Are We Worrying About The Right Things?

| January 2, 2018 | 0 Comments

As we close out 2017 and start looking into the new year, several themes have been pervasive in our public discourse. As an investor, it’s important to look not just at the market results (which have been spectacular), but also the challenges facing us in the years to come. One thing that has struck me is how much time and energy we’ve all spent debating what may turn out to be the wrong problems.

Jobs, Jobs, Jobs.
The 2016 presidential election and much of 2017 has been about “how do we create more jobs.” At 4.1 percent, unemployment is near multi-decade lows. In fact, the more important number is from the Bureau of Labor Statistics’ Job Openings and Labor Turnover (JOLT) survey showing roughly six million unfilled jobs in October. We don’t have a job problem, we have a worker problem: there aren’t enough qualified workers for the jobs that are available. Reducing immigration will only result in more unfilled jobs.

Tax Rates.
An often-cited (and thoroughly de-bunked) statistic is that the United States is the most-taxed country in the developed world. What we do have is one of the most complicated tax systems in the developed world with high marginal tax rates and numerous loopholes for corporations and wealthy individuals to hide income and assets. This creates massive inefficiencies in our economy, and the recent tax bill will make the tax code significantly more complex while encouraging business owners to get very creative to reclassify income. Congress has wasted an opportunity to streamline the tax code, and most of the sweeteners for low-and middle-income workers will disappear in seven years, resulting in tax increases across the board.

Health Care Spending.
The great debate today is over how we pay for healthcare in the U.S., whether it’s through private insurance or some public health system. Conservatives don’t want the government to pay the cost, but don’t want to force the public to pick it up either (and appear happy to let unfunded treatment bankrupt those who can’t afford insurance). Progressives talk about single-payer systems but are unwilling to admit that those systems work largely due to cost controls that limit the supply of health services. Forgotten in this debate is the fact at 18 percent of the economy, health care spending in the U.S. is almost twice as high as any other developed country, with no appreciable improvement in public health outcomes to show for the higher spending. The problem isn’t how we’re paying; it should be “what are we paying for?”

Government Debt.
Over the past seven years, there has been much angst and complaining about ballooning government debt. But the U.S. isn’t anywhere near the levels of some other developed nations, and the numbers that are discussed aren’t even the big numbers. More importantly, focusing on current liabilities has limited discussion of much needed investments in infrastructure, while ignoring long-term unfunded liabilities like Medicare and Social Security. As the Baby Boom generation has begun to retire, these payments are about to get very, very large. Cutting taxes won’t solve these challenges, either.

Business Investment.
The argument for reducing corporate tax rates has been that it will spur investment by businesses, which will in turn stimulate economic growth. However, after-tax profits are already near record highs and corporate cash assets are also near multi-decade records while factory utilization is around 75 percent. Businesses have idle capacity so it isn’t a lack of cash that’s holding back investment, and there is very little evidence that cutting business tax rates will spur new investments by businesses anyway. What is missing is a lack of public investment in infrastructure, research and education – the kinds of things that will provide powerful long-term economic growth and encourage businesses to invest in the future.

Housing Costs.
In California, the public discourse focuses on the high cost of housing and the lack of affordable housing. The economy is booming and California’s workforce is still growing. The fact of the matter is, there is a shortage of housing supply, causing higher prices, and little public discussion about density, mass transit or serious urban planning. We can’t pave over open space forever and still love living in the Golden State.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/chief investment officer with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.


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