21 abril 2017

¿Habría sido mejor haber hecho lo que hizo Islandia?

Es un país muy pequeño, insignificante... Pasó calamidades cuando estalló la crisis de 2008 y se descubrió que había vivido muy por encima de sus posibilidades. Optaron por dejar quebrar los bancos y empezar de cero. Nosotros optamos por rescatar a los bancos y darles todo el apoyo financiero que necesitaban. Fueron dos fórmulas muy distintas. Con la nuestra, ya sabemos cómo estamos y todavía no sabemos cómo acabaremos... La de Islandia es esta historia:
Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.
Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.
While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.
Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.
Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week's edition of the WOW: Iceland

The developed world is going to hell and probably deserves it. Today, I'm going to show you what should have been done both during and post the GFC. That it wasn't, and now almost certainly won't, is a problem for us all but that's a story for another day.
Today, we look to Iceland and marvel at what they managed to accomplish both leading into the GFC and then coming out of it, and then we scratch our heads at the latest news just out from their central bank.
On with it then...
It was over a decade ago now when I very nearly took a flight to Reykjavik but at the last minute opted instead to go to Copenhagen, which I regret since I'm told it's like Scotland on steroids (sounds like a blast). What clinched the decision in the end was that a scotch was about 3 times the price in Reykjavik, and since I was heading out for a wild boys week this was important in our considerations, though I'm told that in the land of fire and ice the women are indeed unbelievable.
Its history is that of an arctic backwater reliant on fishing fishing, energy, aluminium smelting, and tourism. A place with hardy living conditions and hardier people.
Between the late 90's and 2008 they, however, went through what can only be described as a stratospheric rise from this backwater specialising in fishing to one which specialised in global finance.
Using the Irish financial model as a blueprint, Iceland decided to revamp its economy repositioning itself in the international community as a low-tax jurisdiction for foreign finance and investment.
Iceland’s big three banks - Glitnir, Landsbanki, and Kaupthing - grew exponentially as deposit rates in the teens meant investors could borrow in foreign currencies such as sterling, euro, and dollars and earn a significant spread on the yield differential investing in various bond issues from the Icelandic banks.
The influx of capital had the effect of pushing the Icelandic krona into the stratosphere, rising 900% between 1994 and 2008. So not only did investors make a massive spread on the yield differential but the capital appreciation on their investment alone was huge. A lot of people made a lot of money.
As so often happens when money is easy, banks went on a debt fuelled buying spree acquiring international assets and commencing outlandish developments such as the Harpa concert hall funded by Landsbanki and touted at the time as Europe's largest glass building.
Harpa Concert Hall, Iceland
Things got so crazy that by the time the collapse came, triggered by the Lehman bankruptcy, Iceland's banking system held assets worth 10 times that of the entire country's GDP.
And THAT fact is, I believe, why today Iceland is faring relatively well.
Let me explain...

Too Big to Bail Out

The fact of the matter is that the banks were actually just far too big to bail out. Even if the Icelandic government had wanted to, they simply couldn't bail them out... and so they didn't. The CBI couldn't possibly be the lender of last resort for a banking system ten times the country's GDP and spread over many countries.
There was a lot of angst at the time and depositors lost their money. In an amusing side story Alistair Darling, then chancellor of the exchequer in the UK, used anti-terrorism powers to freeze Landsbanki’s UK assets.
I mention this just in case you've ever mistakenly thought that governments would never do such a thing to the private assets of a private institution from another country. You know... in a developed world country where the rule of law is, ahem, "sacrosanct".
In any event, there are 3 key aspects to why Iceland is today doing relatively well today:
1. They let their largest banks fail, and with it the stock market went from "oh my God, are you kidding me" expensive to "dear mother of Mary" cheap.
2. They let their currency collapse. Within days of letting the banks collapse, the krona (graph below) collapsed and over 80 percent of the financial system blew away in the Icelandic wind and almost all businesses on the island went belly up.
The stock market shown in the graph above fell by over 95 percent and interest payments on loans exceeded 300%. Whoopee! Can you imagine locking in a yield on a debt instrument at 300%? Over 60 percent of bank assets were written off within a few months after the banks collapsed and interest rates hit 18 percent in order to curb inflation.
3. And then they imposed capital controls
Pretty much all the things that every government economist said "shouldn't" be done they did.
In between all of this they threw out the government in what was called the "pots and pans revolution".
Now, I suspect Paul Krugman will disagree here as what I'm going to suggest is both fact as well as common sense, a prerequisite if ever there was one for a conflict with Krugman's ideas.
This is not my opinion. This is fact. This happened. Sure, there was the typical government doing the typical stupid things like trying to bail out smaller banks and such but in principal the system cleared.
Fast forward today and Iceland has come out the other side and here is what it looks like.
Unemployment rates after just 12 to 18 months began falling and haven't looked back.
While Iceland let their banks fail they did take on loans from the IMF and others, which saw government debt explode higher (they took on about $10bn in debt - roughly the size of the country's GDP).
And while I can't say I agree with them doing so, the fact is that almost a decade later their debts are increasingly under control and falling relative to GDP. Why? Because the private sector was allowed to begin to grow again from a stable (un-indebted) base.
The economy has been growing steadily and is now the envy of their European cousins.
In large part Iceland let the system clear. They did so because they were forced to. I'm pretty sure that if they'd had the ability to bail out the largest banks and follow all the failed policies the rest of the developed world seems intent on doing, they would have. I'm just glad they didn't, and today, I suspect most Icelanders would agree.
It's not a perfect setup but it's starkly different to how Western governments have dealt with the crisis and the results are telling.

So Here is the Question...

Having a free floating currency and watching it collapse 80% acted as an immediate release valve for Iceland. I'm not sure their central bank understands this. It appears not since they subsequently imposed capital controls, which was like locking the barn door after Flicker had already made it off into the starry night.
The other reason they seem not have understood its significance is because of this...
According to this article, they are now looking at pegging their currency to the euro.
"Iceland is considering pegging its crown to a major currency, most likely the euro, its finance minister said on Saturday, amid concerns the small North Atlantic nation's economy risks overheating."
Pray tell, what jumping onto the deck of the Titanic hours before the band stops playing is meant to do for these fine folks?
What they're looking for is an anchor of stability. Given that Iceland has no people and imports most everything except fish and sheep, they're always going to have a currency that is susceptible to the gyrations of those commodities. Pegging currencies is plain stupid. All pegs eventually break.. They'd be better of pegging the krona to myrrh.
Abrazos,
PD1: ¡Cuántas veces algunos católicos se consideran mejores que los otros porque siguen este o aquel movimiento, porque observan esta o aquella disciplina, porque obedecen a este o a aquel uso litúrgico! Unos, porque son ricos; otros, porque estudiaron más. Unos, porque ocupan cargos importantes; otros, porque vienen de familias nobles... ¿Y la humildad cristiana, y la caridad que nos enseñó el Señor? No se es mejor que otros por tener más fe, por rezar más, por ser más generoso. Se es mejor que los otros por amar más, y aún así, no se es mejor que los otros nunca, nadie lo es, todos somos los Hijos predilectos de Dios y nos quiere a todos por igual… No seamos memos y pensemos que por que uno haga + cosas pías es mejor que los demás, please!!!
Todos los rezos diarios, nuestra forma de vivir la vida y comportarnos lo hacemos por alabanza, por darle gloria, por querer ser mejores, por gratitud con Él, no por fardar de que somos unos buenecitos, o mejores que otros.
La fe nos dice que hay una vida estupenda después de morirnos, y sólo tratamos, muchas veces conseguimos, estar ya en el cielo aquí en nuestra rutina diaria, en nuestro vivir cotidiano… El cielo se consigue mientras estás vivito y coleando, no hay que esperar a estar muerto.

20 abril 2017

el banco malo SAREB

Era otro timo de la estampita… Se aparcaron los activos malos, valorados Dios sabe en cuánto, los banqueros y políticos decidieron, y se prometió que se devolvería el dinero en unos años… Ahora dicen que han palmado ya el 30% de los activos, y del resto, veremos que les queda… Como en todo, tienen un rostro de cemento armado.

Sareb anuncia a sus accionistas que perderán el 30% de su inversión

El Frob será el principal perjudicado con cerca de 650 millones de euros de pérdidas y los bancos deberán hacer provisiones por el deterioro previsto.
Sareb, el banco malo en el que se integraron la mayor parte de los activos inmobiliarios tóxicos de los bancos intervenidos por el Estado a través del Frob, anunció a sus accionistas hace apenas una semana una modificación sustancial de su plan de negocio que implica el reconocimiento de que, al final de la vida de la entidad, 2027, aquellos habrán perdido el 30% de su inversión inicial, cerca de 1.440 millones de euros. Los accionistas van a tener que hacer provisiones por ese deterioro en este mismo ejercicio.
La creación de Sareb (entró en funcionamiento en 2013) se llevó a cabo una vez que el Estado recibió las ayudas europeas para el saneamiento del sistema financiero nacional. Antes no fue posible porque el Tesoro no tenía fondos suficientes para ponerlo en marcha.
En un intento de que la aportación del Estado no computara como déficit público, se instrumentó un procedimiento por el que el sector bancario privado, aseguradoras y alguna inmobiliaria aportarían la mayoría de los recursos propios necesarios, el 55%, y el Frob lo haría con el 45% restante. Esto se plasmó en que en total se aportaron 4.800 millones de euros, 1.200 millones en forma de capital y 3.600 millones como deuda subordinada convertible en capital que recibiría una remuneración relativamente elevada si la compañía obtenía beneficios.
El resto de los recursos necesarios para pagar los activos inmobiliarios adquiridos a los bancos en dificultades lo obtuvo Sareb emitiendo deuda a uno, dos y tres años, suscrita obligatoriamente por las entidades a las que se les adquirían lo activos y que se van renovando por periodos iguales a medida que vencen, disminuyendo su cuantía gracias a la generación de fondos de Sareb para ir amortizándolos.
Todos los bancos privados, salvo BBVA, acudieron a la llamada de las autoridades económicas e invirtieron en función de su tamaño. Santander puso 805 millones de euros; CaixaBank, 581; Sabadell, 321; Popular, 276, y Kutxabank, 122. El resto de entidades aportaron cantidades inferiores, pero no por ello menos representativas para su tamaño.
Inicialmente, el plan de negocio preveía la entrada en rentabilidad a los cinco años de funcionamiento y se afirmaba que la sociedad obtendría una rentabilidad anual del 14% a lo largo de los 15 años de existencia. El papel lo aguanta todo, aunque de forma inmediata se observó que se trataba de un plan de negocio absolutamente voluntarista.
Por eso, con el cambio de presidenta, Belén Romana, y su sustitución por Jaime Echegoyen, se modificó dicho plan de negocio a largo plazo para tratar de acercarlo a la realidad de unos activos problemáticos cuya salida ordenada es complicada y generadora de rentabilidad poco menos que imposible.

Supervisor de las cuentas

El Ministerio de Economía decidió que el supervisor de las cuentas de Sareb debía ser el Banco de España tanto porque los activos procedían de las entidades financieras como porque buena parte de los mismos no eran otra cosa que créditos en dificultades. El supervisor estableció unas normas contables muy estrictas en lo que se refiere a provisiones (aunque desde el banco se defendió que eran menos estrictas que las aplicadas a las entidades financieras), que obligaron a ir presentando pérdidas desde el primer ejercicio, lo que reducía en la misma proporción el nivel de capital suscrito por los accionistas. El ejercicio 2015 supuso, con la entrada en pleno funcionamiento de la circular contable de Sareb, que ésta tuvo que convertir casi 2.200 millones de euros de su deuda subordinada en capital porque las minusvalías de sus activos se habían comido todo el capital suscrito, las provisiones efectuadas en años anteriores y parte de esa conversión de deuda.
Todo indicaba que eso mismo volvería a pasar en los ejercicios siguientes, por lo que para mantener el equilibrio patrimonial habría que volver a convertir parte de la deuda en capital. No obstante, el Ministerio de Economía modificó la norma de manera que permitió que las minusvalías latentes como consecuencia de la valoración de los activos a precio de mercado, no vayan contra resultados sino contra patrimonio.
De esta forma se evita reconocer pérdidas hasta que éstas no se producen por la venta de los activos a precios inferiores a los que figuran en libros. El ajuste de esa manera es más lento aunque posiblemente igual de inexorable.
La evolución del mercado y la propia de Sareb ha provocado que, de nuevo, se elabore un plan de negocio ajustado a la realidad, que, según se comunicó a los accionistas la semana pasada, no solo abandona totalmente que los propietarios de Sareb vayan a obtener rentabilidad alguna por el riesgo que han corrido, sino que reconoce que la liquidación total supondrá unas pérdidas en torno al 30% de lo invertido entre capital y deuda. Es decir, que los inversores recuperarán como mucho 3.360 millones de euros y perderán 1.440 millones. El Frob será el que más pierda: cerca de 650 millones de euros.
Buena parte, si no una muy amplia mayoría de quienes invirtieron en Sareb, entendían que se trataba de un servicio al país y que la obtención de rentabilidad era muy difícil e incluso que habría pérdidas al final del proceso. Pérdidas que reconocerían cuando llegara el momento.
Pero la situación ha cambiado. Con el anuncio que les han hecho los responsables de Sareb de que no va a haber ganancias, aunque se espera que en los últimos ejercicios la sociedad registre beneficios, no van a tener más remedio que hacer provisiones por la pérdida anunciada. Ello significará un nuevo esfuerzo para los bancos, algunos de los cuales ya están muy exhaustos en materia de provisiones en este ejercicio.
Abrazos,
PD1: No podemos sobrevivir a un déficit estructural del 2,5% y destapando errores de saneamiento en las cuentas públicas y en las entidades privadas. ¿Cuánto queda por limpiar? Nadie lo sabe, pero es tal la carga que estamos dejando para las siguientes generaciones que da miedo…

La AIReF afirma que persiste un déficit estructural en torno a 2,5% del PIB que no asegura la sostenibilidad de la deuda

España necesita un plan presupuestario a medio plazo realista y creíble para afianzar la sostenibilidad de las cuentas públicas
Hay que seguir avanzando en el refuerzo del marco institucional nacional de las finanzas públicas y aumentar la transparencia
Es necesaria una reforma normativa para mejorar el marco de disciplina presupuestaria y las reglas fiscales
El presidente de la Autoridad Independiente de Responsabilidad Fiscal (AIReF), José Luis Escrivá, compareció hoy en la Comisión de Presupuestos del Congreso de los Diputados, donde analizó el cierre presupuestario de 2016 y destacó que “a pesar de la recuperación económica y la reducción de los tipos de interés, persiste un déficit estructural en torno al 2,5% del PIB que no asegura la sostenibilidad de la deuda”.
A lo largo de su intervención, José Luis Escrivá señaló que España necesita un plan presupuestario a medio plazo realista y creíble para afianzar la sostenibilidad de las cuentas públicas. “Hay que seguir avanzando en el refuerzo del marco institucional nacional de las finanzas públicas y aumentar la transparencia", solicitó el presidente de la AIReF.
Al mismo tiempo, destacó que es necesaria una reforma normativa para mejorar el marco de la disciplina presupuestaria y las reglas fiscales. 
Documentación adjunta:
¿Somos viables?
PD2: La felicidad nunca llegará a aquellos que no aprecian lo que ya tienen. Hay que reconocer y valorar todo lo que Dios nos da y, por supuesto, ser muy agradecido, darle todos los días las gracias, al levantarme, al mirar la naturaleza, al ver a los tuyos, al reconocer las caricias diarias que nos da. Muchos piensan que esas caricias son por ellos realizadas, qué ilusos, si nosotros solos nada podemos…

19 abril 2017

el problema de las pensiones no es solo español...

On the contrary, los EEUU tienen un severo problema que esperemos no les explote en la cara… Esto tiene más enjundia que las subprime de 2008…
Bloomberg writer Danielle DiMartino Booth says the Pension Crisis Too Big for Markets to Ignore.
But I have a question: If the problem is too big to be ignored, why is nearly everyone complacent?
Only a handful of sites including MishTalk, ZeroHedge, and Jack Dean at Pension Tsunami discuss the problem with any frequency.
On a recent Friday, Dean posted multiple stories on the California Public Employees' Retirement System, the country's largest pension program, as well as a budget cliff facing San Francisco, six Los Angeles public safety officers who collected over $1 million apiece last year in pensions, and eight cities that could face bankruptcy when the next recession hits. But the day's headlines also included the latest on the fiasco unfolding in Dallas, an update on Houston's less awful situation and features on states that have become the site's other usual suspects — Connecticut, Illinois and New Jersey. And that was a slow news day.
The question is why haven't the headlines presaged pension implosions? As was the case with the subprime crisis, the writing appears to be on the wall. And yet calamity has yet to strike. How so? Call it the triumvirate of conspirators – the actuaries, accountants and their accomplices in office. Throw in the law of big numbers, very big numbers, and you get to a disaster in a seemingly permanent state of making. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007.
Federal Reserve data show that in 1952, the average public pension had 96 percent of its portfolio invested in bonds and cash equivalents. Assets matched future liabilities. But a loosening of state laws in the 1980s opened the door to riskier investments. In 1992, fixed income and cash had fallen to an average of 47 percent of holdings. By 2016, these safe investments had declined to 27 percent.
It's no coincidence that pensions' flight from safety has coincided with the drop in interest rates. That said, unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate. In fiscal 2016, which ended June 30th, the average return for public pensions was somewhere in the neighborhood of 1.5 percent.
Corporations' accounting rules dictate the use of more realistic bond yields to discount their pensions' future liabilities. Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions.
So why not just flip the switch and require truth and honesty in public pension math? Too many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used. That would translate into much steeper funding requirements at a time when budgets are already severely constrained. Pockets of the country would face essential public service budgets being slashed to dangerous levels.
What's a pension to do? Increasingly, the answer is swing for the fences. Forget the fact that just under half of pension assets are in the second-most overvalued stock market in history. Even as Fed officials publicly fret about commercial real estate valuations, pensions have socked away eight percent of their portfolios into this less than liquid asset class. Even further out on the risk and liquidity spectrum is the 10 percent that pensions have allocated to private equity and limited partnerships.
How Long Can This Go On?
How long everyone can remain complacent over a brewing pension crisis is a mystery.
It will not even take a market crash to cause panic. A major pension fund blowing up could do it. Chicago and Dallas are possibilities.
A recession could trigger a panic, especially if bond yields rise and equities sink simultaneously. A simple earnings scare could cause panic.
Meanwhile, market valuations are the most stretched in history by many measures.
GMO 7-Year Expected Returns
Source: GMO
*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forwardlooking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forwardlooking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forwardlooking statements. Forwardlooking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forwardlooking statements. U.S. inflation is assumed to mean revert to longterm inflation of 2.2% over 15 years.
Forecast Analysis
GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, even nominal returns are expected to be negative for seven full years.
Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.
Dealing With Insolvency
Some states have bankruptcy provisions to deal with insolvencies other states don't. For example, Illinois does not allow municipal bankruptcies even though a number of Illinois cities and retirement funds are insolvent.
Congressional Help Needed
To help address the eventual problems, Congress needs to get in on the act because states, especially Illinois, will not do what is necessary.
Many other Illinois pension plans are among the walking dead.
Abrazos,
PD1: Según san Agustín: "Quien tiene caridad en su corazón, siempre encuentra alguna cosa para dar". Y no es necesario que sea dinero, aunque Caritas lo acepta con agrado… Muchas veces es tu tiempo, tu alegría, tu interés por el otro, tu apoyo incondicional, tu conversación entretenida, tus chistes, tus sonrisas… Contar lo que te pasa, tus preocupaciones, y preguntarle las suyas al de enfrente. Otra es sentarte a ayudar a tu hijo, al compañero pesado de la oficina, de la universidad… Otra es dar a los tuyos todo lo que tengas, sin reservas… Dar, siempre dar.

18 abril 2017

Novedad: Desde EEUU ven las cosas con preocupación

El CEO de JP Morgan, Jamie Dimon escribe sobre cómo ve las cosas:
It is clear that something is wrong — and it’s holding us back.
Our economy has been growing much more slowly in the last decade or two than in the 50 years before then. From 1948 to 2000, real per capita GDP grew 2.3%; from 2000 to 2016, it grew 1%. Had it grown at 2.3% instead of 1% in those 17 years, our GDP per capita would be 24%, or more than $12,500 per person higher than it is. U.S. productivity growth tells much the same story, as shown in the chart [below].
Our nation’s lower growth has been accompanied by – and may be one of the reasons why – real median household incomes in 2015 were actually 2.5% lower than they were in 1999. In addition, the percentage of middle class households has actually shrunk over time. In 1971, 61% of households were considered middle class, but that percentage was only 50% in 2015. And for those in the bottom 20% of earners – mainly lower skilled workers – the story may be even worse. For this group, real incomes declined by more than 8% between 1999 and 2015. In 1984, 60% of families could afford a modestly priced home. By 2009, that figure fell to about 50%. This drop occurred even though the percentage of U.S. citizens with a high school degree or higher increased from 30% to 50% from 1980 to 2013. Low-skilled labor just doesn’t earn what it used to, which understandably is a source of real frustration for a very meaningful group of people. The income gap between lower skilled and skilled workers has been growing and may be the inevitable consequence of an increasingly sophisticated economy.
Regarding reduced social mobility, researchers have found that the likelihood of workers moving to the top-earning decile from starting positions in the middle of the earnings distribution has declined by approximately 20% since the early 1980s.
Many economists believe we are now permanently relegated to slower growth and lower productivity (they say that secular stagnation is the new normal), but I strongly disagree.
We will describe in the rest of this section many factors that are rarely considered in economic models although they can have an enormous effect on growth and productivity. Making this list was an upsetting exercise, especially since many of our problems have been self-inflicted. That said, it was also a good reminder of how much of this is in our control and how critical it is that we focuson all the levers that could be pulled to help the U.S. economy. We must do this because it will help all Americans.
Many other, often non-economic, factors impact growth and productivity.
Following is a list of some non-economic  items that must have had a significant impact on America’s growth:
-Over the last 16 years, we have spent trillions of dollars on wars when we could have been investing that money productively. (I’m not saying that money didn’t need to be spent; but every dollar spent on  battle is a dollar that can’t be put to use elsewhere.)
-Since 2010, when the government took over student lending, direct government lending to students has gone from approximately $200 billion to more than $900 billion – creating dramatically increased student defaults and a population that is rightfully angry about how much money they owe, particularly since it reduces their ability to get other credit.
-Our nation’s healthcare costs are essentially twice as much per person vs. most other developed nations.
-It is alarming that approximately 40% (this is an astounding 300,000 students each year) of those who receive advanced degrees in science, technology, engineering and math at American universities 
are foreign nationals with no legal way of staying here even when many would choose to do so. We are forcing great talent overseas by not allowing these young people to build their dreams here.
-Felony convictions for even minor offenses have led, in part, to 20 million American citizens having a criminal record – and this means they often have a hard time getting a job. (There are six times more felons in the United States than in Canada.)
-The inability to reform mortgage markets has dramatically reduced mortgage availability. We estimate that mortgages alone would have been more than $1 trillion higher had we had healthier mortgage markets. Greater mortgage access would have led to more homebuilding and additional jobs and investments, which also would have driven additional growth.
Any one of these non-economic factors is fairly material in damaging America’s effort to achieve healthy growth. Let’s dig a little bit deeper into six additional unsettling issues that have also limited our growth rate.
Labor force participation is too low.
Labor force participation in the United States has gone from 66% to 63% between 2008 and today. Some of the reasons for this decline are understandable and aren’t too worrisome – for example, an aging  population. But if you examine the data more closely and focus just on labor force participation for one key segment; i.e., men ages 25-54, you’ll see that we have a serious problem. The chart below shows that in America, the participation rate for that cohort has gone from 96% in 1968 to a little over 88% today. This is way below labor force participation in almost every other developed nation.
If the work participation rate for this group went back to just 93% – the current average for the other developed nations – approximately 10 million more people would be working in the United States. Some other highly disturbing facts include: Fifty-seven percent of these non-working males are on disability, and fully 71% of today’s youth (ages 17–24) are ineligible for the military due to a lack of proper education (basic reading or writing skills) or health issues (often obesity or diabetes).
Education is leaving too many behind.
Many high schools and vocational schools do not provide the education our students need – the goal should be to graduate and get a decent job. We should be ringing the national alarm bell that inner city schools are failing our children – often minorities and children from lower income households. In many inner city schools, fewer than 60% of students graduate, and many of those who do graduate are not prepared for employment. We are creating generations of citizens who will never have a chance in this land of dreams and opportunity. Unfortunately, it’s self-perpetuating, and we all pay the price. The subpar academic outcomes of America’s minority and low-income children resulted in yearly GDP losses of trillions of dollars, according to McKinsey & Company.
Infrastructure needs planning and investment.
In the early 1960s, America was considered by most to have the best infrastructure (highways, ports, water supply, electrical grid, airports, tunnels, etc.). The World Economic Forum now ranks the United States #27 on its Basic Requirements index, reflecting infrastructure along with other criteria, among 138 countries. On infrastructure, the United States is behind most major developed countries, including the United Kingdom, France and Korea. The American Society of Civil Engineers releases a report every four years examining current infrastructure conditions and needs – the 2017 report card gave us a grade of D+. Another interesting and distressing fact: The United States has not built a major airport in more than 20 years. China, on the other hand, has built 75 new civilian airports in the last  10 years alone.
Our corporate tax system is driving capital and brains overseas.
America now has the highest corporate tax rates among developed nations. Most other developed nations have reduced their tax rates substantially over the past 10 years (and this is true whether looking at statutory or effective tax rates). This is causing considerable damage. American corporations are generally better off investing their capital overseas, where they can earn a higher return because of lower taxes. In addition, foreign companies are advantaged when they buy American companies – often they are able to reduce the overall tax rate of the combined company. Because of this, American companies have been making substantial investments in human capital, as well as in plants, facilities, research and development (R&D) and acquisitions overseas. Also, American corporations hold more than $2 trillion in cash abroad to avoid the additional taxes. The only question is how much damage will be done before we fix this.
Reducing corporate taxes would incent business investment and job creation. The charts on page 36 show the following:
+ That job growth is highly correlated to business investment (this also makes intuitive sense).
+ That fixed investments by businesses and capital formation have gone down substantially and are far below what we would consider normal.
And counterintuitively, reducing corporate taxes would also improve wages. One of the unintended consequences of high corporate taxes is that they actually depress wages in the United States. A 2007 Treasury Department review finds that labor “may bear a substantial portion of the burden from the corporate income tax.” A study by Kevin Hassett from the American Enterprise Institute finds that each $1 increase in U.S. corporate income tax collections leads to a $2 decrease in wages in the short run and a $4 decrease in aggregate wages in the long run. And analysis of the U.S. corporate income tax
by the Congressional Budget Office finds that labor bears more than 70% of the burden of the corporate income tax, with the remaining 30% borne by domestic savers through a reduced return on their savings. We must fix this for the benefit of American competitiveness and all Americans.
Excessive regulations reduce growth and business formation.
Everyone agrees we should have proper regulation – and, of course, good regulations have many positive effects. But anyone in business understands the damaging effects of overcomplicated and inefficient regulations. There are many ways to look at regulations, and the chart below and the two on page 38 provide some insight. The one below shows the total pages of federal regulations, which is a simple way to illustrate additional reporting and compliance requirements. The second records how we compare with the rest of the world on the ease of starting a new business – we used to be among the best, and now we are not. The bottom chart on page 38 shows that small businesses now report that one of their largest problems is regulations.
By some estimates, approximately $2 trillion is spent on regulations annually (which is approximately $15,000 per U.S. household annually). And even if this number is exaggerated, it highlights a disturbing problem. Particularly troubling is that this may be one of the reasons why small business creation has slowed alarmingly in recent years. According to the U.S. Chamber of Commerce, the rising burdens of federal regulations alone may be a main reason for a falling pace in new business formation. In 1980, Americans were creating some 450,000 new companies a year. In 2013, they formed 400,000 new businesses despite a 40% increase in population from 1980 to 2013. Our three-decade slump in company formation fell to its lowest point with the onset of the Great Recession; even with more businesses being established today, America’s startup activity remains below prerecession levels.
While some regulations quite clearly create a common good (e.g., clean air and water), it is clear that excessive regulation does not help productivity, growth of the economy or job creation. And even regulations that once may have made sense may no longer be fit for the purpose. I am not going to outline specific recommendations about non-financial regulatory reform here, other than to say that we should have a permanent and systematic review of the costs and benefits of regulations, including their intended vs. unintended consequences.
The lack of economic growth and opportunity has led to deep and understandable frustration among so many Americans.
Low job growth, a lack of opportunity for many, declining wages, students and lowwage workers being left behind, economic and job uncertainty, high healthcare costs and growing income inequality all have created deep frustration. It is understandable why so many are angry at the leaders of America’s institutions, including businesses, schools and governments – they are right to expect us to do a better job. Collectively, we are the ones responsible. Additionally, this can understandably lead to disenchantment with trade, globalization and even our free enterprise system, which for so many people seems not to have worked.
Our problems are significant, and they are not the singular purview of either political party. We need coherent, consistent, comprehensive and coordinated policies that help fix these problems. The solutions are not binary – they are not either/or, and they are not about Democrats or Republicans. They are about facts, analysis, ideas and best practices (including what we can learn from others around the world).
Abrazos,
PD1: Cada uno tenemos nuestra propia conciencia y es por ella por la que nos juzgarán en el final de nuestra vida. Qué cantidad de empresarios han arruinado sus empresas por malas decisiones, qué cantidad de gente cobra más de lo que debe y calla, qué cantidad de políticos han arruinado España con su mala praxis, o se han embolsado dinero que no era suyo…
Allá cada uno con su conciencia, pero yo si fuera uno de estos empresarios, de estos directivos, de estos políticos, no andaría tranquilo. Lo que uno se ha llevado de más, lo que cada uno se ha embolsado indebidamente (por ruina a la empresa, por no ganarse su sueldo, por meter mano a la caja), lo tiene que devolver si quiere ser perdonado…
Pero no se devuelve, porque se creen que no han hecho nada malo. Su conciencia está tranquila, a pesar de lo que han hecho a otras muchas personas, accionistas, subordinados, ciudadanos… ¡Pobres necios!