Clarity

Where to start.

Depending on which talking head you prefer, the republican control of the legislative, executive and possible the courts will either ruin our great country or propel it into an amazing future.  Just like when the democrats had control, your favorite pundit predicted the death of our great country or the beginning of a new era.

The truth, and clarity, always lies in the middle.

These are trying times for all of us, especially those of us who are not ideological purists.  I personally remain unmoved by the arguments put forth by either side in the current handwringing or jubilant flag waiving of the non-centrist.  But this is a time to take stock and carefully start preparing for things to unravel.

On tax reform.

The real problem is, when the legislative and executive branches change hands, as they inevitably will, do you think that these so-called tax reforms will stand? Will we keep a 20% tax on corporate earnings?  Probably not.  Will we keep the unnecessarily complex “pass-through” tax law?  Probably not. Will individual tax brackets go back to more progressive?  Most likely.

Within 10 years.

When I first started in public accounting a partner took me along to a lunch with a long-time client.  He harvested walnuts.  The most striking thing he said at this lunch was that the crops he is harvesting today comes from trees planted 15 or more years ago.  It takes that long to produce mature enough nuts to take to market.

Consider that.  Someone had to be willing to invest day 1 knowing that there would be no pay back for 15 years.  Believe it or not, that is what strong companies do, they plant, the tend, and then they harvest.  What they need is things to remain somewhat consistent and predictable.  But if tax laws are changing every few years, planning become impossible.  Businesses get whiplash and planning goes out the window.

On our current executive.

He is what we elected.  If you don’t like it, then think about how to address the problem.  But I will be honest, more people voting against him in 2020 in the states of California and New York will not get him voted out of office.  If he really bothers you, then you will need to move you, your family, and the 10,000 close friends you have to the mid-west.  The Elector College matters and yes, sometimes it gives us terrible results, but I think that is why it was put in place.

On jobs and economic growth.

Several years ago I read a paper on the correlation between economic growth and the increase to the labor pool.  Historically, countries tend to grow at the same pace as the participants in the labor force grows, otherwise, countries end up in either inflationary or recessionary cycles.  I believe that our labor force participation rate is growing about 2% a year.  This is the net of new entrants, retirees, immigration and emigration.  Cut immigration and the economy will grow at 1.5%.

This is a huge problem, and not just for meeting the projections in the tax bill.  Japan is a fascinating example of this.

Social security needs a certain minimum number of working adults paying into the system in order for it to receive sufficient funds to pay out claims for retirees.  If I remember my numbers, back in the 1930’s there were 8 working people for every retiree drawing social security.  Today I believe that number is about 3:1.  Again, if the ranks of retirees are growing faster than the ranks of new entrants to the labor market, we have to face the reality that this ratio could drop to 1.5:1.

Oh, and consider that wages are not growing.  That means that social security taxes, which are only on wages, is not growing.

Getting clarity is not hard.  It does, however, require a little effort to look beyond your belief system and ask hard questions.  The most effective answers always lie in the middle.  Let’s see if we can’t start having that conversation there instead of always arguing from the fringes.

Have a great day.

 

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