Tag Archives: Nevada economy

The Good Old Days? White House Fights the Free Market

The current occupant of the Oval Office would have me believe he’s The Champion of Small Business In The Face Of The Evil Empire of….Amazon.  Spare me.  (And, NO, the USPS isn’t going broke because of the shipping contract the company has with Amazon. It has much more to do with the Republican supported and enacted restrictions on its pension plan, which require inordinate prepayments into the plan. [IG Report]) So, returning to the topic at hand, let’s start with the proposition that nostalgia isn’t conducive to successful retail marketing.

A Little History 

Extrapolated into the realm of the ridiculous, there was a time before Macy’s and Bloomingdales (1858, 1861) when shoppers roamed among small retailers along commercial corridors.  Add the installations of elevators and escalators and the retailers could further “departmentalize” their offerings.  Surely there were objections from smaller retailers at the time, and there were probably others who decried the Memphis Piggly-Wiggly grocery store’s 1916 decision to let customers get their own items from the shelves rather than have a clerk do the accumulation.  However, it’s unimaginable to give any credence to the notion that innovations in retailing are necessarily nefarious.

The department stores faced competition beginning in 1872 from Aaron Montgomery Ward whose catalog advertised shipping via Express rail services, and from Richard Sears. Their catalog sales were boosted by the decision in 1913 to have the Post Office deliver domestic packages. [AtlasObs]  Again,  to assert that companies like Amazon, which depend on Internet ordering systems are somehow essentially different from the innovations adopted by Ward and Sears is risible.  What we might be hearing from the White House is the lament for brick and mortar retailers who rent property?

Another Change in Retail Habits

We’ve moved from shopping along Main Street, to shopping from catalogs, to shopping from online catalogs.  And, yes, Amazon is now a big presence in the retail system:

“The simplest explanation for the demise of brick-and-mortar shops is that Amazon is eating retail. Between 2010 and last year, Amazon’s sales in North America quintupled from $16 billion to $80 billion. Sears’ revenue last year was about $22 billion, so you could say Amazon has grown by three Sears in six years. Even more remarkable, according to several reports, half of all U.S. households are now Amazon Prime subscribers.” [Atlantic]

However, this is an over-simplification which goes nowhere toward explaining how a chain store founded in 1962 in Arkansas has grown into a 2,000,000+ employer, or why Target seems to be holding its own in the Big Box Store category.  Notably, both Walmart and Target have an Internet operation.

We can lament the demise of the brick and mortar retailers, but as the Atlantic article points out, part of the hard, sad, truth is that we simply built too many of them.

“The number of malls in the U.S. grew more than twice as fast as the population between 1970 and 2015, according to Cowen and Company’s research analysts. By one measure of consumerist plentitude—shopping center “gross leasable area”—the U.S. has 40 percent more shopping space per capita than Canada, five times more the the U.K., and 10 times more than Germany. So it’s no surprise that the Great Recession provided such a devastating blow: Mall visits declined 50 percent between 2010 and 2013, according to the real-estate research firm Cushman and Wakefield, and they’ve kept falling every year since.” [Atlantic]

Toss in a measure of stagnating wages and decreased levels of discretionary spending and it’s little wonder the mall traffic is declining.

“After adjusting for inflation, wages are only 10 percent higher in 2017 than they were in 1973, with annual real wage growth just below 0.2 percent.[1] The U.S. economy has experienced long-term real wage stagnation and a persistent lack of economic progress for many workers.” [Brookings]

Those “many workers” are deciding the Big Box, and online bargain offers, are preferable to mall browsing.   We overbuilt malls, organized them around “anchors” which are looking at declining sales from Big Box, discounters, and online shopping, and thus shouldn’t be surprised when the free market works.

That the current president is upset with the reportage of the Washington Post, owned by the same man who founded Amazon, is no surprise either.  However, that doesn’t fully explain his antagonism which may also be a function of being a real estate developer, and a real estate developer who seems to be freighted with altogether too much nostalgia for those “Good Old Days” when we’d take the transit or pile into the family wagon to shop on site.   There have been major innovations in retailing since the first butcher opened his first shop and accepted payment in cowrie shells.

The Nevada Situation

Obviously, the largest factor in the Nevada is “Accommodations and Food Service,” read: Casinos and restaurants; but the second largest employment category is good old fashioned retailing.  As of the SBA’s 2017 report, there are 140,879 people employed by retailers; of this figure 39,947  are employed by small businesses, or about 28%. [SBA pdf]

There’s reason for cautious optimism in southern Nevada with regard to wages and spending, but …

“The Las Vegas MSA’s 12MMA of average weekly earnings (not inflation-adjusted) went up by another $3 in November. This was the 4th month in a row nominal average weekly earnings rose by $3, continuing a steady streak of growth started just over 3 years ago in September 2014. On a YOY basis, the 12MMA was up $37 (5.0%) from November 2016.

When considered on an inflation-adjusted, YOY basis, earnings rose by 2.8% in November 2017 compared to November 2016, reaching $669 (in 2007 dollars). This was an increase of $1 from October. Las Vegas’ average weekly real wage is now $82 (10.9%) below the most recent inflation-adjusted peak of $751 that occurred over 10 years ago in August 2007. The trough occurred in February 2012 at just over $616, so Las Vegas remains much closer to the trough than the peak.” [StatPak]

If we’re looking for significantly increased demand to boost the southern Nevada retail sector further, something is going to have to happen to those average weekly wages.  The picture for northern Nevada is slightly more optimistic:

“While Washoe County’s economy continues to benefit from rising taxable retail sales, the YOY growth rate has fallen considerably from a year ago. In November 2017, the rate of growth was 6.2% YOY, or 3.2 points lower than the year period ending in November 2016. However, when compared to the month prior, it is down 0.2 points. Taxable retail sales reached $686.8 million in November, having already surpassed, in March 2016, the previous peak on a nominal basis (not inflation-adjusted). As the chart shows, Washoe’s taxable sales growth is very near the state average at just 0.4 points below.

Success in business attraction and retention is driving the region’s economy and is the primary cause of growth in taxable retail sales, though increasing visitation has also contributed.”  [Statpak]

One other factor to be considered before pronouncing Amazon as the harbinger of demise for retail malls is good old fashioned demographics. Neighborhoods change, people move, and the “centrality” of a mall constructed in the late 1960’s or 1970’s may not reflect the residential and traffic patterns 40-50 years later.

And yes, I remember shopping for vinyl records in Park Lane Mall ages ago… when I was still playing vinyl records… before I shifted to CDs … before I downloaded … anyone who expects (or wants) retail endeavors to remain constant in the tides of time will have about as much success as King Canute attempting to command the liquid form of tides.

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Filed under Economy, Nevada economy, Nevada politics, Politics

Nevada and the Tax Scam: Debts Debts and More Debts

The Bureau of Economic Analysis has some important numbers for the state of Nevada.  As of September 26, 2017 the agency reports Nevada’s per capita personal income was $43,567 ranking 32nd in the US and 88% of the national average.  However, the numbers don’t signify as much as they could without looking at the trends in which they occur.

“The 2016 PCPI reflected an increase of 1.0 percent from 2015. The 2015-2016 national change was 1.6 percent. In 2006, the PCPI of Nevada was $39,930 and ranked 15th in the United States. The 2006-2016 compound annual growth rate of PCPI was 0.9 percent. The compound annual growth rate for the nation was 2.6 percent.”

There are at least two things to unpack from this. First, it’s evident Nevada took a wallop from the Great Recession in the wake of the Housing Bubble and Wall Street Casino collapse. Secondly, Nevada’s per capita personal income isn’t growing at a pace which would make anyone too confident of increased disposable income for Nevada consumers.   In fact, it makes one think we’re going to be looking at increased levels of household indebtedness — again.

Another number to toss into this mix is the inflation rate, ranging in 2017 from about 1.6% to 2.7%.  And now we come to the inflated promises of the President* and the members of the 115th Congress who claim that their tax plan will “put more money into consumers’ pockets.”  Not. So. Fast.

It’s no secret the Tax Bill benefits those in the upper income brackets far more than it does those in the lower quintiles of the tax brackets.  Nor is it any surprise that the pass through benefits inserted into the bill are a windfall for a select group of businesses which in most circumstances don’t really qualify for the brand “small business.”  Therefore, it’s hard to visualize how this plan truly benefits the “average” Nevada taxpayer.

It’s even harder to see how the bill would create the kind of growth necessary for the bill to “pay for itself.”  The conclusion of the Tax Policy Center isn’t exactly comforting:

TPC has also released an analysis of the macroeconomic effects of the Tax Cuts and Jobs Act as passed by the Senate on December 2, 2017. We find the legislation would boost US gross domestic product (GDP) 0.7 percent in 2018, have little effect on GDP in 2027, and boost GDP 0.1 percent in 2037.

If you’re thinking this isn’t enough to boost the per capita personal income level in Nevada, except for a chosen few, you’re probably right on target. Nor is there much reason to believe the Growth Fairy will wave her wand more strenuously anywhere else in the country.  What do people do when wages and salaries don’t increase by all that much, inflation creeps up, and those people want to maintain their standards of living? The borrow.  And this is where DB starts jumping up and down again sounding alarms.

Look, for example, at the NY Fed Report from February 2017: (pdf)

Aggregate household debt balances increased substantially in the fourth quarter of 2016. As of December 31, 2016, total household indebtedness was $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. Overall household debt remains just 0.8% below its 2008Q3 peak of $12.68 trillion, but is now 12.8% above the 2013Q2 trough.

Yes, this dry as dust account is saying that levels of household debt are perilously close to what they were just before the Bubble splattered all over our economy in 2008.  There are a couple of reasons not to panic — quite yet.  The level of debt delinquencies hasn’t approached the 2008 level, and we’re seeing fewer bankruptcy filings.  [CNN Money]  There are a few more dessicated sentences from the Fed of note:

“…while comparable in nominal aggregate size, the composition of current household debt is very different from that in 2008. We pointed out in a recent press briefing that debt balances are evolving; mortgages now have a much smaller share than in 2008, auto and student loans have increased in their share, and balances are increasingly shifting towards more creditworthy and older borrowers.”

Read: Mortgage debt is down, student and automobile debt is up. Banks are lending to older borrowers with better credit.  This situation is fine for the banks and those who invest in them, it isn’t exactly cause for young people to rejoice.

At the risk of sounding alarmist — we do need to watch the effects of those automobile loans on the financial sector because those loans (like the mortgages before them) are sold into secondary markets (securitized) and there are some initial warning signs.

One industry analysis doesn’t provide all the comfort I’d care to feel at the moment:

In fact, S&P Global Ratings has issued 881 upgrades and no defaults or downgrades on the subprime auto ABS deals it’s rated from 2004 to present. However, the company ran a stress test simulating what another financial crisis-like event would look like today and found that subprime losses would rise 1.67 times higher than S&P’s baseline expectations for the economy. So while the markets are stable, there are certainly economic factors to watch for.  “Yes, losses are going up from 2015 and 2016, and are even approaching recessionary levels,” Amy Martin, S&P’s senior director, told Auto Finance News. “But you have to look at it relative to what’s happening with the ratings, and the ratings are very stable.”

Yes, auto loans are up, increasing the transactions in the secondary market, but we should all relax because the ratings are stable? The last time we put our faith in the ratings agencies every investment bank on Wall Street fell into its own sink hole.

If I’m a little shaky on the subject of auto loans and their securitization, I’m even less enthusiastic about what’s been happening on the student loan front.  Again, from the NY Fed which as a good track record for keeping tabs on the student loan situation:

Interestingly, though the difference in default rates between two- and four-year private college students is not large (less than 5 percentage points at age thirty-three), this is not the case for public college students. Default rates for community college (two-year public college) students are nearly 25 percentage points higher than those for their counterparts in four-year public colleges. The chart below also shows that while for-profit students have the highest default rates, the default rates of community college students are not too different from those of for-profit students (36 percent versus 42 percent for two-year and 39 percent for four-year for-profit students, respectively, at age thirty‑three).

And now comes the trap: While the administration and GOP controlled Congress make it harder for students to escape the clutches of student loan purveyors, the default rates are ominous.  Further, once in the student loan trap it becomes harder for younger people to become those “older creditworthy” souls to whom banks want to offer mortgages. The following assessment isn’t all that encouraging for the housing market:

“At any given age, holding debt is associated with a lower rate of homeownership, irrespective of degree type. While the homeownership gap between debt-holding and non-debt-holding bachelor’s-plus students remains relatively constant, that for associate degree students expands with age. Associate degree students who take on debt buy homes at almost the same rate as those who never went to college until they reach age twenty-five, when their homeownership rate rises above that of those who never went to college. At age thirty-three, the non-college-goers are almost 4 percentage points behind their peers who enrolled in associate degree programs and took on student debt, while lagging behind debt-free bachelor’s-plus students by 25 percentage points.”

The situation isn’t immediately indicative of economic peril BUT there are some points to remember.  While home-ownership is down (banks are looking for older more creditworthy borrowers) auto loans and student debt are up, and student indebtedness is linked to a reduction in home-ownership.  Meanwhile, the per capital personal income keeps slogging upward at a pace making garden snails look swift.   If you are wondering  from whence comes the fuel for the Growth Fairy — so am I.

Thus far the only elements I see emanating from this GOP controlled Congress are an untoward enthusiasm for giving tax breaks to those who need them the least, an equally unpropitious capacity to ignore trends in household indebtedness, coupled with an almost vexatious tendency to put the burdens on younger generations of Americans for whom education is increasingly costly.

If Nevadans are suspicious of Republican claims of “fiscal responsibility” it’s because they should be.

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Filed under Economy, Nevada economy, Politics

Bubble Bubble Crash and Trouble: Gambling With Nevada’s Prosperity

A person doesn’t need an advanced degree in either economics or finance to figure out that the current versions of the Tax Bill are not good for Nevada.  We’ll begin with the premise that the Republican tax plan gives the majority of the benefits to corporations.  High income individuals would also benefit from the elimination of the Alternative Minimum Tax, and the Estate Tax.  We should also note that the individual/family tax cuts would expire in 2027 while the corporate tax cuts are made permanent.  Additionally, we should accept the proposition that because of the fluid nature of the proposals and the complexity of how middle income families may be affected, the NY Times analysis is probably one of the best generalization summaries to date.  We can say with some certainty that the vast majority of the benefits will accrue to the upper 2% of American income earners, and to corporations.

Another point often overlooked in the various summations is what the bill will not do.  This element should not be ignored as we try to imagine what the ramifications will be for Nevada and its citizens.  First, a reminder of the obvious —

Nevada depends on the leisure and hospitality sector — our way of saying gaming, which is our way of saying gambling and the hotels that provide the entertainment.  In hard cold stats — the BLS reports employment as follows:  Leisure and Hospitality – 353.8 yoy +2.0; Trade, Transport, Utilities – 242.6 yoy -0.5; Professional and Business Services 191.1 yoy +5.9; Government – 163.0 yoy +2.3; Education and Health Services – 134.4 yoy +2.9.  Little wonder most people are employed in the “Hospitality” sector, the Las Vegas Convention and Visitors Authority reports some 32,108,552 visitors as of the end of September 2017.   Each visitor averaged about $619 spent on “gaming.” [LVRJ]

And now to state the obvious — that $619.00 spent at the tables or playing the slots is literally disposable income.  We intend for our visitors to dispose of it during the time they spend in Las Vegas.  Not to mince words,  anything that restricts disposable income has a direct impact on the total taxable gross revenue generated by our “hospitality.”  For example, in 2007 Las Vegas (Clark County) enjoyed gaming revenue totaling $10,868,464,000. As the housing bubble burst in 2008 the number declined to $9,796,749,000.  As of 2009 with the Recession deepening, the number fell to $8,838,261,000.  The last report, issued in 2016 reported gaming revenue in Clark County of $9,712,796,000, a good number, but still below the halcyon days before the Bubble and Crash.

If Nevadans had adopted the notion that gaming is a “recession proof” industry before the Wall Street Casino wiped out the Housing Market, we were disabused of the idea in the wake of the last debacle.  There was, obviously, a limit to the capacity of our visitors to save our bacon.

And now, we have a Republican tax plan which gives most of its benefits to upper income earners, and corporations, and eventually leaves middle income earners (those earning between $30,000 and $100,000) holding the bag awaiting immediate or eventual increases.  What happens to that average $619 budgeted for the tables and slots when a family has to adjust to higher health insurance premiums?  When a family is no longer able to deduct major medical expenses?  When a family can no longer deduct interest payments on student loans?  When a family finds it can’t deduct state and local taxes?

Years ago Nevadans would sing the praises of the “$60 bettor.”  High rollers are, of course, always welcome, but those $60 bettors were the prime rib in the Nevada casino buffet — the staple, the predictable, the profitable.  Decades later the $60 increased to $619, and these vacationers and tourists are still the staple, the predictable, and the profitable.  Make inroads into their disposable income and they will have less of it to dispose of at the tables and slots.

An economic policy which further rewards the already successful at the expense of the middle class, that would add a return to financial institution deregulation, and would compound the problems by eliminating or reducing the deduction of mortgage interest, is a recipe almost strategically designed to have a negative impact — another negative impact — on Nevada’s economy.

Going a step further, someone is going to have to make up the massive $1.5 trillion hole created by the Tax Plan.  What will Nevadans have to sacrifice?  Their Social Security? Their Medicare?  Their Medicaid?  What then of the now increasing education and health care services sector in Nevada?  What of the construction trades in Nevada, the builders and the contractors?  They’ve seen this movie before and it didn’t end well.

And yet we have one Senator who appears to have purchased the Trickle Down Hoax hook, line, and sinker; who appears to believe the Growth Fairy will wave her magic want and make all things whole — including that $1.5 trillion gap — and one who believes that balanced budgets are paramount except when it’s the GOP blowing the deficits into the stratosphere.   It is time to tell Senator Heller that we have all seen this script play out, and instead of buying into the Trickle Down Hoax he’d do better to purchase some chips from the cashier and donate his $619 to the Nevada economy.  Otherwise we’re looking at more Bubble Bubble Crash and Trouble.

Senator Heller’s office: 202-224-6244.

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Filed under Economy, Nevada economy, Politics, Taxation

Amodei’s Wonderland: Wherein Economic Vision Becomes Hallucination

One of the more confusing statements from Representative Mark Amodei (R-NV2) concerns how the Republican Tax Scam will affect the economy:

(Part A) “With respect to the effect on businesses, Main Street job creators will see their tax rates reduced through the lowering of the maximum tax rate on business income to no more than 25%. (Part B) Additionally, federal tax rates on corporate taxable income will see a decrease from the highest rate of 35% to a flat corporate tax rate of 20%. (Part C) Each of these changes will help businesses and corporations expand, hire new employees, increase wages, and also give them the resources they need to stay competitive in the global marketplace.”  [Amodei] (“parts” added for discussion)

Let’s begin with Part A, those “main street job creators” are the high income earners discussed yesterday as be beneficiaries of the Pass Through Loophole.   It really doesn’t matter if the firm’s address is Main Street, 5th Avenue, or Wall Street, the result is essentially the same.  After telling Nevadans not to worry about losing their most popular deductions because not all that many people use them and the new standard deductions will take care of them,  Amodei doesn’t apply the same test to the business and corporate deductions.  That Pass Through Loophole, by any and all other names, has resulted in massive revenue losses in Kansas, the state which imprudently serves as a laboratory for the GOP’s ideological economics.  Let’s not confuse Mom and Pop’s Midtown Market with the capital management firm of Grabbem, Gouggem, & Howe.   Both may “create jobs” but there’s no comparison in terms of how much of a tax break each will receive for having essentially the same number of employees.

Moving along to Part B:  Yes.  At present there’s a plethora of corporate accountants employed to create a situation in which a top rate of 39.1% becomes an effective rate far below that maximum rate.  One study of Fortune 500 companies reached the following conclusions:

  • As a group, the 258 corporations paid an effective federal income tax rate of 21.2 percent over the eight-year period, slightly over half the statutory 35 percent tax rate.

  • Eighteen of the corporations, including General Electric, International Paper, Priceline.com and PG&E, paid no federal income tax at all over the eight-year period. A fifth of the corporations (48) paid an effective tax rate of less than 10 percent over that period.
  • Of those corporations in our sample with significant offshore profits, more than half paid higher corporate tax rates to foreign governments where they operate than they paid in the United States on their U.S. profits.

Now, if they’re starting at 39.1% and getting their taxes down by half or even more at present — imagine what they can do when they start from 20-25% and work their way down?  For example, the “intangible drilling costs” loophole seems not to have closed up at all in the House version, and this while it’s acknowledged that seismic testing has significantly reduced the prospect of drilling dry holes.  The old Depletion Allowance survives as it always does, even if other deductions for mere mortals do not.

Or, consider the creative ways corporations use depreciation.  The House Ways and Means Committee version allows corporations to write off the depreciation for new equipment immediately.  Nice, if one is looking for a way to get from 20% down to a 10% tax rate or less.  [WaPo]  Not to put too fine a point to it, but while mere mortals are expected to absorb the elimination of student loan interest deductions, home mortgage interest deductions, and major medical expense deductions — the corporations go almost untouched.

Part C is unalloyed wishful thinking.  Walter Isaacson observes in his new book about Da Vinci that “vision without implementation is hallucination,” and this GOP canard is an almost perfect example.   Where the Tax Cut Fairy Waves Her Magic Wand wonders ensue — commerce increases, new employees will be hired, employees will have higher wages, and we will be “more competitive.”

Let’s step back from the hallucinations and observe what happens in the real world of employment:

“Service businesses, in which payroll is the major cost of providing the service, can take on higher payroll percentages since the payroll is, in fact, producing the revenue. There is likely to be no other significant cost of services to be provided. In such situations, payroll can reach the 50% mark without destroying profitability. Manufacturers, however, must maintain a payroll figure closer to 30% or less as the business must endure the cost of manufacturing the widget plus the payroll. Same with restaurants, given the high cost of food the payroll must stay under thirty percent.”

In order to lend any credence to the overblown rhetoric of GOP apologists for reducing corporate taxes and enacting pass-through loopholes, we have to merge all hiring from all sectors into one grand lump.  No matter the tax rate, what really matters is that the widget factory can keep its payroll allocations to 30% or less of its costs.  Nor can we argue that the sector with the highest payroll allocation, “service,” is all created equal.  This tertiary sector includes everything from health care to banking to education, to media and communications.   At the risk of continuous redundancy, the tax rate doesn’t determine payroll allocation — no one will be hired to do anything unless there is a demand for the goods or services beyond the capability of current staffing levels to deliver an acceptable level of consumer or client satisfaction.

Employees will have higher wages if the corporation gets a tax cut?  Probably not.  We can wade into the deeply arcane economic theoretical weeds and talk about the relationship between labor costs and tax liabilities, but let’s keep our feet on the ground instead.

Nevada has a fairly unique economy given one of our major sectors is “hospitality,” (or how to house, feed, and amuse people whom we want to leave behind large sums of money) establishments.  Therefore, there’s nothing surprising about finding out that we’ll need about 191,141 people working in food service in 2018; a growth rate of 2.8% with about 5,048 new positions expected. [DETR download]  The mean wage for food service workers is $12.74 per hour.  Most dealers are earning about $8.57 plus tips.  What will drive up food service and dealers’ wages?  Which is more likely to drive increases in food services wages: (a) more customers or (b) a bigger tax cut for corporate headquarters?

If you answered “b” then you are willing to wait for the calculations to be completed concerning how much the corporation should allocate for payroll expenditures, and then try to bank the results from this theory:

“Why would anyone think slashing corporate tax rates would increase workers’ wages in the first place? The theory endorsed by the CEA relies on three steps to get from corporate tax cuts to higher wages. First, the corporate tax cut increases companies’ after-tax returns on investment. As a result, firms will make more investments in plant and equipment than they would in a higher-tax-rate environment. Second, greater investment by firms leads to higher productivity by the workers who put those investments to work. Third and finally, workers will receive increased wages in line with those productivity gains.” [vox]

And, if you believe this I have a lovely bridge over the Humboldt River to sell you.  Why? Because corporations can do lots of other things with those savings — higher executive compensation, mergers and acquisitions, stock buy backs, and dividend payments.

Short Form:  Representative Amodei’s analysis requires redefining “job creators,” as those titans of the financial system who don’t necessarily become those doing the hiring; and requires disconnecting wages and salaries from the accepted wisdom about payroll allocation; and, means a person has to roll the dice and hope that the corporation trickles the money down to the counter-man.  In Isaacson’s parlance:  It’s vision without implementation.

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Filed under Economy, Nevada, Nevada economy, Nevada politics, Politics

Anti-Choice: The Rebirth of Deregulation

I don’t think anyone in the state of Nevada doesn’t know what happened the last time Wall Street was left unfettered.  The Bubble splattered all over the state.   The offcast included 167,000 empty houses. [USAToday]  Nevada’s unemployment rate soared to 12.8% by December, 2009.  By October 2010 the state’s unemployment rate was 14.4%.  And now the House of Representatives is on track to vote on H.R. 10, the “Choice Act” to dismantle the financial regulatory reforms enacted in the wake of the Housing Debacle and deregulated banking disaster.

Two procedural votes are on record to move this bill forward — House vote 290, and House vote 291 — and Representative Mark Amodei voted in favor of bringing this bill to a vote by the full House.   Watch this space for an update on the vote for passage.

Update:  On House vote #299, Representative Mark Amodei (R-NV2) voted along with 232 other Republicans to essentially gut the financial reform regulations enacted in the wake of the Housing Bubble debacle. (HR 10)

Representatives Kihuen, Rosen, and Titus voted against this deregulation bill.

Comment: Be aware of Republican representatives to frame this vote as one against Bank Bailouts and “Too Big to Fail.”   In a polite world we’d call this something euphemistic like “south bound product of a north bound bull.”  The Dodd Frank Act requires banks to have a plan for unwinding failing banks, and bankers have screamed to the heavens about provisions to allow outside oversight of banking management.  More simply, if you approve of the antics of Wells Fargo — then you’ll love the “Choice Act,” a bill which gives banks the “choice” to skewer its customers and investors.

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Filed under Amodei, Economy, financial regulation, Nevada economy, Nevada politics, Politics

The Warning Flags are Up: Trumpsterism and Corporate Debt

Corporate Debt Chart 2016

No, you don’t need to get out the magnifier to get the gist of this chart, but if you’d like to see the original click here.  Simply consider the trajectory of the blue line indicating the level of non-financial corporate business debt – as in UP.  Nevadans may want to gaze at this with some caution, because (to borrow and vandalize a fine old saying) the last time the national economy caught a cold, Nevada got pneumonia.  We can, and should, look at the comparison in the trends of corporate debt, government debt, and household debt:

Corporate Government Debt Levels

In the last five years government debt has dropped precipitously, (don’t show this chart to Uncle Fustian at your holiday dinner it’s likely to jolt his fact free universe) household debt has declined, and “business debt” is way up.  There are all manner of reasons for an increase in corporate debt, and some of them are very productive – such as expansion of plants and factories – others not so much.  We’re in “maybe not so much” territory.

Part of the pile of current corporate debt is the result of stock buy backs, a boomlet of sorts in recent times:

“Over the first six months of the year (2016) S&P 500 companies paid out 112 percent of their earnings in the form of either dividends or share buybacks. That, Damodaran argues, is the kind of figure you might expect to see when a recession had suddenly crimped company cashflows, not during a very long-running, if tepid, expansion.

The last time companies were paying out this much more than they are taking in was in 2008, when the financial crisis hammered revenues faster than companies could cut buybacks and dividends.”

… Certainly the very idea of buybacks has come under increasing scrutiny. While a share buyback improves per share earnings performance, it is a piece of financial engineering which increases leverage but does nothing to improve a company’s product offerings or market position, much less its long-term prospects. Indeed, the vogue for buybacks has happened at the same time as an otherwise puzzling lack of corporate investment, especially given that corporate profit margins are still high by historic standards.” [Time] (emphasis added)

There’s nothing too terribly “puzzling” about this state of affairs.   Why would companies indulge in “financial engineering” while profits are high?  Could it be that the “wealth” of the company is financially anchored rather than structurally? Consider this Household debt service as a percentage of disposable personal income  chart from FRED:

Household Debt trends 2016

Superficially, we could argue that the American consumer has done some belt tightening since the Recession of 2007-08 and there’s less money being paid out in debt service from the family coffers – but, we’d also have to be realistic and see that the debt levels are already too high.

Yes, household debt levels relative to the GDP have been declining, but it remains higher than it’s been for almost all of post-war history, and by post-war we mean World War II. [Slate]  

What else could be depressing loans? Other loans – such as Student Debts. Again, we have a picture of that from the Federal Reserve:

Student Loan Trends FRED

What we see here is an increase in student loans owned and securitized, which are outstanding: from Q1 2006 at $480.9670 to Q3 2016 at $1,396.3355.  Student loan indebtedness now exceeds credit card debt, auto loans, and other non-mortgage debt. [Slate] What’s happening here?  Perhaps those corporate profits aren’t predicated on the increasing number of consumers flocking to their doors?  Perhaps not when consumers have an annual household credit card debt of $16,000; a $27,000 average of auto loans; and $169,000 in mortgages? [Slate]

Then, there’s the matter of real household income in the US.  In the first quarter of 1999 it hit a high of $57,909 and hasn’t been back since. The current figure is $56,516. [FRED]   Little wonder there’s some “financial engineering” going on in the corporate world.   That “financial engineering” especially in terms of stock buybacks simply doesn’t make any long term sense:

“No matter how low-interest rates get, it is hard to justify the raising of corporate debt to purchase outstanding stock. Longer-term debt should be used for longer-term needs, e.g. capital expenditures. But from a macroeconomic view, raising stock prices does not figure in promoting economic growth or general well-being—it is simply financial engineering serving the interest of only shareholders and management. No new jobs are created and no new capital investment is undertaken in a world of corporate buybacks. Investors are simply bribed with their own money.” [FinSen] (emphasis added)

So, where does Trumpsterism come into play?  First, let’s assume, given the preliminary appointments to Commerce and Treasury, that the emphasis in this administration won’t be on reducing student debt and regulating the securitization of corporate debt.  Let’s also assume that a Corporate Tax Holiday in the form of “re-patriated” corporate earnings will be a feature.  How is that likely to be spent?

The Financial Times reports: “Much of the debt sold by companies in recent years has been used to buy back their own shares, pay out higher dividends or finance big mergers and acquisitions. While these buybacks funded by cheap borrowing have boosted earnings, a missing ingredient has been spending on investment to build their businesses.”

Why not? If the consumers (read the other 99% of the US population) aren’t clamoring to spend more (read creating demand) then the “financial engineers” will boost themselves by … buybacks, higher dividends, and mergers and acquisitions.  Or…

“A tax holiday that prompts repatriation of cash held overseas by global US companies, a move investors expect during the Trump administration, could help boost investment. Mr Milligan says it is unclear whether companies will plough any repatriated profits into capital investment or simply boost buybacks.“Repatriation could flow through fairly quickly and lead to a noticeable rise in share buybacks.” [FinT]

In less diplomatic terms – here we go again.  Corporations, getting tax breaks and subsidies, faced with a market in which there is declining or stagnating consumer capacity, find ways to engineer their financial statements.  Nevada has seen this movie before, and it didn’t end well for us.

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Nevada’s Good News, Bad News Economy: Housing, Wages, and Woes

Nevada’s home foreclosure rate is still not a pretty picture.   The state still exceeds the national average.  This is not an argument to slather on the Doom and Gloom economic message with a trowel, but it is a cautionary item in the prolonged narrative of the effect of the housing bubble, and the continued pressure from low wage employment.

Nevada Foreclosure 4 2016One in every 702 properties is in some phase of foreclosure, with one in every 373 in Lyon County, one in every 448 in Nye County, one in every 468 in Churchill County, one in every 643 in Clark County, and one in every 657 in Elko County. [RealtyTrac]  Dismal as this may seem, it does represent an improvement over Nevada’s record breaking performance in 2008-2010. [LVSun] At the end of 2010 Las Vegas saw one in every 9 home receiving some form of default notice. [moneyCNN]

The good news:

“The December surge in foreclosure starts is not a cause for concern, as it comes from a previously existing supply of distressed properties,” said Andres Carbacho-Burgos, Senior Economist at Moody’s Analytics, which analyzes RealtyTrac foreclosure data to forecast foreclosure trends. “The national pool of distressed mortgages has not increased despite the surge in foreclosure filings.” [RealtyTrac]

The astounding appetite of the Wall Street Casino for a supply of home mortgages to slice, dice, tranche, and securitize seems to have mellowed given that the “national pool of distressed mortgages” (of which Nevada contributed more than its share?) hasn’t increased.  National foreclosure statistics illustrate an effort to “clean up” previous backlogs.  So, if housing isn’t the big downer, what might be?

The Not So Good News: Nevada’s wage growth from 2007 to 2012 was a –6.5%.  Yes, that’s a minus sign in front of the percentage.  This is not the sort of chart that warms the hearth:

Nevada wage growth 2012 In short, whatever general wage growth there was between 2002 and 2008 was given back in the wake of the housing bubble collapse. The average weekly earnings of $835 in 2002 dribbled down to the average weekly earnings of $840 in 2012, a $5 increase in five years isn’t much to applaud.

There’s a bit  better news for 2016.  Weekly wages in the 3rd quarter of 2015 were $860, compared to the $840 of a year ago, up 2.6%. [NWF pdf] Even better, the unemployment rate in Nevada is now reported at 5.8%, a significant improvement over the +/- 14% we were looking at during the Recession. [NWF]  And now, another note of caution.  The greatest demand for employees in the state is for wait staff (2,229 openings), retail salespersons (2,113 openings), combined food prep including fast food (1,793 openings), and cashiers (1,420 openings) [NWF pdf] 

More food for thought:  Only two of the jobs listed with more than 500 potential openings offer wages or salaries above the median income in Nevada.  General and Operations Managers (571) has an annual average wage of $104,832, and Registered Nurses (608) can expect an average about $78,811. By contrast, wait staff averages $22,277, retail salespersons about $27,040, food prep about $19,781, and cooks $27,456. [NWF pdf]

Not to put too fine a point to it, but the occupations most in demand in Nevada aren’t the ones which will do much to improve either the housing market or the actual level of wage growth.

Nevada’s current $8.25/$7.25 minimum wage is not helping the situation.  A informative graphic in the Las Vegas Sun illustrates that a studio apartment rental in Clark County is affordable for someone working full time at $12.12 per hour, 1 bedroom requires $15.13, a 2 bedroom $18.63, a 3 bedroom unit $27.46, and 4 bedrooms $32,60.  Want a 2 bedroom apartment in Clark County? It requires 2.25 jobs at $8.25 per hour.

One of the least helpful suggestions made to the last version of the Nevada legislature came from Senator Joe Hardy (R- Boulder City) who offered the following resolution:

The resolution would repeal a constitutional amendment approved by Nevada voters in 2006 setting a standard minimum wage. Hardy said he would also propose legislation giving the Legislature the power to control the state’s minimum wage and tie the wage to the Consumer Price Index. [LVSun]

Republicans offered up a proposal for $9.00 per hour, still well short of what it would take a minimum wage worker to afford a studio apartment. Democrats proposed a $16/$15 minimum wage – which would just about get someone into a single bedroom rental unit.  Hardy’s proposal went nowhere, as did the other two offerings.

Meanwhile, the income inequality gap increased in the state.

“The states in which all income growth between 2009 and 2012 accrued to the top 1 percent include Delaware, Florida, Missouri, South Carolina, North Carolina, Connecticut, Washington, Louisiana, California, Virginia, Pennsylvania, Idaho, Massachusetts, Colorado, New York, Rhode Island, and Nevada.” [EPI]

If there were ever a way to insure that an economy based on consumer demand could stagnate, then it surely must be related to the incongruous notion that if a few rich people get richer then everyone will be better off. Let me suggest a re-reading of the old classic, “Where Are The Customer’s Yachts?

Let me also suggest a review of the Department of Labor’s myth-busting publication on the effects of raising the federal minimum wage.  Conservative sites have their own “myth-busting” reports but their conclusions are highly questionable, and just as highly generalized,  and none effectively challenges the research from Kruger and Card which demonstrates that there’s nothing “job killing” about increasing minimum wages. [HuffPo]

Nevada’s economy could be improved by:

  • Increasing the state’s minimum wage to at least $13.00 per hour.
  • Continuing to restrict the activity of bankers who want to securitize mortgages, under the terms of existing banking laws and regulations.
  • Continued implementation of the Dodd-Frank Act.

Nevada’s politicians might be improved by asking some pointed questions:

  • Do you support an increase in the State’s minimum wage to $13.00 per hour?
  • Do you support the continued implementation of the Dodd-Frank Act

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Filed under Economy, Nevada economy, Nevada politics