? Surprisingly, the winner may not be taxes, but the government’s free printing press. Really?
In 1971, America replaced the traditional gold standard and tied the nation’s money supply to the U.S. dollar. That effectively created the government’s mysterious “free printing press.” The rest is history.
Even so, administrations stayed fairly constrained in their spending. In 1974, the ratio of government debt to GDP was a mere 24.6%, and even that was criticized as being too high at the time. Fast forward to the present. In 2020, that ratio reached a whopping 136%, and there seems to be no end in sight in 2021.
Let’s look at the issue of a high debt-to-GDP ratio. One argument is that a sizeable debt encourages hyperinflation and places an unacceptable burden on future generations. A countervailing argument is that we have not experienced hyperinflation in recent years, so the mere size of government debt is not an issue. In addition, it can be argued that if GDP continues to grow, that will ease the burden on future generations.
The jury is out on this issue. However, it appears that, notwithstanding concerns about too much borrowing, the Biden Administration is ready and willing to borrow vast amounts to revive the economy. In fact, as of this writing, a $1.9 trillion economic stimulus and relief package appears likely to become law. Whatever the ultimate amount of the package, the government is expected to finance the majority of it with borrowing.
2. Raising Taxes. Raising taxes on the “so-called rich” and corporations as an alternative means to finance the Administration’s platform is also subject to criticism. In the end, it might serve no one and could create a backlash that might destroy the goodwill associated with the economic stimulus and relief package.
3. Alternative Approach. As an alternative, I suggest the following approach to this highly emotional topic.
Cost of inaction
The Administration should lay out in understandable terms the true cost of inaction on pandemic relief. Recent data reveal that we have lost 10 million jobs due to the pandemic and that scores of small businesses have gone bankrupt. Unfortunately, herd immunity is still many months away. During this critical period, inaction by the government can only exacerbate the crisis we are currently facing. If this fact is effectively explained to the public, a great deal of the fierce opposition to launching a vigorous relief plan might melt away.
Scientific Approach
One way to convince a skeptical public of the wisdom of financing the proposed platform with higher taxes is to present arguments supporting those actions where science plays a role. This partly takes politics out of the picture and lays the foundation for convincing the public that bold, expensive actions approved by the scientific community are, in fact, necessary to address some of the country’s current issues.
Pay-As-You-Go Projects
Rebuilding the nation’s crumbling infrastructure falls into this category. Current estimates are that an additional $2-4 trillion will be needed over the next five years to address these needs. If a government funded project can be partially financed by the revenue it subsequently generates, then opposition to funding the project with higher taxes might be overcome.
Reduction of Waste
Finally, reducing government waste and misuse of funds involving billions of dollars could generate taxpayer goodwill and hopefully reduce objections to funding useful projects with tax dollars.
Bottom Line
Given the extensive negative impact the pandemic has had on the economy, bold action by the government is required. I suggest financing this action with a judicious combination of borrowing and a carefully orchestrated one-time tax on the “so called rich” and corporations. In this measured approach, we may find the best solution to funding the Biden Administration’s platform. In this blog I have suggested only a few ideas, but there may well be others.
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting blog titles. However, the author takes full responsibility for the contents of this blog.
Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
“Taxes are great equalizers.”
That’s how I began my university investment course every year. Invariably, my students evidenced their disdain for taxes with responses such as: “I hate paying taxes”; “Taxes are a necessary evil”; and “I am leaving for Bermuda, which is one of only four civilized countries that does not impose taxes on its citizens.” When asked to clarify my statement, I responded as follows: “American taxpayers, who pay federal income taxes on incomes of $10,000 to $50 million – and everything in between — are all united behind a single cliché: I Hate Paying Taxes.” That generated a whole lot of hysterical laughter.
It is extraordinary that the sentiments of most Americans relating to taxes appear to echo those expressed by my university students. That begs the question: Should we consider this a non-issue, or is there a rational description of the current tax situation?
How Taxes Evolved in the U.S.
First, let’s define our scope. When we talk about taxes, we usually refer to federal income taxes. There are, however, many other forms of taxes, such as: State Income Taxes, Sales Taxes, Consumption Taxes, VAT or Ad Valorem Taxes, Property Taxes, Capital Gains Taxes, Inheritance/Estate Taxes, and the Alternate Minimum Tax. Each tax is designed to make the tax system fair for all Americans. However, because of space constraints, in this blog we will concentrate only on the federal income tax.
In 1861, the need to finance the Civil War prompted the creation of the first American income tax. The system was repealed in 1861, but resurrected with the passage of the Revenue Act of 1913. The Act established a 1% tax on income above $3,000, which affected 3% of the population, and became the basis of our current tax system. Currently, the rich generally pay a higher percent of their incomes in taxes than other taxpayers. In 2019, the top 20% of households earned 54% of all income, and paid 69% of all federal income taxes, and the top 1% of households earned 16% of all income, and paid 25% of all federal income taxes.
Incidentally, the government also imposes an income tax on U.S. domiciled corporations at a rate of 21%, which was reduced from 35% by the 2017 Tax Cuts and Jobs Act. The corporate income tax raised $230.2 billion in fiscal year 2019, accounting for 6.6% of total federal revenue. Arguably, because of the 40% reduction in the corporate income tax rate in 2017, the current corporate rate is generally considered to be fair.
Now that we have identified the scope of our discussion, our task is to definitively answer this question: Should Americans accept the current tax structure as both fair and equitable? To this loaded question we now turn.
Fairness and Equitable Nature of Taxes
Since a clear definition of a fair tax system does not currently exist, I propose a five-dimensional approach to defining a fair and equitable tax system.
1. Taxes represent Payment for Services
Our tax system is based on a simple premise: While Americans have the freedom to make their own lifestyle decisions, they are either unable or unwilling to pay for many of the services the federal government provides, such as national defense, social security, Medicare, and other social programs. So, by default, the government provides these services at its own discretion and collects income taxes to cover the associated costs. Viewed in this light, the perception of taxes can change from being coercive to the legitimate cost of services we enjoy. If that happens, then over time the stigma attached to the term “taxes” is likely to disappear.
One major concern, however, still remains. In contrast to a system where Americans pay for only those goods and services they want, under our present system, the government provides us with additional goods and services it considers to be socially desirable. This system is subject to criticism because it results in the government paying for these additional goods and services by imposing taxes on our hard earned income. Here again, this ill feeling is short-sighted. Even in those cases where the government provides goods and services that do not directly benefit many of us, its actions do help create a healthy, vibrant, and affluent society in which all of us can thrive. When we recognize that it is we taxpayers who elect the legislators and administrations that impose these taxes, our argument that we have a fair and equitable tax system becomes even stronger.
2. Progressive Nature of Tax System
Fairness is deeply embedded in our progressive tax system, which ensures that all taxpayers pay the same rates on the same levels of taxable income. The overall effect is that people with higher incomes pay higher taxes. For example, taxpayers with annual incomes of $9,525 are subject to a 10% tax rate. The tax rate progressively increases, capping at 37% for taxpayers with annual incomes of $500,000 or higher.
It is apropos to add two caveats. First, someone earning an income of $500,000 does not pay a tax rate of 37% on that entire income. Rather, the 37% marginal tax rate applies only to the income in excess of $500,000. Second, our tax system offers a plethora of means by which we can legitimately lower our taxable income and, as a result our income taxes. While some of these means are designed to spur investment and economic growth, others are aimed at helping the needy. Current data show that for most taxpayers the effective tax rate (i.e., taxes as a percent of income) is much lower than the published tax rate. This, too, strengthens our argument that the government strives to make the tax system fair and equitable.
3. Checks and Balances
The Constitution provides that “all bills for raising revenue shall originate in the House of Representatives” and that “Congress shall have the power to lay and collect taxes.” Presidents can, and frequently do, recommend changes to current tax laws, but only Congress can make the changes. Under this system, all tax legislation bills are first passed by both houses of Congress and then submitted to the President for signature, at which point the legislation is enacted into law.
This legislative process guarantees that the President cannot arbitrarily raise or lower taxes merely to suit his or her political agenda, and that Congress cannot enact tax laws without the consent of the President. This system of checks and balances strives to make our tax system fair, and hopefully one that creates the maximum potential for economic growth and a healthy economy.
4. World beyond Normal
Occasionally we face a severe recession, a pandemic or a major war, during which time tax revenues fall woefully short of what is needed to combat the crisis. To address these temporary but serious revenue shortfalls, the government can borrow money by selling government securities. This ensures two critical outcomes. First, in times of crisis, the government is not compelled to increase tax rates to raise much-needed additional funds. Second, once the crisis is over and any adverse impact on the economy is eliminated, the borrowed money can be repaid, and the economy can hopefully improve and generate much needed tax revenue. This borrowing capability provides a means for keeping our normal tax structure in place, and presumably fair, even in the midst of a national crisis.
5. Uses, not Abuses
Each year our tax system generates trillions of dollars of tax revenues. In 2020, the federal income tax alone generated a whopping $3.71 trillion in tax revenue. All this is achieved even though some taxpayers cheat the system by fraudulently avoiding paying taxes they owe. Even though the Internal Revenue Service has examiners and inspectors who work hard to prevent and penalize such abuses, it is impossible to eliminate all tax frauds; but this effort does demonstrate the government’s intention to keep our tax system fair and equitable.
Bottom Line
Will Kenton defines tax fairness as follows: “Tax fairness is a concept that stipulates a tax regime should be fair to everyone under its authority. Ideas of what makes a tax regime fair can differ significantly, however, based on how much wealth or income a person or a group has and their philosophical orientation.” This definition virtually assures that not everyone will ever accept our tax system to be fair and equitable.
It might be helpful at this point to consider the related concept of fairness versus compromise. Universities teach their management students that, in most successfully negotiated contracts, each party recognizes the critical role of compromise in bringing the contract to fruition. Applying that concept to the issue of tax fairness, I suggest that if each party – affluent taxpayers and corporations on the one hand, and the rest of Americans on the other – views the compromise it makes in accepting the current tax structure as fair and equitable, and feels that it generates significant benefits, then I can say with confidence that the American tax system is indeed fair and equitable.
Interestingly, even before the ink on my conclusion is dry, it is likely that objections will be raised to part of it. Harold Evensky, an internationally recognized, long-time leader of the financial planning community, quips somewhat facetiously that, as his Dad told him: “Taxes are basically voluntary. If you decide not to generate any income you will not have to pay any taxes. In fact, the more tax you have to pay the better off you are financially likely to be.” Evensky then goes on to assert that our current tax structure is:
And so, there are two different answers to the question at hand. My answer is that our current tax structure is both fair and equitable. The other answer partly agrees with my conclusion, but asserts that the tax structure, although fair, is unequal.
With that we rest our case. By the way, where do you stand on this critical issue?
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting blog titles. However, the author takes full responsibility for the contents of this blog.
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If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
Date: January 20, 2021. Time: 10:43 a.m. CST. Occasion: Inauguration of Joe Biden.
I am sitting in front of two laptops: one on which I am watching this historic moment in Washington, D.C., and the other on which I am typing this blog.
By design, this blog will not go through the usual rigorous review process, and hence it may be subject to criticism. I still plan to publish it because it captures a historical moment.
Emotions of the Moment
A quick check reveals that today all the major news media—New York Times, Washington Post, Wall Street Journal included—have already published articles covering this occasion. My purpose is neither to duplicate them nor to present a summary of these articles. Rather, I wish to express my personal views on how President Biden should approach the monumental tasks ahead of him.
Importance of Various Tasks
In order to systematically approach this complex challenge, it is best to classify the tasks into a set of priorities:
Priority One: The Pandemic
Priority Two: The U.S. Economy
Priority Three: Climate Change, Racial Equality
Priority Four: Immigration, Foreign Policy Challenges, Other Pressing Problems
I will now briefly comment only on the broad aspects of these priorities. Clearly, this discussion will suffer from the limitations of a discussion such as this that ignores the important details. But I do so in order to post this blog in a timely fashion.
PRIORITY ONE: THE PANDEMIC
The problems associated with the pandemic are unequivocally related to our current economic problems. Hence, any plan that considers only the pandemic as the priority one problem might seem shortsighted. I counter that argument by saying that our pandemic-induced economic problems are short-term and hence are diminished by our long-term economic problems.
Here are solutions to our pandemic problems, based on numerous published and unpublished sources:
Produce vaccines in quantities exceeding the current demand. Several choices are now available to increase the vaccine supply.
Ramp up both the conventional and unconventional means of putting the vaccine in the arms of Americans.
Intensify research to develop a vaccine for the “new” strains of the virus now showing up across America.
Establish priorities for the administration of vaccines, based upon sound logic and fairness.
Make sure that pandemic news is accurate and honest so the public can be reasonably assured of when life will return to normal.
PRIORITY TWO: THE U.S. ECONOMY
Our economic problems today are of a nature vastly different from those we have faced during past recessions. A recession is typically associated with a lack of consumer demand and a shortage of liquidity. Hence, the solution takes the form of concerted efforts to accelerate consumer demand and pump massive doses of liquidity into the economy.
In our pandemic-affected economy, these traditional problems are non-existent. Currently, consumer demand is at a high level and the economy is flush with liquidity. Based on this observation, here is a sensible strategy for solving our economic problems:
Develop short-term solutions to address the pandemic-related economic problems. Once the pandemic problem is solved, or even the end of the pandemic is confidently predicted, small businesses will begin opening up to their full capacity, and consumer demand will accelerate to its full potential.
Provide funds for reopening hundreds of small businesses that were forced to close because of the pandemic.
Encourage research and development to support new businesses that have the best chance of succeeding in this new era.
Develop fairer tax plans that are acceptable to corporations and the wealthy.
Put the economy on a path to a robust and sustainable comeback.
PRIORITY THREE: CLIMATE CHANGE, RACIAL EQUALITY
These are mega problems that require national dialog in order to make substantive changes. Here are steps that should be taken as soon as convenient:
Start a bipartisan national dialog so there is more harmony and less divisiveness.
Address climate change first because of its urgency.
Divide the action plan as follows:
Identify and implement the changes that can be instituted by executive order.
Identify aspects of this problem that have large bipartisan support and pass the laws required to implement necessary changes.
Continue a dialog around the remaining issues.
Use the same approach to solve other problems like racial equality.
PRIORITY FOUR: IMMIGRATION, FOREIGN POLICY CHALLENGES, OTHER PRESSING PROBLEMS
Since this category includes the toughest problems we face, it is best to begin a dialog around problems like immigration that require immediate attention. Then, implement solutions through executive order and legislative action.
Address foreign policy challenges by engaging the services of foreign policy experts.
BOTTOM LINE
As I mentioned in the beginning, I am writing this blog while watching the inauguration of President Biden. By now he has already been sworn in and has left the podium. Now that everyone can breathe easier, daylong celebrations will begin in anticipation of the day when normalcy can be taken for granted.
That brings me to the end of the blog. It is just a snapshot of my current thinking and hopefully will set the stage for healthier and more productive discussions.
That being said, I end the blog with the classic quote by Paul Muni in The Good Earth:
Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting our titles. However, the author takes full responsibility for the contents of this blog.
Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
On Christmas Eve, two skiing buddies get snowbound at a resort near Aspen, Colorado. One skier, Cap, is a fierce defender of capitalism. The other skier, Soc, passionately supports government’s role in creating a just society. As a result, Cap and Soc are staunch political adversaries.
They sat quietly for a long time that night until finally the silence was broken.
Soc: Damn it, this silence is driving me crazy. Say something, anything.
Cap: Me too, but you know damn well that we have nothing in common to talk about.
Soc: I know, I know. But just for once, let’s try hard to find something we can both agree on.
Cap: Like what? I don’t get it.
Soc: Here’s one. Think of all the unfortunate people who, through no fault of their own, suffer from serious disabilities, such as blindness, crippled bodies, incurable cancer, autism and malnutrition. Our free enterprise system is not equipped to help these poor souls who can’t compete in a capitalistic society. Would you agree that the government should play a vital role in helping these poor souls?
Cap: When you put it that way, how can I not? Count me in.
Soc: See, we did find one thing we can both agree on. But let’s keep going. Now it is your turn.
Cap: In America, success is strangely defined by our living not only within, or even up to, our financial means, but deliberately beyond our means. Our entire economic system embraces this philosophy, as is evidenced by the availability of easy credit and special offers to lure gullible consumers into constantly buying merchandise and services they don’t even need. That may be good for the economy as a whole, but it can spell disaster for consumers with little or no savings when they retire, or even when the economy heads south during a recession.
We have seen this drama played out again and again, the latest example being during the recession of 2008-2009, when consumers endured widespread suffering. And yet, once we recovered from the recession and the economy recorded its longest expansion in history, the savings lesson was lost, as consumers quickly reverted to their old habits. So, here is my point. Since our buy-buy culture is deeply embedded in our psyche, about the only choice left for us to rein in this monster is for the government to step in and find ways to compel people to save.
Soc: That is an interesting observation, especially since it comes from you. It seems like you are referring to our Social Security system, which forces workers to contribute part of their earnings during their working years into a tax-deferred savings fund. This fund then provides spendable income for retired workers. That’s pretty clever, and I am all for it.
And now, for fairness, I will suggest another idea that tops even yours.
Before I share my idea, I do have to do a bit of explaining. Our country has a most advanced medical system that is the envy of the world. But since it is run largely by the private sector, these essential services are available only to those who can afford and are willing to pay for them. Therein lies the rub. What are people supposed to do when they can’t afford to pay for them?
This vexing problem has two counterparts. First, our collective conscience does not permit us to let our ill, untreated poor people die on the streets. As a result, our society has devised a crude system that compels health providers to treat these people at no cost, and make up the loss of income by overcharging paying patients and insurance companies. Granted, this is a grossly unfair system; but it is the current practice, and the government plays a significant role in perpetuating this seemingly unfair system.
Second, it is commonplace that the medical problems of people become more frequent as they get older, and are often more expensive to treat. And since the majority of retired Americans fail to save sufficient funds to pay for these expensive treatments, once again the government has little choice but to create a master plan that provides post-retirement medical coverage, similar to the Social Security system that provides post-retirement income.
Yes, you guessed right, I am talking about the much lauded Medicare and Medicaid plans that have become an integral part of our society. True, Medicare pays only 80% of medical costs, but the rest can be conveniently covered by buying private supplemental health insurance. Here again, by way of providing guaranteed medical services for all Americans, our government becomes an indispensable partner of the private sector. As you can tell, I wholeheartedly support this valued partnership. But how about you?
Cap: I don’t know what’s come over me, but I am finding it very hard to disagree with you. And now it is time for a big one from me. It is no secret that Americans value their freedom as if their lives depend on it. Maintaining our country’s freedom in this complex world is crucial, but it does come with a hefty price tag. Clearly, because of its very nature and its massive capital investment needs, the task of guarding the nation’s freedom cannot be delegated to the private sector. So, by default, our government steps in and shells out in excess of $750 billion a year to guarantee our freedom. I’m sure you will readily agree with that assessment.
Soc: You bet I do. But something is beginning to rattle me as we keep finding new grounds for cooperation between the private sector and the government. Where does the government get billions and billions of dollars to finance all these important programs and services we have been talking about? I’ve heard that the government has access to a printing press that it can use freely to print money to satisfy its financial needs. Is that really true or just a myth?
Cap: You’ve got to be kidding. Our government has no access to such a printing press, and in fact it must depend almost entirely on taxing people and borrowing money. I realize that everyone, rich and poor alike, hates to pay taxes. But if we can be taught to think that taxes are in fact payments for the programs and services we ask the government to provide to us, then I believe the negative reaction to paying taxes will be inexorably mitigated.
Soc: That’s pretty smart. Why didn’t I think of that myself?
But now I am going to change my stance and challenge you on a serious flaw embedded in our free enterprise system. I am referring to our response to the climate change problem that has gone to hell on a hand basket. The private sector can only think of the bottom line, much to the chagrin of our climate change experts who have been correctly predicting massive tornados, wild fires, other severe weather conditions, dirty water, air pollution, and countless health issues directly related to climate change. Many of these issues are preventable, or at least can be mitigated. But to achieve that, the private sector needs to take scores of expensive steps, all of which directly affect the bottom line. I doubt if the government can succeed in convincing the private sector to voluntarily take the steps necessary to achieve a national goal of controlling climate change.
Cap: Here we go again. Your confrontational attitude shuts off all fruitful dialog in this area. But since we have discovered so many common grounds to work on, I will give this one a try.
First, by criticizing the private sector about its venerable profit maximizing policy, you totally miss the point. Competition is the driving force behind the spectacular success of our economy. Any businesses that are sloppy and do not bring to market quality goods and services at the lowest possible prices are immediately taken over by companies that do perform that valuable role. That ensures that consumers get the best quality products at the lowest possible prices.
But it doesn’t end there. Successful businesses also generate income for their workers, pay dividends to their stockholders, and lay the foundation for improved products through innovation and research. None of this would be possible if these businesses did not remain at the cutting edge of providing quality goods and services for the American people.
It is in this context that climate change regulations should be viewed. Corporate executives do realize that they need to play a role in mitigating climatic disasters. But they are also mindful of the fact that undertaking these measures ad infinitum costs tons of money, affecting their profit margins. So, it remains a catch-22, and leads to a never-ending challenge. I think you can now see that corporate executives are not necessarily bad people; they just have the critical task of finding a fine balance between these two competing concerns.
If you do not accept my analysis, then there is no point in going on. But if you do, I have something useful to say. If corporate executives are totally oblivious to the climate change disasters that are continuously affecting our country, then that would be a very short sighted approach to the problem. So a better approach would be for the climate change experts to work closely with the government and the private sector to assure that all parties acknowledge the fact that neglecting the climate change problem in the short run will inevitably lead to disasters on several fronts, many of which may come back to haunt the entire country, ultimately adversely affecting the private sector. If this point is clearly and convincingly made, then perhaps the government will be able to convince the private sector to move to the same side of the table, laying the foundation for effective measures to control climate change that everyone can support.
Soc: Wow, that’s quite a switch. Honestly, I do not fully understand where you are coming from. But I sense that the ultimate solution lies not in government’s takeover of the problem, but rather in forging a mutual partnership in which the parties on both sides of the table come together.
That being said, I do have one serious gripe about the free enterprise system that I guarantee does not lend itself to the type of partnership we’ve been talking about. I am referring to the consistent exploitation of workers by employers purely in the name of maximizing profits. As you well know, for a long time the minimum wage in this country was a paltry $5.00 an hour. Then after many years of struggle, the minimum wage was grudgingly raised to $7.00 an hour, still far too low to meet the basic needs of workers. And now, there is widespread opposition to raising the minimum wage to $15.00 an hour. Shouldn’t the government use its power to control such despicable behavior on the part of the private sector?
Cap: You need a reference point to approach this thorny problem. Recently, billionaire Warren Buffett made the following powerful observation: We should “try to create a society that under normal conditions with more than $60,000 of GDP per capita, that anybody that worked 40 hours a week can have a decent life without a second job.” If everyone agrees with Buffett’s observation, then labor and the private sector working closely together can work effectively towards reaching that goal, and the government would not need to step in. This is not a direct answer to your question, but it is the best I can think of at the moment.
The phone rings. Front desk informs snow is ploughed and the skiers are free to leave now.
Cap: Thank God we can leave now and spend Christmas Day with our families. I still can’t believe that we took this opportunity to discover how much we can agree upon if we just communicate with each other without prejudice or malice.
As a parting shot, I can’t stand all the free loaders who shamefully extend their hands out for freebies. They exploit our remarkable social service system by lying, cheating and depriving deserving people of benefits and services they are entitled to. That’s why I hate any form of socialism that allows people to unscrupulously cheat our government and demand that the rich be taxed more to make the cheaters richer.
Soc: That is a very unfair criticism of the system that allows our government to build a partnership with the private sector to create a fair and equitable social order. Just like you, I too am sick of these so-called free loaders, and I feel that everything possible should be done to prevent them from taking advantage of the system. But to eliminate the government’s vital role in our society just to punish these people would be like throwing the baby out with the bath water. So why don’t we all work together to prevent these abuses from taking place and build a better America?
Cap: On that encouraging note, I wish you a Merry Christmas. But don’t let this tete-a-tete go to your head. I am still the same person as I was, and I will continue to summarily reject the form of socialism you deeply admire.
Soc: Merry Christmas, Cap. And just so you don’t indulge in wishful thinking, I too remain totally opposed to your brand of capitalism.
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.
Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
Sid Mittra Ph.D., Economics Emeritus Professor, OU, Michigan
WAITING FOR STOCK MARKET DIRECTION
This may seem premature, but this blog deals with my first attempt of the year to identify a reasonable strategy for investing in the stock market. I do so primarily in response to requests from many readers to address this important issue at this time.
Contradictions Galore
The following table clearly demonstrates that the stock market continues to defy logic and reasoning. Even the argument that the market is forward-lookingand ignores the past is not supported.
Backdrop for the Stock Market
Stock Market Contradictions
The COVID-19 pandemic rocked the U.S. economy in early 2020.
After March 23, 2020, the stock market defied COVID-19 and went on a meteoric rise that continued the rest of the year.
Democrat Joe Biden won the presidential election on November 3. Traditionally, business-friendly Republications have been good for the market, whereas Democrats, who are perceived as advocates of higher taxes, are generally associated with a lackluster stock market performance.
Notwithstanding Biden’s election victory, all three of the major U.S. stock market indexes ended 2020 at record highs.
Historically, the stock market has preferred a split Congress, such as has recently been the case, with Democrats controlling the House of Representatives and Republicans controlling the Senate. This is because such a split is viewed as creating checks and balances on an administration enacting laws that advance its agenda. With two Democrats winning the recent runoff elections in Georgia, Democrats will have control of the presidency and effective control of both houses of Congress.
Notwithstanding this development, the stock market remained bullish, with stocks continuing their upward move. In fact, the stock market rally that began after March 23, 2020, has continued into 2021. On Thursday, January 7, 2021, all three stock market indexes reached record highs.
Experts Have an Opinion
When it comes to 2021 and beyond, there are countless stock market predictions from so-called experts. As such, I have decided to rely on the forecasting of one highly respected forecaster.
Sean Darby, Head of Global Equity Strategy at Jeffries Group, Inc., a global investment banking firm, predicts that at the end of 2021 the S&P 500 will reach 4,200, the collective dream of all stock market investors. Darby bases his prediction on the following factors: “Easy monetary policy, a weak dollar, a rebound in the old economy accompanied by a synchronized global upswing is the perfect backdrop for the S&P 500 in 2021.” Of course, this is just the prediction of one person, and many unforeseen events can torpedo a forecasting model; hence caution is advised.
Democrats and the Stock Market: The Myth Exposed
People generally believe that that Democrats are bad for the stock market. This is because Democrats generally favor raising taxes, and are friendlier toward the common man than they are to corporations. By that logic, Republicans are assumed to be good for the stock market. Just out of curiosity I dug into the archives and discovered the some interesting facts.
Since 1901, the Dow Jones Industrial Average has been higher 65% of the time and gained an average of 17.77% during Congressional sessions when Democrats controlled both houses of Congress and the White House. Only twice since World War II have there been negative returns under these circumstances. This statistic convinces me that the perceived negative relationship between Democratic administrations and the stock market is a myth. See, also, the Appendix at the end of this blog.
Bottom Line
Given this historical perspective, where does that leave us? I suggest that until the impact of the installation of the Biden administration becomes clear, it is best for investors to defer decisive actions. When the appropriate time comes, which I hope will be in a few short weeks, I plan to post another blog discussing an investment strategy that would be unbiased and profitable. I can do no better than to conclude this blog with the following quote from a piece by Jeff Sommer in the New York Times on January 10, 2021.: “The bull market has withstood pandemic, recession, political crisis and a mob attack on Congress. But it’s not immortal.”
APPENDIX
Ryan Detrick, Chief Market Strategist at LPL Financial, recently published the following excellent table that reinforces my observations on the relationship between Democrat presidents and the stock market.
Should A Democrat Sweep Scare Markets? Probably Not
S&P 500 Index Returns When Democrats Controlled The White House and Congress
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, selected the title. However, the author takes full responsibility for the contents of this blog.
Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.
If you just landed in America from outer space and listened to the news media, you’d inexorably jump to the conclusion that all 350 million Americans are rotten people. That is absurd. I could share with you scores of personal experiences to demonstrate the true spirit among people who call themselves Americans. However, given the limited space in this blog, by using the acronym, PEOPLE, I will present only six diverse incidents I have experienced over the past six decades.
P
PERFORMANCE UNCHARACTERISTIC OF A BAGGAGE HANDLER
The date was September 5, 1957; the place was John F. Kennedy International Airport. That afternoon, arriving on a flight from London (I travelled from Mumbai, India, to London by ship), I was unaware of the challenges I would soon be facing. After clearing immigration and customs, I literally dragged my heavy bag behind me and exited the airport terminal. Once outside, I approached a baggage handler (BH) standing nearby, and the following conversation took place:
BH: I can take care of your baggage. Where to, sir?
I had no idea what “where to” meant. But I still responded.
Me: I want to go to the Greyhound Bus Station to catch a bus to Florida. But I can’t carry this heavy bag and I have no money to hire a taxi to get to the bus station.
Unfortunately, in my excitement I spoke so fast and with such a heavy Indian accent that BH understood not a single word. So the conversation continued.
BH: Do you speak English?
Me: I just told you in English where I wanted to go. But I will say it again. I then proceeded to repeat what I had said, this time speaking more slowly.
BH: Mister, my job is to carry your baggage to your transportation from the airport, and that’s all. I don’t go to the Greyhound Bus Station or anywhere else. And with that, BH walked away.
I stood there, motionless, not knowing what to do next. But to my surprise, BH suddenly returned.
BH: You are downright dumb to come to New York with no money and with a heavy bag you cannot even carry. I really feel sorry for you.
After scolding me, BH picked up my heavy baggage, placed it on his trolley cart and started walking toward a city bus waiting on the street curb. Once there, he convinced the bus driver to let me ride the bus without buying a ticket. He also placed my baggage in the baggage compartment located at the rear of the bus. After I had settled down, BH spoke in a caring voice: “Realizing that you are in my country without any money and no one else to help you, I feel really sorry for you. That’s why I’ve done all I could do to help. I wish you good luck my friend. I am sure you will need it, and lots of it.”
I arrived at the Greyhound Bus Station with my baggage, clutching my wallet with $8.00 still in it. What’s more, my good luck continued when the bus driver carried my heavy baggage into the bus station.
I just stood there, motionless, wondering how such an incident could have taken place – in a city like New York, no less.
This story had a strange ending as well. Before arriving in New York I had already purchased a Greyhound Bus ticket from New York to Gainesville, Florida, so I was okay there. But what I didn’t realize was that it would take two and a half days to get to my destination, and each day I had to buy three meals so I could barely survive.
Well, guess what! On my first bus stop I noted that the food on the menu had many strange sounding names, none of which I could relate to. But there was one menu item that caught my attention: McDonalds advertised a hamburger for $1.50. So that instantly became my choice of meals for the trip. Each day I bought two meals for $3.00 (one meal for the third half day) and managed to survive on $8.00. True, I remained ravenous during the entire trip but made it all up once I got to Gainesville.
E
EXTRAORDINARY DISPLAY OF CHARACTER BY A FRESHMAN
In 1958, toward the end of the winter semester at the University of Florida, the world couldn’t have looked rosier for me. I had aced all of my Ph.D. courses and was looking forward to a relaxed summer semester before plunging into the rat race typical of the upcoming fall semester. I had been awarded full a scholarship for the entire Ph.D. program, so my finances were no longer a concern.
Just then, an unexpected phone call from my Department Chairman, Dr. Clem Donovan, shattered my dream. After casually reminding me that my scholarship did not cover the summer semester, he politely enquired about what arrangements I had made to finance my summer expenses. As soon as I heard that, I felt like someone had just dropped a bomb on me. I was not aware that my scholarship did not cover the summer semester, nor that my student visa prohibited me from working off campus.
After I promised Dr. Donovan that I’d get back to him with an answer, I sprinted to the student employment office, where I was told that all the available campus jobs had already been filled. I was devastated.
When I called Dr. Donavan to inform him of my predicament, he expressed profound displeasure with my irresponsible behavior; but he also indicated that he felt sorry for me, and promised to see if there was anything he could do to help. I spent that night on pins and needles, blaming myself for my predicament, and praying that somehow a miracle would happen. God must have listened to my prayers.
The next day Dr. Donovan informed me that he had found an on-campus job for me. However, he also cautioned me that this job was so undesirable that no one else wanted it. “Beggars can’t be choosers” was my guarded response.
The job entailed working at the university’s Agricultural Experimentation Station where citrus fruits were grown for experimentation. I was delighted, because that didn’t sound too bad. Well, I shouldn’t have been so optimistic. I cringed when I learned that my job involved shooting squirrels with a shotgun to prevent them from damaging the citrus fruits.
A gun? Shooting? What was I getting into? I had never held a gun before, let alone shot anything with one. Besides, I was petrified of firearms. This development certainly gave me pause, but not for long. Since my survival was at stake, I had little choice but to accept the job. I rationalized my decision based on the assumption that if I merely pointed the gun at the squirrels, they would be scared away and all would be well.
Well, as it turned out, squirrels were far more intelligent than I gave them credit for. These creatures quickly figured out that I wasn’t going to shoot them after all, and they freely carried out their destructive activities to their hearts’ content. The result was predictable. I got fired.
After losing the job, I returned to my dormitory, literally collapsed on my bed, and started crying uncontrollably. The only way to survive now was for me to stand on the street corner with a beggars’ bowl. Yuck!
Right then, my fouled-mouthed roommate, Marshall Jackson, returned from his class, and found me crying. Instantly, he yelled: “That’s what I hate about these goddamn Indians. When they are pissed off about something they just cry and cry. Now what the hell is the matter with you?”
After I explained my predicament to Marshall, he yelled again: “Oh s—, is that it? I will deal with these squirrels like they have never been dealt with before. So, go back to your goddamn director and tell him you want your s—-y job back. Tell him you are now a straight shooter and will kill all the squirrels that show up. And warn your f—— director never to piss you off again by firing you.”
I was rehired, and for the rest of the summer semester, Marshall went over to the Station thrice a day, picked up the shotgun and, in a matter of a half hour, killed a whole bunch of squirrels. He then lined up the dead squirrels on the ground so the director would be convinced that I was doing my job.
The summer semester ended well. The director gave me a glowing job review based upon my satisfactory performance. I got paid for doing nothing and enjoyed daydreaming all summer; and the squirrels learned never to mess with me, or more appropriately, with my surrogate.
What sticks in my mind out about this story is the extraordinary caring attitude of my fouled-mouthed, 19-year-old roommate, Marshall Jackson. He was an immature youth away from home, but showed an unparalleled level of compassion, care and commitment to help someone for three long months by voluntarily sacrificing his entire summer vacation when he could have gone fishing or played golf to his heart’s content.
This story has an interesting ending. Years later, when I was a university professor in Michigan, during a Florida vacation I made it a point to visit Marshall, who lived on a farm, along with a whole bunch of cats, dogs and chickens. At one point, I asked him what motivated him to help me the way he did during the summer of 1958. His answer, quick, direct and true to himself, was simply this: “I can’t stand seeing these goddamn Indians crying all the time.”
O
OVERLY ENTHUSIASTIC AND CARING PUBLISHER
“Publish or perish,” was the mantra drilled into me when I started my university career. So, after joining Oakland University in 1966, I shared with Dr. Robbin Hough, my Department Chairman, the strategy for getting my Ph.D. dissertation published. I believed that, since it was a well-researched scholarly piece, I should have no difficulty getting it accepted for publication.
Dr. Hough disagreed. He pointed out that new faculty members typically have a difficult time getting their first manuscript published. In fact, he went so far as to suggest that a publisher might even summarily reject my manuscript without even reading it.
It took me some time to get over such a negative assessment of the chances of getting my manuscript published. Eventually, however, I decided to send my manuscript to a randomly selected publisher. Before mailing the manuscript, I pasted its first few pages together to test Dr. Hough’s assertion that the publisher might reject the manuscript without even reading it.
Dr. Hough was right on the money. The publisher did return the manuscript with a rejection note, with no indication that there had been any attempt to open the pasted pages. I immediately sent the publisher a nasty note explaining my pasted pages strategy and criticizing them for their highly unprofessional behavior.
Surprisingly, the publisher immediately sent me a reply including the following response to my criticism:
“With regard to your allegation that we did not even open the pasted pages before rejecting your manuscript, let me say that one does not have to eat the whole egg to find out it is rotten.”
That did it. The publisher’s downright insulting note strengthened my resolve beyond belief. I worked feverishly to improve my publication record and, within four years, I succeeded in having three full length books accepted for publication – two of which were published, and a third that was scheduled for publication.
Years later, in 1980, with an established publication record, I submitted to a noted publisher a 789-page manuscript. Although the manuscript was voluminous and contained numerous mathematical equations, complicated tables and fancy charts, the manuscript was quickly accepted for publication and the book was published in 1981, a publication timeline unheard of in the industry.
But the story did not end there. As soon as the book was published, the editor sent me an autographed copy of the book along with a personal letter. [Note: I left the letter behind when I left Michigan, so the following reflects my recollection of, and the spirit of, the letter.]
“Hello Sid, this is Bob Fisher (name changed to maintain confidentiality), your favorite textbook editor. Today I wish to share with you an amazing story. This is private, so keep it to yourself. You will recall that in 1967 you submitted a manuscript to a publishing company where a man named Bill worked as an Associate Editor. Bill works for me now and he instantly recognized your name and your work. He told me that, after reviewing your manuscript, he was impressed by the high quality of your work and felt that it more than met their publication standards. In fact, he was convinced that the manuscript also revealed your enthusiasm and talent for professional work.
“Now, here’s the surprise. Bill also felt that, although you had barely started your educational career, you were too naïve to believe that all you had to do was to submit your manuscripts and they would get routinely accepted for publication. That’s why he strongly felt that at that point in your career you needed to have your ego bruised a bit to bring out the best in you in the long run. On that basis, he took the enormous risk of sending you the rejection letter and the subsequent nasty note.
“And now that Bill sees your latest manuscript and the enormous success you’ve had in publishing your work, he feels vindicated.”
So, to summarize, this publication story is really all about Bob Fisher and Bill. Bill took enormous risks in sending me the nasty note solely to get the best out of me. And Bob Fisher followed up by instantly accepting my manuscript and publishing it in record time. To this day, I find it hard to believe that I was the beneficiary of this unbelievable story of compassion.
It is apropos to add two final notes. First, although Bill did not unglue the first few pages of my manuscript, I presume he did spend a lot of time reading the rest of the 400-page manuscript with great care and formulated his opinion about me and the quality of my manuscript. Second, in 1967 I resubmitted the manuscript to Asia Publishing House, a prestigious publishing company, and in record time it published the book entitled, A New Horizon in Central Banking.
A postscript: Bob Fisher, in an attempt to lighten the mood, attached to my copy of the newly published book the following picture, which made my day.
P
PRESIDENT CROSSES BOUNDARY TO HELP A PROFESSOR
By 1980, I had published a fair number of books and articles on economics and personal finance, and had earned the Certified Financial Planner (CFP) designation. As a result, I felt that by starting my own financial planning practice, I could gain valuable experience that would make me a more effective teacher. But there was a major stumbling block. The university had a rule that strictly prohibited its professors from having a personal business. I felt that although the university was unlikely to grant me an exemption from this rule, it was worth a try. After all, what did I have to lose?
On November 10, 1981, I presented my case to Dr. Joseph Champagne, President of Oakland University. I argued that, through publications, outside lectures and radio appearances, I had already established a respectable reputation in the financial planning industry, and had brought visibility to Oakland University. I pointed out that my objective in running an independent financial planning practice would be to generate income that would enable me to donate substantial sums of money for student scholarships, and establish at the university an Institute of Personal Finance open to the general public. Finally, I asserted that by having my own private practice, I would become a more seasoned university professor. I hoped for the best, but expected the worst.
Dr. Champagne, after listening to my presentation, said reflectively: “Nothing can be accomplished until I succeed in getting the Board of Trustees to go along with your proposal. At this point, all I can say is that it is a tough call because I will be asking the Board of Trustees to change the basic rules of conduct for university professors, at best a highly risky proposition. So, wish me luck.”
And guess what? It worked.
Dr. Champagne’s support of my proposal and encouragement of my efforts were a lot more than I had hoped for, and certainly more than I had any right to expect. In fact, Dr. Champagne subsequently contributed a valuable piece to my Practicing Financial Planning text, and for many years he served on the Board of Advisers of my financial planning practice. I am therefore convinced that, but for the enormous risks Dr. Champagne took to help me, I would not have achieved as much as I have in the financial planning industry.
L
LAUDABLE EFFORTS TO ASSIST A PROFESSIONAL IN NEED
I was naïve to believe that a CFP designation was all that was needed to establish a successful financial planning practice and deal with financial products. I soon discovered that to act as a bona fide financial advisor I also needed to pass the challenging Series 7 and 63 exams; and even that would not be sufficient. My financial planning activities had to be closely supervised by an established broker/dealer, which was news to me. Unfortunately, no reputable broker/dealer was likely interested in supervising a university professor. And so, once again, I hit a stone wall.
Then, one day after I concluded a financial planning seminar at the university, an attendee walked up to me and invited me to lunch. He said that while he enjoyed my seminar, he needed clarification on some issues to make sure that we were on the same page. That person was Tuck Brubaker, President and CEO of Mutual Service Corporation (MSC), the most prestigious broker/dealer in Michigan. During our lunch meeting, Brubaker made an unbelievable offer. He said that MSC would act as my broker/dealer if I joined the company as a part-time consultant while still remaining a tenured faculty member at Oakland University. At that point, all I could think was – WHAT A DEAL!
After working at MSC as a consultant for a while, it was time for me to set up my own independent practice. However, Brubaker felt that I still needed more business coaching to become effective. So, he made me an unusual offer. He volunteered to travel three time a week, after office hours, from his office at the Renaissance Center in downtown Detroit to my mid-town office in Troy. He would then spend hours teaching me everything I needed to know about the business. I presumed that on those days he would miss his dinner and literally work on two jobs before returning home after 11:00 p.m. He did all of this for someone he had only recently met. I would be remiss if I did not admit that it was largely as a result of Brubaker’s painstaking personal training that I subsequently became a noted financial advisor.
E
ENTHUSIASTIC ASSISTANCE OFFERED BY AMERICANS OF ALL CREEDS
After living in Michigan for six decades, in November 2018 I moved to Trillium Woods (TW), a Continuing Care Retirement Community in suburban Minneapolis. I quickly learned about three distinct features of this community. First, many of its residents have retired from distinguished careers as doctors, attorneys, business executives, entrepreneurs, etc. Second, it offers a wide variety of activities, including sightseeing tours, movies, educational and entertainment programs, and other indoor activities, so one can always find something interesting to do. Third, residents generally accepted it as an unwritten rule that discussions about politics, religion and racial issues are out of bounds for them.
Incidentally, I was also impressed by the friendliness and camaraderie of everyone in the community. That’s why I felt compelled to do my part by becoming a valuable resource for our residents. Unfortunately, I couldn’t find any activity that would help me achieve my objective.
Then one day, a long-time personal friend living half way across the globe shared with me the following Ralph Waldo Emerson quote: “Always do what you are afraid to do.”Elaborating further on his point, my friend suggested that, since I was afraid of getting into something too challenging at this point of my life, I should create a sophisticated website and start publishing blogs on a variety of critical subjects.
That day the idea of establishing a sophisticated website was born.
For me, creating a highly professional website appeared to be prohibitively expensive. But an old acquaintance, who is the CEO of a prestigious Southeast Asia publishing company, virtually took over the project and provided all the expert assistance I needed to develop a website that was beyond my fondest expectations.
Once the website was established, I turned my attention to blog writing. I quickly learned that to write effective blogs I urgently needed help in several major areas.
First, blog writing required different writing skills – such as a breezy style and easy readability – than I had acquired as a writer of technical books. When I tried to write my blogs in simple, colloquial language, I frequently distorted or oversimplified technical information, which reflected negatively on me. So I needed someone to check my blogs for technical accuracy. Second, I also needed someone who would perform the arduous task of professionally editing my blogs. Third, I had to look for an experienced publisher who would be willing to pick attractive titles for my blogs. I was informed that catchy titles play a major role in attracting blog readership. Fourth, my skills and objectives were unknown at TW, so I was grateful to learn that it was okay with TW management that I share my blogs with other residents on a regular basis, which I consider a unique opportunity. No permission, of course, was needed for me to share my blogs with non-residents of TW. Firth, I needed feedback from my readers to learn how well my blogs were being received.
Two qualified people offered to critique my blogs from a technical standpoint. Travis Smith, co-owner of a noted financial planning practice in Michigan, is extremely busy with his own practice and has little time to spare. And yet, disregarding this fact, and expecting nothing in return, he agreed to regularly critique my blogs for technical accuracy. Dr. David Doane, an Emeritus Professor, busy with his own heavy publication schedule, also agreed to offer valuable suggestions for improvement.
Charles Gauck, a fellow resident at TW, offered to edit each blog with a high level of proficiency and suggest ways of improving clarity and presentation. He made this commitment at a time when he was dealing with some health issues, and despite being involved in myriad other time-consuming activities.
Roger Wingelaar, a retired professional editor who was reluctant to get involved with professional work, realized that I had no other option and generously agreed to provide catchy titles for my blogs.
Finally, much to my surprise, the response to my blogs from readers living all over the world has been phenomenal. Speaking exclusively of TW residents, I receive continuous critical comments, compliments and suggestions from TW residents. That gives me the incentive to try harder to serve my readers with distinction.
Bottom Line
I have described only a few personal experiences in this blog. Space limitations prevent me from sharing additional stories describing how people with different orientations and backgrounds, and with no expectations for reward or recognition, have extended their helping hands over a period of six decades to help me become who I am today.
So it is fair to ask: Did this happen due purely to my dumb luck? Or was it the result of my dealing with Americans who by nature are generous, caring and helpful, and firmly believe in the time-tested adage: “No one stands quite as tall as when he or she stoops down to help someone.”
Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, selected the title. However, the author takes full responsibility for the contents of this blog.
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