Consensus Isn't Science

On Saturday, in conjunction with Earth Day, the March for Science was held around the country.

The march was portrayed as a non-partisan but it seems that the only grievances of the marchers were directed at President Donald Trump.

What are their chief gripes?

It seems they are principally upset that Trump is not a blind believer in man-made climate change. In addition, he is proposing cuts to the National Institute of Health's budget and some other research programs funded by the federal government.

I was in Oxford, Ohio on Saturday and happened to come across the March for Science at their political rally on the campus of Miami University. It is probably not surprising that there were a lot of marches on college campuses since any NIH and science research cuts would hurt academia the most.

The March for Science gathers for speeches at Miami University in Oxford, Ohio 

Trump is proposing a 18% cut in the NIH budget for next year. To put that in perspective, the NIH spends about $32 billion on various research grants each year. The Trump budget proposes cutting about $6 billion of that total that goes for "indirect" costs for university overhead. It does not propose any cuts for direct research grants for science. It merely wants to cut back the money it is giving colleges and universities that is not going directly to research. Of course, the universities say they need this money for administration of the programs. Can you say bureaucracy?

I recently wrote about the massive subsidies the federal government is providing to the Ivy League in my blog post, "Higher Cost Education". The NIH grants are part of what I was referring to and it is not chump change.

• The eight Ivy League universities actually derived more in revenues from the federal government through government contracts and grants ($25.27 billion) than in supporting their educational mission ($22 billion in student tuition) for the fiscal years 2010-2015.

• The eight Ivy League colleges actually receive more money annually from the federal government than do 16 states!

The first question you need to ask is whether this is a March for Money rather than a March for Science on those college campuses?

It might also be worth remembering that the projected federal budget deficit for the current year is $559 billion. If we are to ever get the federal budget under control where are the savings supposed to come from? For some additional context here is a chart that shows federal spending on research from 1970-2016 in constant dollars. 

www.aaas.org

I have written about the climate change issue many times over the years. I wrote the following in 2011 in one of my first blog posts and it still summarizes my views on the issue. You can read some other posts that I wrote on the subject here, here and here.

I am not a climatologist or meteorologist. However, I consider myself a practical thinker who makes decisions by looking at facts. I have also learned that it is always important to look beyond the "facts".  How are the facts packaged and what is the motivation of the messenger?

Over the years, I have listened to the claims about human created global warming. Without even spending a lot of time on the science, these claims never seemed to make sense to me.  The planet is known to have warmed and cooled over the years.  Even if the data shows it is warming, how do we know it is caused by man when you look at past history?  We know there was an ice age.  We also know the ice melted.  How did it ice up? How did the ice melt?

I can't help but be a little skeptical when I also see the changing explanations about the climate.  In fact, it does not even seem to be global warming we are worried about any more, it is climate change. We also heard a few years ago that we would see far less snow because of global warming. When we got more snow, we were then told this was also caused by the warming. 

It is all very confusing for something that is supposed to be so settled in science. I also remember in the late 1970's and 1980's all of the talk from scientists was concern that the planet was cooling.  What happened?  That was only a few short years ago- a speck of time in the history of the earth.

When it comes to settled science, there is no doubt that we have climate change. It changes every hour, every day and every year. It has changed over the centuries.

The question is not whether it is changing but whether man is impacting that change and, even if that is the case, whether we can even do anything about it?

Whenever we hear about the "science" of human related climate change there is nothing "settled" about it. That is why we hear that this view is supported by the "consensus" of scientists.

Of course, "consensus" is not the same as facts. And consensus is not a scientific fact. A scientific fact is the law of gravity, the boiling point of water or the distance to the moon. 

Credit: CNN.com

Prior to the 15th century, the consensus of scientists was that the earth was the center of the universe.

In the 18th century, the consensus of medical scientists was that blood letting was the best method to cure illness.

As recently as 25 years ago the consensus was that peptic ulcers were caused by stress. We now know it is caused by bacteria.

I could go on and on. In fact, in most cases like these, the consensus of scientists was proven wrong by one person who did not believe the consensus and proved it wrong.

All of this "consensus" of science talk reminded me of a speech that the late Michael Crichton gave at Caltech (if there was ever a center for science that is it) in 2003 titled "Aliens Cause Global Warming". Don't the charts below show that has to be true?

Credit: DrRoySpencer.com

Of course, Crichton's entire purpose in the speech with that outrageous title was to call attention to the "increasingly uneasy relationship between hard science and public policy." There is no better evidence of that than in the March for Science. This march had nothing to do with science per se. It had much to to do with public policy. More importantly, it was about money. It almost always is.

Consider a few of the observations that Crichton made about the subject of consensus science.

I want to pause here and talk about this notion of consensus, and the rise of what has been called consensus science. I regard consensus science as an extremely pernicious development that ought to be stopped cold in its tracks. Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled. 

Whenever you hear the consensus of scientists agrees on something or other, reach for your wallet, because you’re being had.

Let’s be clear: the work of science has nothing whatever to do with consensus.

Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world. In science consensus is irrelevant. What is relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus.

There is no such thing as consensus science. If it’s consensus, it isn’t science. If it’s science, it isn’t consensus. Period.

It is advice worth remembering especially to those who are among are our best and brightest who seem to be letting their emotions overrule the more logical parts of their brains.

Of course, it is easy to do. All the more so when gigantic sums of money are involved.

In one of my earlier posts on the subject of climate change, I cited the fact that since 1993 over $193 billion had been spent by the federal government on research on the subject. I pointed out that if there is that much money in play for academics, researchers and climatologists into proving global warming, how much effort is going into looking at data that might be contradictory to that conclusion? 

Indeed. Consensus isn't about science. However, the scientists that marched on Saturday seem to want us to believe it is. And at its core the consensus they are trying to promote is for us to keep spending our tax dollars on their research projects---whether it is science or not.

"It is difficult to get a man to understand something, when his salary depends on his not understanding it."

                                                                     -Upton Sinclair

Less Cheese, More Moves

There are more real agents in Cincinnati than there are current real estate listings.

That is a factoid I picked up last week when I had lunch with a real estate agent friend.

I asked him why people were not listing their houses for sale as I had seen that low levels of real estate listings were the norm in a number of U.S. cities. For example, CNBC recently reported that the supply of homes for sale in the U.S. was the lowest it has been since 1999.

He shrugged his shoulders and said that a lot of people just seemed to be satisfied with where they are. They simply did not want to risk a change in their lives.

A couple of days later I came across this op-ed by Kyle Smith in The New York Post on "Why Americans have stopped moving" which delves into the issue in more detail.

Americans are stuck. Locked into our jobs, rooted where we live, frozen at our income levels. More than at any previous point in our history, we’ve stopped moving — whether moving up the income ladder or packing up a truck and finding another home. We’ve grown ossified, rigid.

Smith sees a bigger issue under the surface and suggests that something has changed in the American character and the American economy that seem to be reinforcing each other. Parts of the country are booming and parts are stagnant. Why the disconnect and why aren't people doing something about it?

It wasn't always like this. Americans have a long tradition of moving towards opportunity. Does anyone remember, "Go West, young man"? What about the thousands upon thousands of people who left Appalachia to work in the steel mills and manufacturing plants of the Midwest after World War II?  Grandparents like those of J.D. Vance who wrote Hillbilly Elegy.

...labor mobility is in a funk. Especially after WWII, millions of Americans with limited resources — southern blacks — moved hundreds of miles from home to take up industrial jobs in the north. At the peak, more than 30 percent of southern-born blacks moved north, from 1920 through the 1960s. Even when technological limitations made long-distance travel extremely onerous, in the late 19 century, we were willing to travel in search of opportunity. In the second half of the 1800s, more than two-thirds of US men over 30 had moved away from their hometowns, and more than a third of those moves were for more than 100 miles.

Smith does a good job of explaining the problem but he does a poor job of explaining why it is happening.

He blames high real estate prices in New York City and San Francisco. He blames low white collar office productivity. He cites the fact that fewer start-up companies are being formed.

None of these explanations seem to explain anything by my way of thinking.

If all of this is true then why do we have so many immigrants flooding into the United States? They don't seem to be deterred by any of these factors. If they are willing to move across thousands of miles to seek opportunity in the United States how come Americans will not cross a state line?

Nowadays, moving from one state to another has dropped 51 percent from its average in the postwar years, and that number has been decreasing for more than 30 years. Black Americans, once especially adventurous, are now especially immobile. A survey of blacks born between 1952 and 1982 found that 69 percent had remained in the same county and 82 percent stayed in the same state where they were born.

Smith seems to have missed the most obvious explanation---America's social safety net.

The social safety net has become so large and all encompassing that it no longer provides protection--it has reached the point that it has trapped and ensnared millions of people. People don't move because they don't need to move. Their situation may be less than ideal but they have subsidized housing, they have food stamps, they have Medicaid. Millions gets a government check each month. There is no need to move.

People used to move because they needed to in order to put money in their pockets and a roof over their heads. They were willing to take a risk to better a bad situation. There are few situations anymore where Americans feel the pain of a bad situation like people used to. We have taken care of that by removing much of the discomfort. We have also destroyed people's incentive to do something about bettering their lives in the process.

Spencer Johnson wrote a very popular book almost 20 years ago entitled, "Who Moved My Cheese?"

The book is about four characters who live in a maze and have grown accustomed to a nice, big piece of cheese that they live off of. Two are mice who are simple and instinctive and two are "little people" (named Hem and Haw) who represent the complexities of us as human beings. Hem and Haw even move their homes closer to the cheese to make it the center of their lives. However, the cheese gradually gets smaller and smaller until it is all gone.

The mice see the situation for what it is when the cheese is gone and immediately head out into the maze to search for another supply of cheese.

Hem and Haw refuse to accept the reality that the cheese is gone. They linger near with the hope that the cheese will be replenished. They spend their days bemoaning how unfair it is that the cheese is gone. They complain endlessly that they are victims of fraud or theft.

Hem and Haw eventually grow hungry and Haw tries to encourage Hem to join him in a search for new cheese. Hem is fearful of moving even though he is hungry. He won't move. Haw ventures out on his own. It is scary in the maze but Haw begins finding small chunks of cheese to sustain himself along the way. Eventually he finds a new supply of cheese that is bigger and more varied than he could have ever imagined. Of course, the two mice had found the new cheese long before Haw arrived.

The core lesson of "Who Moved My Cheese"is that change is inevitable in our lives and to live life to the fullest you have to embrace that reality. Change is scary but breaking through your fears sets you free. Those who continually seek security end up living in constant fear of losing it.

Human beings are naturally risk averse. Therefore, providing a steady supply of cheese actually works against our long term best interests. No pain almost certainly means no gain in the end when humans are involved.

Should you think that government "cheese" is our only problem in this regard, consider this additional factoid that came out this week from the U.S. Census Bureau.

More Americans aged 18-34 are living with their parents than with a spouse.

57% of 18-34 olds were living with a spouse in 1975 compared to only 27% today. By contrast, 31% are living with their parents today compared to 26% in 1975. It should be noted that the Census Bureau counts college students living in dormitories during college as living with their parents for this purpose.

What do we seem to need to get America moving again?

A little less cheese---from government and parents---might be worth considering.

It is hard to say no when someone is in need. However, what is often needed is not a free lunch but the freedom to overcome their fears and move beyond them. For many, that is the only way you will ever get anyone to move.  Over 200 years of American history and the influx of millions of immigrants into the United States in recent years proves it.

Lessons On Investing

I gave a presentation on achieving financial success to a hundred or so graduating college engineering students two weeks ago.

For this audience, my primary message was simple and straightforward.

You have the greatest asset in the world for financial success---your youth.

Live beneath your means. Save and invest. Start when you are young and stay with it.

Compound returns will guarantee that you become wealthy.

It is no more complicated than that. 

Despite the fact that the formula is simple, very few people seem to be able to follow it.

Consider these statistics from the Economic Policy Institute (data as of 2013).

Nearly half of all families have no retirement savings at all.

The average retirement savings account holds $95,776.

However, that number is pumped up by the few that have saved a lot. When you take account of the many that have nothing, the median is just $5,000.

Even for those ages 56-61 nearing retirement, the median retirement savings is just $17,000.

Besides failing to save in the first place, many fail to achieve financial success because they can't keep their hands off of their savings, they lose too much to taxes or they make poor investment decisions with their money.

You see all three of these working together when someone borrows from their 401(k) account. On average, about 20% of participants in a 401(k) plan have a current loan from their 401(k). Almost 40% of plan participants have taken a loan out over the last five years.

There are many reasons why taking a loan from your 401(k) is a bad idea but the biggest reason is that the loan terms effectively make the loan fully callable if your employment ceases with that employer. Could there be anything worse financially for anyone than to lose their job which then becomes the trigger for a loan being called?

It is probably not a surprise that 86% of those with a 401(k) loan that leave their employer, default on the loan. This then triggers full taxation of the loan amount and a 10% penalty. A sure-fire way to end up with little or no retirement savings.

One of the other big messages I conveyed to the college students was to "watch their pennies." People tend to think that pennies are not important. That is why I seem to find so many laying on sidewalks. I never ignore a penny on the sidewalk.

You understand this when you see what a penny's difference can make when it is compounded over time.

Take the example of a graduating college student who receives a $2,000 gift at graduation from her grandparents. Her grandparents tell her to invest it in a retirement account and to add $2,000 to the fund each year for the next 45 years as a tribute to them. She does just that.

That money, compounded monthly at an 8% annual return, will give her almost $1 million at age 67. However, if she only earns 7% (a mere penny on the dollar less per year), she accumulates only $682,000. If she earns 9%, her retirement nest egg becomes $1,356,475.

An extra 1% in extra investment return per year makes a huge difference over a lifetime. The same goes for an extra 1% in investment management or advisor fees that reduces your investment return. Those fees can be well worth the money if Warren Buffett is picking stocks for you or managing your investments. However, the fact is that only 19% of active investment fund managers around the world are doing better than their benchmark index according to a recent Bank of America study.  However, those active managers are charging premium fees even though they may be delivering sub-par returns.

Why is it hard to beat index investing?

The easy answer is that the benchmark index has no fees. For a manager to beat the index they have to deliver outsized returns at least equal to their fee. That is not an easy task.

New research provides the answer as to why this is so hard. The reality is that stock market index performance is heavily skewed to a handful of stocks each year. A few stocks typically drive annual stock index performance while 70% of stocks will perform worse than a Treasury bill according to a study by J.B Heaton, Nick Polson and Jan Hendrik Witte.

A few quotes from the Bloomberg Markets article on the research.

The distribution of returns in the stock market is bizarrely lopsided. Often, equity benchmarks are so reliant on gigantic gains in just a handful of stocks that missing them—as most managers do—consigns the majority to futility. 

A concentration of outsize gains in a minority of index members is tantamount to a death sentence for anyone who gets paid for beating a benchmark. It’s a pattern of returns that virtually ensures everyone outside of an indexer owns mostly deadbeat stocks.

By itself, the observation that you need to pick winners to beat the benchmark isn’t news. What else are fund managers paid for? The point of this vein of research is that the contours of the market itself make the odds against picking winners prohibitively long. 

Lessons worth remembering whether you are a college student, a 401(k) participant or an active investment manager.

Fair or Not? You Decide.

"Don’t tax you. Don’t tax me. Tax the guy behind the tree."                                              -Former Senator Russell B. Long

The income tax filing deadline is upon us and there are two things most people know for sure.

They are paying too much in taxes.

The "rich" are not paying enough.

A Gallup poll last April 15 found that 61% believed that the upper-income pay too little in taxes.

As you might expect, this view is skewed one way or the other if you are a liberal or conservative, Democrat or Republican. Interestingly, it is not as skewed along income lines as it is by political philosophy.

The views on using heavy taxes on the rich in order for the government to redistribute wealth are even more extreme when comparing Democrats vs. Republicans. 80% of Democrats believe there should be a heavy tax burden on the rich in order to redistribute income compared to only 22% of Republicans. However, again, you don't see these extreme views along income lines.

Another truth about taxes I have discovered over the years is that most people have no idea how heavy the tax burden is on the rich already. They also believe that the rich are using all sorts of loopholes to avoid paying their fair share. As a former tax attorney and CPA, I hate to tell them that most tax loopholes have been gone for over 30 years.

What is a fair share of taxes?

As we have seen from the quote above, "fairness" seems to exist in the eye of the beholder.

However, let's look at that question more objectively.

The information below is from the most recent Congressional Budget Office analysis on "The Distribution of Household Income and Federal Taxes" based on 2013 data. This data is categorized by income quintiles comparing before-tax incomes with the federal tax burden for each group. This analysis also breaks out the top 1% of income earners.

Federal taxes in this analysis includes individual income taxes as well as payroll taxes, corporate income and excise taxes.

As you can see, the only group which is paying a higher share of taxes as compared to their share of income are the highest quintile of income earners---"the rich".

The lowest two quintiles are paying far smaller shares of tax compared to their incomes than those with higher incomes. In fact, the top 1% are paying 34% of their pre-tax income in taxes. The lowest quintile--- a mere 3%.

The amount of federal taxes paid as a percentage of pre-tax income by income quintile group is as follows.

Source: Congressional Budget Office

Fair or not? You decide.

It is also interesting to see where the components of pre-tax income come from for each quintile income group.

Source: Congressional Budget Office

If you want to consider the current redistribution of income by the federal government, consider that 38% of before-tax income of the lowest quintile of income earners is in the form of government transfers (Social Security, Medicare, Welfare).

The so-called 1% could also get their name from the amount of their income they are getting in the form of similar government transfers---a mere 1%.

By the way, it takes $1.6 million of income to be considered in the top 1%, $327,000 to be in the top 5% and $201,000 to be in the top 10% in this CBO report.

What is also interesting is the degree to which the middle class in the 3rd and 4th quintiles are reliant on income from labor to support themselves--about 2/3 of their household income comes from labor income. Only 2%-3% of their income is coming from capital income and gains.

On the other hand, the Top 1% derives only 35% of their income from labor. Almost 2/3 of their income comes from business income (23%) and capital income and gains 38%).

It really drives home the lesson my father taught me growing up when he would drive me to an area nearby to where we lived that had large, beautiful homes. He would say to me as we drove down the street, "The people who live in these homes don't do it on salary or wage, they have got people working for them or they have capital working for them." I never forgot what he told me and this graph shows that my father knew what he was talking about.

I don't know that I have ever seen a better graphic to show where the jobs come from that pay the labor income or the taxes that pay for the government transfers that the bottom 80% rely on to live on than what you see above.

Looking at this graphic, what do you think happens if a tax increase cuts into the income of the rich? Do you think it might have some impact on jobs and the labor income that ultimately sustains the masses? What about a tax cut for these people? Who would really benefit?

38% of the before-tax income of the poorest 1/5 of Americans is already being paid by the rich and 34% of the next quintile by redistribution by the federal government.

Fair or not? You decide.

If we want to just look at the federal tax burden compared to income with regard to federal individual income taxes alone, the numbers are even more stark. This is the most recent IRS data from the 2014 tax year compiled by The Tax Foundation.

Consider the fact that those with adjusted gross incomes of less than $100,000 account for 43% of all the income reported on U.S. individual tax returns. However, these taxpayers only shouldered 15% of the total federal income tax burden.

Those making $100,000 or more accounted for 57% of all income but paid 85% of all federal individual income taxes.

Those making $250,000 or more accounted for 28% of all income but paid 55% of the tax bill.

Fair or not? You decide.

I am not happy with what I pay in taxes.

However, I am just happy there is a guy or gal behind the tree that is paying even more than me.

This is a day to be thankful for every last one of them.

ADDENDUM:

Some historical perspective on the differences today compared to 104 years ago when the individual income tax was first implemented.

Credit: Americans for Tax Reform

Incentives Drive Results

There is one absolute when considering human behavior.

Human beings respond to incentives. We quickly understand what is in our interest and what is not, and we respond accordingly. We will act in accordance with what is in our best interest. Period.

Incentives drive the world. If the incentives for people are properly aligned, you will get the result you want.  If the incentives are not properly aligned, you will get poor results.  Whenever you get a poor result it is likely that you will find that the underlying incentives were not aligned properly.

For example, our illegal immigration problem from Mexico and the outsourcing of jobs from the U.S. to Mexico can be explained in one chart. It is all about incentives.

Wages in the United States are four times what they are in Mexico. That is a powerful incentive for a Mexican worker to want to work in the United States rather than in Mexico.

Wages in Mexico are one-fourth what they are in the United States. That is a powerful incentive for the owner of a manufacturing plant to transfer its production to Mexico.

Considering the natural incentives in place in the form of the wage differential, wasn't it rather foolish to not enforce our immigration laws and to also sign a free trade agreement with Mexico?

Is it any wonder we got the result that we did in mass illegal immigration from that country as well as the loss of scores of U.S. jobs to Mexico?

The incentives by themselves told us it would lead to a bad result. Our public policy then made the situation even worse.

We see this all the time in public policy.  If you pay people not to work, they will not work.  If you give aid to single mothers with dependent children, you will end up with more children who are dependent. If you penalize corporations by taxing repatriated earnings, they will not bring money back to the United States they earned (and were taxed on) overseas. If employers get a tax advantage for providing health care to their employees, you end up with an employer-based health system rather than an individual-based market. If you provide low-cost federal student loans, more kids will go to college but more and more loans are necessary for everyone because colleges can increase tuition with little consequence.

Nowhere have we seen the perverse effects that occur with misaligned incentives more clearly than in the welfare system of the United States.

Many of the major elements of our social safety net programs were introduced as part of President Lyndon Johnson's "War on Poverty" in the mid-1960's. One of those programs was the Food Stamp Act of 1964.

Of course, today it is no longer officially called the food stamp program, it is called the Supplemental Nutrition Assistance Program ("SNAP') and they don't use stamps anymore, recipients get an EBT Card (Electronic Benefit Transfer).

If it was a "War on Poverty", we lost the war a long time ago. It seems that the more money we spend on combating poverty, the more people who end up in poverty.

When the food stamp program began in 1965 there were 500,000 people initially receiving food stamps. Over the last four months, an average of 43.1 million people are receiving food stamps according to the latest numbers from the U.S. Department of Agriculture. That is down from a high of 47 million people in 2013 but it is still an astronomical number when the unemployment rate is 4.7%

The chart below shows the growth of the number of households on food stamps by state since 2000.

Credit:ZeroHedge.com

Could it be that the incentives are not aligned properly when it comes to food stamps?

The State of Maine, led by Republican Governor Paul LePage, recently began enforcing work and volunteer requirements in order to continue receiving food stamps. These have been part of federal law since President Clinton signed welfare reform legislation into law in the 1990's. However, many states had waived out of the requirement in the wake of the Great Recession.

In effect, the "new" rules are old rules that were first used in the 1990's and had a dramatic effect in reducing the welfare rolls and getting more people in the work force. However, the Obama administration and big government liberals wanted nothing to do with anything that might actually have been proven to work.

The new rules prevent adults who are not disabled and do not have dependents from receiving food stamps for more than three months - unless they work at least 20 hours a week, participate in a work-training program or meet volunteering requirements.

In other words, for those who are able-bodied and do not have dependents to care for, they need to get out and do "something" to better their lives in order to continue receiving food stamps. Work, get trained or volunteer. It is their choice. However, if their choice is not to do anything, they are stricken from the food stamp rolls. Once stricken, an individual must wait at least three years before they can again receive food stamps.

What happened once Maine starting enforcing the rule this year?

75% of these people decided that the idea of working, getting trained or volunteering was too much effort to expend to continue getting food stamps. Maine had 12,000 such individuals receiving food stamps at the beginning of the year---it now only has 2,680 as of the end of March.

Incentives drive behavior. Incentives drive results.

If you want the right result you need to pay attention to the incentives in any system involving human beings.

If people in poor countries are incentivized to immigrate to the United States because it pays 4 times as much in wages, you better make sure you have a way to deal with it. That is why there are immigration laws and why they need to be enforced.

If business owners are incentivized to move their manufacturing to a lower labor cost market, you better have a way to deal with it. You don't allow those owners to chase the lower wages and then turnaround and let the products flood back into the U.S. market without some type of import duty, tax or tariff.

When we start studying the incentives that drive people, and develop public policy around that reality, the country and world we live in will be a much better place.

Higher Cost Education

April is the time when high school seniors are making their decision on where to attend college. The acceptance letters have been received. It is time to send the the deposit money in. It will be the first of many checks over the next four (or five?) years for these students.

College enrollment has been in decline the last few years.

This has been largely driven by a declining number of those turning 18 in the U.S. population. This decline is leveling off but will still result in approximately 5 million fewer 18-year olds each year over the next decade than there were in 2009.

This will put additional pressure on the budgets of many colleges and universities as they compete for a smaller applicant pool while being burdened by higher debt loads that funded a massive amount of building and renovations over the last decade.

Two years ago I wrote about the higher education "arms" race in Ohio with specific reference to the substantial levels of debt that Ohio public universities had taken on since 2004. It is the same across the country where public universities have doubled their debt load over the last ten years, according to Moody's Debt Service.

Where has the money gone from all of this borrowing?

Some went for new classroom buildings and technology upgrades. However, a lot of the debt has been taken on to pay for student amenities such as rec centers, student centers, food courts, hip residence halls, climbing walls and lazy rivers.

In recent years, colleges have embarked on a massive facilities binge in a competition to attract students that is reminiscent of the old-fashioned defense arms race between the U.S and the U.S.S.R. Dorms that resemble the TajMahal, recreation centers that look like they could be an Olympics venue and dining halls that are fit to serve meals straight from The Food Channel.

It all costs money, and tuition and fees need to go up to pay for the luxuries, and the added debt. Bucking the trend is career suicide to the college administrators should they fail to enroll the necessary numbers to fill their incoming classes with a declining pool of eligible students. After all, nobody wants to lose a good student and the tuition money that comes with her because they did not have a rock climbing wall in the rec center.

However, the reality is that the university borrows the money for the facility upgrade, it passes the cost on to the student, who has to take out a federal student loan to pay the tuition and fees, and the federal student loan program is, in turn, funded by additional federal government borrowings (or Federal Reserve QE)!

Federal student loan debt
Does not include an additional estimated $400B+ in private student loan debt

A vicious cycle if there ever was one. Where does it end?

Most states in the Northeast and the Rust Belt will face the greatest enrollment challenges as these states will see larger declines in the number of 18-years olds than states west of the Mississippi River.

This chart shows the expected change in college age populations between 2009 and 2028.  All the Northeast states are looking at declines of over 20% as are Pennsylvania, Delaware and Michigan. The Rust Belt states are generally looking at declines of at least 10% in prospective students.

Credit: http://www.smithgroupjjrblog.com/where-the-university-students-are/

Of course, not all colleges are going to feel the challenge of declining student age  population the same. The top-ranked and highly competitive schools in a state or region have the high ground. They will get the students to fill their dorms and classrooms. It is the colleges further down the higher education food chain that have the most to lose.

Consider the Ivy League schools that span the Northeast states. All these states will be experiencing declines in college age populations exceeding the national averages over the next decade. However, the Ivy League is unlikely to feel any effect at all from this decline in the student population.

They draw from a national student base, they have unparalleled brand appeal, they have huge financial endowments and they receive massive federal taxpayer support in the form of federal contracts, grants and direct financial assistance for students.

The numbers are staggering as compiled in a recent report by Open the Books, a non-profit organization whose mission is to compile and post online spending at all levels of government.

One big item that Open the Books has focused on is the size and tax-exempt status of the endowment funds of the Ivy League schools which now total over $119 billion. That is equal to about $2 million per undergraduate student.

To put that it context, that amount of money is enough (even without any more gifts) to pay for the entire tuition of every undergraduate student at the Ivy's for the next 51 years.

Needless to say, Open Secrets questions whether the tax-exempt status should be maintained for these university endowment funds.

You begin to understand this perspective even better when you considerh that the eight Ivy League universities actually derived more in revenues from the federal government through government contracts and grants ($25.27 billion) than in supporting their educational mission ($22 billion in student tuition) for the fiscal years 2010-2015.

The eight Ivy League colleges actually receive more money annually from the federal government than do 16 states!

Read the full report.

The law of supply and demand would suggest that with reduced numbers of college-age students that there should be some moderation in college costs over the next decade.

However, with the federal government providing more than $100 billion in funds that annually pay those college costs, that is not likely to happen.

Isn't it curious that those two areas of the economy which have seen the greatest infusion of government money have also seen the highest inflation costs over the last 40 years?

 Coincidence? I think not.

Made in China

President Trump will be meeting this weekend with Chinese President Xi Jinping in a summit at Trump's Mar-a-Lago estate in Palm Beach, Florida.

It promises to be an interesting few days considering that Trump consistently criticized China's business and trade practices during the campaign.

Let's look a little deeper at the trade between China and the United States.

Imports from China were practically non-existent 25 years ago. Today the United States is importing over $400 billion of goods per year from China. This is producing a $300+ billion annual trade deficit with that country.

Credit: earnforex.com

This trade imbalance is the reason Trump has been so vocal in questioning the fairness of the trade and business practices of the Chinese relative to the United States.

Back in 2012, I wrote how the trade practices of the United States and China differed. And how the United States was getting taken to the cleaners as a result.

A Chrysler Jeep Cherokee SRT8 costs $189,750 in China.  This is over 3 times what it costs in the United States. Why the difference?  China imposes import duties and taxes on the sale of the American-built SUV in their market

We hear all this talk about free trade but it often seems that it is a one-way street.  We provide a freeway into our market-the richest and most lucrative in the world-but we often see roadblocks are placed on our access to foreign markets.  How about free and fair trade?

The United States is the largest export market for Chinese goods. 20% of China's exports go to the United States. China needs the United States market to continue to grow their economy. This gives Trump a little bit of leverage in any talks about the relationship.

This chart  (click to enlarge) shows the level of imports from China by product category ordered by China's share of all imports of those products. For example, 90% of all umbrellas and sun umbrellas that are imported into the United States are from China.

What is interesting in the chart is that the number of categories in which China is making up more than 40% of the share of imports for various products (Toys, games and sports (80%), Footwear (60%), Bedding (50%), Electrical machinery and equipment (40%).

It is also troubling to see that just two product categories (Electrical machinery equipment-$136 billion and Machinery, mechanical appliances-$107 billion) make up more than half of the total amount of Chinese imports. These are exactly the products that used to be made in the Rust Belt. Look no further than this statistic to better understand Trump's appeal in those states. Those voters know where their jobs went.

Of course, as President Trump was quick to say, China only bears a portion of the blame. The United States let it happen though poorly designed trade agreements and a tax system that was totally out of step with the rest of the world.

The United States has the richest, most lucrative market in the world but our policies essentially invite the rest of the world to access it with little or no cost. Most other countries apply some type of value-added tax or border tax on imports so that those products coming into the country bear some cost of supporting the market they are using.

Not the United States.

One of the many Chinese umbrella maufacturers

Consider an umbrella manufacturer in the United States. It pays its employees and also pays the employer share of FICA. It must pay for their unemployment insurance. Under Obamacare, it must provide healthcare. It pays property taxes on the plant property and personal property taxes on the equipment. It is subject to an immense number of regulations from the EPA to OSHA. Then, if there are any profits left, it must pay a corporate income tax. 

A single umbrella manufactured in the United States carries a staggering amount of costs that support why the United States is the United States. Schools, hospitals, the social safety net and all the rest.

What about the umbrella that was manufactured in China and imported to the United States?

It provides nothing. There is no contribution at all to pay for Social Security, Medicare, Medicaid, food stamps, schools or anything else, not to mention the defense security of the market that makes it such a stable, lucrative market.

This cannot continue. 

The United States must reform its tax system with some type of border-adjustable tax system that will tax imports coming in so that they bear an appropriate cost to support our market. At the same time, exports from the United States should get a tax break just as is the case in the tax regimes of most of our trading partners.

That is what is required to level the playing field. I would expect to see some type of border-adjustable tax in President Trump's tax reform proposal later this year.

Retailers, who are probably the biggest beneficiaries of the current tax and trade regime, are already preparing a big fight. A group of the largest, including Best Buy, Macy's, Walgreen's and Wal-Mart, have launched a coalition called "Americans for Affordable Products" to resist any change in our tax laws that might make imports pay some tax costs in our system.

After all, as I have written before, quoting Daniel Kahneman,

"Reforms always create winners and losers, and the losers will always fight harder than the winners."

I am not sure the retailers and the others relying on imports are going to be able to fight and win this one in the end. However, it promises to be a real dog fight.

Consider the numbers.

Over $400 billion in imports from China.  $2.7 trillion in total imports into the United States annually. Considering U.S. exports with it, the United States is on the wrong side of a $800 billion trade deficit.

A border-adjustable of tax of just 10% has the potential to bring in $270 billion of new federal tax revenues that is not being captured anywhere currently in the system. That is a tremendous amount of money that could be used to offset other taxes in tax reform, provide export tax relief,  shore up Social Security or Medicare, pay for infrastructure spending or  ease the transition from Obamacare. Just a small slice of it could even pay for a border wall with Mexico.

The uses of this money are endless for a dealmaker like Donald Trump. That is why I will be shocked if this is not one of the major items in any tax reform package.

All of the companies who are funding "Americans for Affordable Products" must think this is where this is headed as well.

Made in China has grown across our land the last 25 years.

This weekend may mark the beginning of Made in the USA once again standing a fighting chance.

One Person (or Several Judges) Can Make A Difference

One of the great things about the United States of America is that one person can literally make a real difference. The freedom is there to take an idea and change the country, if not the world.

In our lifetimes we have seen it done so many times.

Walt Disney. Sam Walton. Bill Gates. Steve Jobs. Jeff Bezos. I could go on and on in the business realm.

The same can be said in the political arena.

Wayne Wheeler is a name most people have never heard of. However, he is the man most responsible for the passage of the 18th Amendment to the U.S. Constitution banning the manufacture, sale of transportation of liquor which became none as the Prohibition era in the United States.

Wheeler's anti-alcohol stance dated back to when he was a young boy and a hired hand at his family's farm was so drunk that he drove a pitch fork into Wheeler's leg without comprehending what he was doing. Things like that have a way of staying with you. Wheeler's focus over his entire life then became to wipe out what he saw to be the scourge of alcohol in the country.

Wayne Wheeler
1869-1927
Credit: Wikipedia

I wrote about the political lessons of Prohibition in the blog, "People, Power and Prohibition." Prohibition would never have occurred but for the steadfast resolve and persistence of Wayne Wheeler. Wheeler changed the entire arc of American history.

Much like the story of Wheeler and Prohibition, I came across a story this week that reminded again of the power of one person. It is the story of Gregory Watson who received a "C" on a paper on the U.S. Constitution in 1982 as a college student and ended up being the driving force for the ratification of the 27th Amendment to the Constitution.

The story begins in 1982. A 19-year-old sophomore named Gregory Watson was taking a government class at UT Austin. For the class, he had to write a paper about a governmental process. So he went to the library and started poring over books about the U.S. Constitution — one of his favorite topics.

“I'll never forget this as long as I live,” Gregory says. “I pull out a book that has within it a chapter of amendments that Congress has sent to the state legislatures, but which not enough state legislatures approved in order to become part of the Constitution. And this one just jumped right out at me.”

That unratified amendment read as follows:
“No law varying the compensation for the services of the Senators and Representatives shall take effect until an election of representatives shall have intervened.”

Basically, it means any raise Congress votes to give itself can’t take effect until after the next election, allowing voters to decide how they felt about that.

The amendment had been proposed almost 200 years earlier, in 1789. It was written by James Madison and was intended to be one of the very first amendments, right along with the Bill of Rights.

But it didn’t get passed by enough states at the time. You see, to ratify an amendment, you need three-quarters of states to approve it.

This amendment, though it was 200 years old, didn’t have a deadline.

Gregory was intrigued. He decided to write his paper about the amendment and argue that it was still alive and could be ratified.

Despite all his work, Gregory Watson received a "C" on that paper. It was thought to be just another paper for just another undergrad student by the Teaching Assistant who graded the paper and his professor who upheld the grade after Watson complained to her.

However, Watson wasn't just like any other student. He thought the "C" was unfair and he committed then and there to see what he could do to get the forgotten amendment ratified.

He started writing letters and calling people in Washington and various state capitols. He did not stop for 10 years.

The 27th Amendment was formally adopted as part of the U.S. Constitution in 1992.

By the way, that is the last formal amendment that has been made to the Constitution ---25 years ago.

One man---Gregory Watson---made a difference.  And last month he got the grade he deserved. UT Austin formally changed the grade he got in that Government class from a "C" to "A+".  Better late than never.

Read the entire story.

While reading the story I also came across an interesting section of the article that includes a quote from the professor at UT Austin who tipped off the press to this story. He makes the point of how difficult it is to amend the Constitution and the reasons why it should be so hard.

What’s so striking about this story is the sheer degree of difficulty of what Gregory did. Amending the Constitution is — by design — incredibly hard to do.

"The founders saw this as higher law,” says Zach Elkins, a government professor at UT-Austin who introduced me to this story.

"So in some sense [the Constitution] should be beyond the reach of majorities and certainly a majority in the legislature, which makes sense for higher law. You want something a little more stable.”

I have made the same point a number of times in my blog posts over the years.

That is why it continues to befuddle me how we have come to the point that several judges can effectively amend the Constitution to circumvent this carefully considered and deliberative process?

For something that is our highest law, for something that you want stability with, how is it that several judges can upend the entire document?

It is not the way our Founders intended the process to work. No changes were to be made until there was real consensus for it to be done. Not just mere majorities in Congress. A 2/3 vote in both houses. Note just a mere majority of the states. 3/4 of the states.

And certainly not a mere majority of the Supreme Court to effectively amend the Constitution.

The amendment process is arduous. It is hard. It was meant to be hard.

There was a time when the Constitution meant something.  It was respected for what it was.  So were the limitations that were carefully crafted into the document by the Framers. Even when there was pretty compelling language in the Constitution to bend it to the "current times" it was ruled out of bounds.

If the American people want a federal government with expansive power they can have it. They can ban prayer in schools or make sharia law the law of the land. They can allow gay marriage. Or ban it in all 50 states. The same with abortion. They can ban the use of alcohol or repeal the ban and allow it again. They can require everyone to buy health insurance or anything else. However, these types of issues should not be decided by a handful of people. Certainly not by judges who are not supposed to make law.

It is simply not within the power of a handful of judges to suddenly discover fundamental rights that have somehow been hidden in the Constitution for over 200 years and start applying them to 310 million citizens by fiat. Several judges should not make this much difference. Period.

Why has the Supreme Court taken on such importance today? Why are the Democrats so intent to filibuster one of the most qualified jurists you could ever think of in Neil Gorsuch?

What the Democrats have not been able to gain at the voting booth over the last 50 years they have been able to win in federal courts or at the Supreme Court. Of course, when you prevail on fundamental issues by one or two votes you can also potentially lose in the future by one or two votes.

And for that reason, Neil Gorsuch is a supreme threat to Democrats. The same can be said for any Republican nominee to the Court. This is just not a confirmation. This puts their entire agenda at risk. They know that they do not have the support of the necessary majorities of American voters to support and extend their progressive agenda. They do not want to follow the Constitution to get there.

Our Founders wanted a clear consensus before we made radical changes to the rules that governed us. The Democrats simply don't want to wait and do the heavy lifting necessary to get what they want.

If you want to know a major reason why the country is so divided right now look no further than what the Supreme Court has done to undermine our constitutional principles. It has moved the country before it was ready to move to support that progressive agenda.

The entire liberal agenda is tied to the Supreme Court. It is that simple. They have nothing else. That is why any nomination to the Supreme Court is everything to them.

One person can make a difference. Thanks to Gregory Watson for showing that and demonstrating how our Constitutional process is supposed to work.

However, several judges should not be making a difference. That is not the way our Constitutional process is supposed to work. Judges should be weighing the scales of justice rather than tipping the scales for some political agenda.

The sooner we return to this constitutional principle, the better we all will be.

The Real Russian Scandal

A lifetime of experience tells me that people are motivated first and foremost by their self-interest, particularly their economic self-interest.

The same is true for countries.

Would the United States even be involved in the Middle East but for our dependency on oil from that region over the last half century?

Most wars that have been waged over the years have been to either protect or promote economic interests.

There is a lot of talk in the media today about Russian influence in our Presidential election. All of which is to have us somehow believe that Putin and the Russians wanted Trump to win and Clinton to lose.

Of course, the Director of the FBI and Obama's Director of National Intelligence have already told us that there is absolutely no evidence that one vote was changed as a result of Russian interference.

However, we are being told the Russians still sought to influence the election in order for Trump to win.

Let's take a look at that question in terms of economic self-interest to see how logical that argument is.

Russia's economy is a mere fraction of that of the United States. Russia's GDP last year was $1.3 trillion. That is about 7% of what the GDP of the United States is ($18.037 trillion).

Let's put that into better context.

Total student loan debt in the United States today ($1.491 trillion) is larger than the entire Russian economy.

Three states (California, Texas and New York) each have larger GDP's than does Russia.

What is the most important segment in the Russian economy?

Energy. There is not anything even remotely close after that.

The quote below is from an energy profile and analysis of Russia that was published in 2015 to give you an idea how significant energy dollars are to the Russian economy.

Russia is a major producer and exporter of oil and natural gas, and its economy largely depends on energy exports. Russia’s economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 50% of Russia’s federal budget revenues and 68% of total exports in 2013.

50% of Russia's federal budget is tied to oil and natural gas revenues?

68% of total exports are related to oil and gas?

Russia's proven oil reserves are just about twice what the United States has.

Russia has the largest gas reserves in the world and is the second largest producer of dry natural gas.

Russia also has the second largest reserves of coal in the world (behind the United States) and is the world's third largest exporter of coal. If you are wondering, the United States ranks fourth in coal exports despite having the largest reserves. Australia and Indonesia both export more coal than Russia.

Does all of this suggest to you that energy prices, particularly the price of oil and gas, are very, very important to the Russian economy?

In fact, there is much to support the proposition that much of the Crisis in Ukraine was driven by energy concerns including Russia's continued ability to use pipelines across Ukraine to get to their important markets in Europe and recently discovered natural gas fields off the coast of Ukraine. This is not to suggest there were not also defense and nationalistic reasons for Putin to do what he did, but it is hard to ignore the link between energy revenues and the economic fortunes of Russia. Those energy revenues are also very critical to the regime of Vladimir Putin. After all, hungry and unhappy people often become rather angry about their leadership.

Of course, that crisis led to significant economic sanctions being placed against Russia by both the United States and Europe which serve to limit the ability of Russian energy companies to access U.S oil technology and U.S. and European capital markets for energy-focused projects.

This chart shows how Crude Oil Prices (Brent-Europe) have moved since the beginning of 2014. Prices today are less than half of what they were three years ago.

You can see the effect that lower oil prices had on the Russian ruble in 2014 as oil prices dropped in the graph below. It should be noted that the impending effects of sanctions undoubtedly also had effects on the value of the ruble during that period.

Credit: http://www.russia-direct.org/rd-explainer-oil-prices-and-russia#explanation-9

The situation is not much different today. Oil is at $50 per barrel and the ruble is trading at 56 to the U.S. dollar. In dollar terms, the price of oil has been cut by more than half. To make matters worse for Russia, the ruble only buys half as many dollars.

Considering everything above, what is the most important factor for Russia's long-term economic well-being?

Higher oil and gas prices.

Of the two candidates running for President, which of the two candidates was more likely to initiate policies that would lead to increased oil and gas prices?

Was it the candidate who wanted to build the Keystone pipeline, lift the Obama moratoriums on drilling on federal lands, lift the restrictions on new drilling technologies, rescind Obama-era EPA rules on drilling and coal and end the excessive regulations of fossil fuels?

All of these positions of Donald Trump would serve to lower oil and gas prices by increasing U.S. and global supply.

Hillary Clinton's policies would have done the exact opposite. In fact, she was on record during the 2016 campaign as saying that "we need to move away from coal and all the other fossil fuels as energy sources".  That was about the same time she was saying she would put all of the coal workers in the United States out of work. She might have thought those statements were in her own self-interest in order to play to her liberal left base of voters. However, it could not have been further from our nation's economic self-interest.

At the same time, if you were sitting in Vladimir Putin's chair, wouldn't those positions be music to your ears? What could be better for Putin than a U.S President who wanted to exorbitantly raise the prices of fossil fuels in order to make green energy projects more viable?

The argument could be made (and is the most plausible reason for any Trump favoritism on the part of Russia) that Putin figured he might be able to cut a better deal with Trump on lifting the sanctions than he could with Clinton. However, this would have not solved the real problem for Russia---low oil and gas prices. That can only be accomplished by changes in the supply/demand relationship for oil and gas.

However, even if this was the case, who would you rather be negotiating against on the subject of sanctions? Donald Trump or Hillary Clinton? Don't you think that Donald Trump would get something in return that Hillary Clinton wouldn't even dream of if this subject came into play?

And do not let it be forgotten that Secretary of State Hillary Clinton is the person who in October, 2010 signed off on the transaction allowing Russian energy company Rosatom to effectively acquire and control 20% of U.S. uranium reserves.

If you review the entire Russian influence story based on simple logic, economic facts and self-interest, why would Vladimir Putin and Russia have any reason to prefer Trump over Clinton?

It just doesn't add up in any shape or form when you look at it from that perspective.

And what other perspective could there be other than looking out for your own economic self -interest?

Have you seen or heard any of this reported or discussed in the mainstream media?

That is the real Russian scandal.