Economic Impact: Time will tell how dangerous this simple curve is

Posted on April 30, 2019 by matt ohern
Share this article on:

Talk of recession has picked up again. The reason might sound complicated, but the principle is fairly basic.

In financial parlance, we’re talking about the inversion of the yield curve. Here’s what that means … and how it might take a bit of time to know the consequences.
The U.S. Treasury Department sells government bonds at various maturity dates — ranging from one month to 30 years — and it pays interest on that money it is borrowing. The “yield curve” simply represents the relationship between interest rates on short-term and longer-term securities.
Typically, the yield on a three-month Treasury bill is lower than on a 10-year note. That’s because there is lower uncertainty over what will happen in only three months.
For example, the holders of a 10-year note have a longer period to worry about the economy. If inflation goes from 2 to 3 percent in that decade, they will have less purchasing power when the note matures. To compensate for that risk, they demand a higher interest rate.
So the yield curve typically shows incremental increases between the three-month bill, the one-year bill … and so on, up to 30-year Treasuries.
But the curve is said to invert when the three-month yield is higher than the 10-year yield. When that happens, it indicates that investors have concern about economic growth.
For the inversion to happen, two things need to occur. One is that short-term interest rates have to rise, and the other is that long-term rates have to stay put or decline.
Here’s what has been happening lately.
The goal of the Federal Reserve Board is to bring short-term rates to a level where they don’t cause the economy to accelerate so much that inflation rises.
For two years, the Fed has been raising the federal funds rate target — the overnight rate that banks use to lend money to each other. The yield on the three-month bill rises almost in lockstep.
The Fed has raised the fed funds rate target to a range of 2.25 to 2.5 percent. That pushed the three-month yield to 2.46 percent for the week ending March 22, while the 10-year yield closed the week at 2.44 percent. (The March 29 closing yields were not quite inverted, with the three-month figure at 2.40 percent and the 10-year at 2.41 percent.)
Typically, when short-term rates rise, so do long-term rates. But this has not happened lately — because investors are concerned that economic growth will slow. That would mean lower yields in the future.
So what do investors do? They buy more long-term Treasuries now to lock in current higher yields. The increased demand for long-term notes causes the price to go up, and the yield comes down — because Treasury prices and yields move in opposite directions. When this process pushes long-term interest rates below short-term rates, it results in yield curve inversion.
Since 1956, an inverted yield curve has preceded every recession by a year and a half or so. We’ll know before long whether today’s bond investors are right this time.
A version of this commentary originally appeared in the April 7, 2019 edition of The Richmond Times-Dispatch.
chmura-100Email this author

Posted in Economy | Comments Off on Economic Impact: Time will tell how dangerous this simple curve is

How Government Creates Poverty

Posted on April 18, 2019 by matt ohern
Share this article on:

Government is much better at creating poverty than at curing it.
On April 3 the General Assembly voted to end the practice of suspending driving licenses for non-payment of fines or restitution or both and ordered Department of Motor Vehicles to restore driving privileges for hundreds of thousands of Virginians. If you need to do business at a DMV office in July, when all this happens, get there early. Restoring 600,000 licenses may take a while.
The General Assembly did nothing to eliminate the underlying debts that the various individuals cannot or will not pay (and often it is will not). Nobody really asked any questions about how high the fines have become, how many additional court and processing costs have been layered on to enrich government, and whether those should be rolled back.  Some of the legislators did bring that up in debate, but it wasn’t a focus.
As with so many things in this world, this is all about the money. Follow the money. How government creates poverty and profits off it may become a theme for future stories. This one is a good start, because nothing was fixed.
For several General Assembly sessions, I represented some of the law firms who collect these debts for Virginia’s court system as contractors working on a contingency fee basis.
I was initially approached by one firm to research a small issue. During the previous session of the Assembly, in a typical undercover budget move, language was added to put yet another cost on the backs of these debtors, a 17% surcharge. If the debt had been $300, it suddenly became $351; if $1,000 this added another $170. Why? To cover the cost of collection, of course! Why 17 percent? Because that was the contingency fee being charged to the courts by the state Department of Taxation.
My father, when he was a city manager, found a joke sign which he hung in his city hall office that announced a new 6% tax to cover the cost of collecting taxes. As I explored this question for that Hampton Roads lawyer five years ago, that sign was then hanging in my office and the parallel was clear.  Government was getting greedy.
The last step in the process for these debtors, if they ignore the court’s own collection efforts and if losing their license doesn’t bring them around, is assigning the case to somebody for collection. The state wanted the debtors themselves to cover the contingency fee paid to the collectors.
My client list grew to several firms when it turned out turf wars were erupting over that collection process and the related fees.  The private law firms were competing with the state agency that collected for most court systems, the Department of Taxation, and a growing number of local city and county treasurers who were doing the collections. When the local agencies took the contract and kicked out the private firm, the contingency fee demanded and paid on the collections routinely went up. Some localities saw a way to funnel state dollars to their local bank account by jacking up the fee.
Eventually the legislature stemmed the local greed parade. It happened with (you guessed it) budget language, boilerplate which is in the annual bill to this day.  It sought to force the localities to charge no more in fees than their actual costs of doing the work. That issue is not the point of this essay, but what I learned and observed while working on it, lessons I took away.
Nobody was interested in solving the problem by reducing the fines or taking off the extra charges, including that final 17% extraction. Nobody was interested in creating a process for negotiation and settlement, like the process that exists if you have a tax debt. Many of these debtors have a problem in more than one jurisdiction, but no jurisdiction was interested in surrendering control of their claim on that person’s finances to a streamlined central process.
The whole system cried out for an intelligent redesign, which is still needed. One recent reform imposed by the Supreme Court did make it far easier for debtors to get on a payment plan, something many local courts were refusing to do. That reform was never given time to work, however, before this recent decision by the General Assembly to restore the licenses without payments.
If you examine the most recent report of the State Compensation Board on the fines collection process, here, you won’t find much data about the debtors, their average amount in arrears, how far behind they are. Just how much in such “receivables” is owed to the state and locality, accumulated over years, is never included in the report.
In 1998 about 68 percent of the $281 million in fines and costs assessed by the courts were collected directly by them, leaving 32 percent for other collectors to try.  By 2018 the rate of immediate payment was down to 63% of $470 million assessed, leaving more than $170 million for others to chase and earn a contingency fee.
Government paying itself a contingency fee to collect a government debt – a fee higher than the private sector would charge – is a great way to create and preserve poverty.
Not one dollar of that liability has been set aside by the General Assembly’s actions. The liabilities will continue to pile up, with interest and with one less major collection tool available. The calculation has probably been made it is better to collect high dollars from those who can pay than to set lower fine and fee amounts. What approach would actually reduce the misbehavior being punished?  That doesn’t seem to be the goal at all.

E-Mail this author

Posted in Economy | Comments Off on How Government Creates Poverty

Richmond’s Proposed Cigarette Tax is Bad Policy

Posted on April 18, 2019 by matt ohern
Share this article on:

Last year, the Richmond City Council considered an 80 cent per pack increase in the cigarette tax. After several public hearings and careful consideration of the shortcomings of this proposal, the City Council voted it down. But like Jason in the series of Halloween movies, “he’s back!”
This time the increase in the cigarette tax being considered is “only” 50 cents per pack or fully $5.00 per carton. But the economic arguments against this year’s proposed tax increase are the same as last year and such those impacted the most have not changed. Those are people making lower incomes in the City of Richmond.
The Thomas Jefferson Institute for Public Policy recently published its third annual study on the impact of cigarette tax increases on local government budgets. This study again shows, as it has in the past, that projected income from cigarette taxes is rarely collected and that in most cases a tax increase produces less and less income in future years. This tax is not one that is reliable and it is clearly a tax that hits small businesses the greatest.
The counties surrounding Richmond have not changed their cigarette taxes so they will be the big winners if the City Council adds 50 cents to a pack of cigarettes. Smokers will seek out the best prices for cigarettes and those will be found a few blocks away in Henrico or Chesterfield counties. And when a smoker walks into a convenience store to buy cigarettes, he or she will also purchase other items. Studies show that small “mom and pop” grocery stores and convenience stores are hurt the most from an increase in cigarette taxes.
When we will drive blocks out of our way to save 10 cents for a gallon of gas or about $1.60 to fill up our gas tank, and we will drive three miles to save $4.00 on a shirt, what makes the City Council think that smokers won’t do the same to save $5.00 on a carton of cigarettes? And the gas stations outside of Richmond will encourage customers to come to their establishments to buy less expensive tobacco products, and in the process buy gas and other things as well.
This proposed cigarette tax is not a good budget decision and will not help build the economic base in Richmond. Indeed, it will only hurt Richmond’s economy.
And those individuals hurt most by this proposed tax increase are those in the lower income brackets. The Virginia Department of Health in its study titled, “Virginia Adult Tobacco Survey 2016-2017” shows that 53.1% of those who buy cigarettes make $30,000 a year or less. And 26.1% of adults in Virginia making less than $15,000 a year are smokers while only 10.4% of our those making more than $50,000 use cigarettes. So the City Council is considering yet another tax that will hit our lower income neighbors the most. This just isn’t right.
Cigarette sales will also be impacted by these three relatively new elements to the market place: 1) the new 21 year age limit on buying cigarettes could reduce cigarette sales by as much as 10%; 2) vaping products are becoming more popular and could impact normal cigarette sales; and finally, 3) a study that the state legislature has requested could redefine how tobacco products are taxed here in Virginia and the impact of such changes cannot be contemplated at this time. These changes in the marketplace combined with the negative experience from raising cigarette taxes by localities across the Commonwealth, this is the wrong time to impose new taxes on tobacco products.
And finally, when recent studies show that school construction in Richmond costs more than most any other area in the state, it makes more sense for the City Council and the School Board to take a look at it own operations and find the $3.1 million in savings that the proposed 50 cent tax increases is projected to bring into the city coffers. This proposed tax increase is not a good budget decision.
Email this author

Posted in Taxes | Comments Off on Richmond’s Proposed Cigarette Tax is Bad Policy

Is North American trade deal good for U.S. agriculture?

Posted on April 18, 2019 by matt ohern
Share this article on:

Farm Foundation, which studies agricultural issues in a neutral manner and does not lobby, issued a report last October which is disturbing for agriculture.

 

This report, How U.S. Agriculture Will Fare Under the USMCA and Retaliatory Tariffs, included experts from Purdue University and the Global Trade Analysis Project. This study agrees the United States-Mexico-Canada (USMCA) agreement “…will lead to an expansion of U.S. agricultural exports by $450 million, mostly in the dairy and poultry sectors.”

 

The Trump Administration has been touting the benefits of USMCA. But there’s a negative side.

 

According to the study Canada and Mexico, upset about the tariffs on their exports of steel and aluminum, have set new tariffs on U.S. agricultural exports and those exports are expected “…to decline by $1.8 billion, and by $1.9 billion to…key trading partners.”

 

The USMCA was signed on November 30, 2018 – a month after the Farm Foundation study was published.

 

Some good news

 

Chapter three of the USMCA covers agriculture. It includes excellent provisions, such as “No parties shall adopt or maintain an export subsidy on any agricultural good destined for the territory of another party.” There appear to be excellent provisions regarding cooperation when there is a dispute involving a restriction or a prohibition on a product.

 

Another positive in the agreement requires parties to limit domestic support that have “…no, or at most minimal, trade distorting effects or effects on production.” Another provision calls for the establishment of a committee on agricultural trade entitled Agricultural Committee.

 

Experts in the trade field tell me this is a good step forward and that the committee must meet at least once a year.

 

Agricultural biotechnology is discussed and has a specific definition relating to low level occurrence issues in GMO products. Another provision deals with duties relating to dairy, poultry, egg products, sugar and sugar-containing products.

 

Dairy, wheat wins

 

Another provision describes tariff rate quotas, which means a country will only allow in so many metric tons before the tariff increases substantially. Specifically, the USMCA deals with dairy pricing and exports regarding milk class 6 and milk class 7. Canada will ensure that these classes will be eliminated 6 months after the USMCA goes into effect. The Farm Foundation study indicates these changes would result in a $450 million gain for dairy.

 

How wheat is graded is another positive for U.S. agriculture. Canada agrees in the grain provision not to apply its Maximum Grain Revenue Entitlement. It appears this rule subsidized the transportation of wheat. There is an article on sugar and sugar-containing products (SCP) which the U.S. allocates to Canada certain amounts of sugar that can come into the U.S.

 

Annex 3-B discusses agricultural trade between Mexico and the United States. The first item in this Annex discusses sugar and SCPs. Several paragraphs deal with specific numbered tariff items making it impossible to interpret the impact. Annex 3-C discusses distilled spirits, wine, beer, and other alcohol beverages. One interesting provision in this section prohibits “…province of Quebec from requiring that wine sold in grocery stores in Quebec be bottled in Quebec, provided that alternative outlets are provided in Quebec for the sale of wine of the other Parties, whether or not that wine is bottled in Quebec.”

 

U.S. whiskey

 

Another curious paragraph in the USMCA states “Canada and Mexico shall recognize Bourbon whiskey and Tennessee whiskey, which is a straight Bourbon Whiskey authorized to be produced only in the State of Tennessee, as distinctive products of the United States.” Whiskey products apparently cannot be sold in Canada unless they come from Tennessee. Canadian whisky, on the other hand, is a Canadian product and cannot be sold in the U.S. unless it too is manufactured in Canada.

 

Farm Foundation states from 2013-2015, U.S. agricultural exports to Canada, China and Mexico represented approximately 44% of U.S. agricultural exports representing an average of $63 billion a year. The USMCA and the new potential deal with China must equal or beat this bar. And soon!   

 

A version of this commentary originally appeared in the February 26, 2019 issue of Farm Futures.

Email this author

Posted in Agriculture | Comments Off on Is North American trade deal good for U.S. agriculture?

How Toll-Financed Interstate Reconstruction Could Address Two Major Problems

Posted on April 18, 2019 by matt ohern
Share this article on:

The two largest problems facing America’s highway system are (1) the need to reconstruct and modernize the aging Interstate highway system and (2) the need to start replacing per-gallon fuel taxes with per-mile charges.  In the January issue of Surface Transportation Newsletter, I suggested that the Transportation Research Board (TRB) Future Interstate Study Committee had missed an opportunity to propose addressing both problems simultaneously. That committee discussed but did not recommend long-term financing of Interstate modernization based on per-mile electronic tolling. In that article, I did not discuss how such a transition could be launched, but that is the subject of a new Reason Foundation policy study, released April 3.

“The Case for Toll-Financed Interstate Replacement” draws heavily on the case made by the TRB Committee that the Interstates need both major reconstruction and selective widening. Our new study also explains why long-term financing is wiser than pay-as-you-go funding out of annual revenues, and that depending on a huge increase in federal gasoline and diesel taxes would be unwise as well as politically unlikely. It also explains that if we expect highway users to pay (over several decades) for a trillion-dollar modernization program, they will need to get real value for the per-mile charges they will pay. And that, alas, is not what the TRB Committee report offered to motorists and truckers. Under its mid-range scenario, after 20 years of spending $57 billion per year on Interstate modernization, they project that both poor pavement and traffic congestion would worse than today.

With political control of Congress now divided, the political climate is not promising for major new infrastructure funding. And agreeing on either a serious federal effort to switch from per-gallon to per-mile highway fees or a mandated switch to tolled Interstates seems highly unlikely. Instead of proposing either, our report proposes a voluntary program to be offered to all 50 states. For any states that wanted to move to toll-financed Interstate replacement, Congress would lift the 1956 federal bans on tolling and on commercial rest areas (i.e. service plazas), but only if the state agreed to a set of provisions that would create a genuine value proposition for motorists and truckers. Here are the six conditions, and the reason for each:

  1. Tolls must be collected electronically and charged per mile traveled. (This begins the transition from per-gallon to per-mile.)
  2. Tolls on a segment would be instead of, not in addition to, fuel taxes—meaning fuel-tax rebates from the state would be required. (This reinforces per-mile charges as the replacement for fuel taxes.)
  3. Toll revenues would be used only for the capital and operating costs of the state’s Interstate highways, bridges, and tunnels. (This prevents tolled corridors being used as cash cows.)
  4. Tolls on a segment would begin only after that segment is reconstructed or replaced and opened to traffic. (This ensures that users pay only for something better than the status quo.)
  5. Tolls must apply to all vehicles using the rebuilt Interstates. (This prevents discrimination against trucks and is fair since all users will benefit from the rebuilt Interstates.)
  6. For a given category of vehicle, tolls must be the same for in-state and out-of-state customers. (This ensures no discrimination in interstate commerce and travel.)

As I watch the debates going on in states where Interstate tolling is being considered, I’m often dismayed by several aspects. First, there is far too much emphasis on revenue generation and far too little concern on the value for newly-tolled customers. Second, there is a focus on getting toll collection in place as soon as possible—without assurances that those who will pay the tolls can count on meaningful benefits from doing so. There is no consideration that per-mile tolls can and should be the first step in converting to mileage-based user fees—which are premised on (and promised to be) a replacement for fuel taxes, not an add-on. There is also still too much talk about charging only trucks, and there are all kinds of proposed schemes to make out-of-state Interstate users pay far more than in-state users.

Congress created the Interstates as a way to facilitate inter-state travel and commerce. If, as seems highly likely, Congress does not come up with the funding to replace the first-generation Interstates, it still has an obligation to make sure the system remains a national system that does not discriminate between in-state and out-of-state users, and that all users pay for this immense and much-needed make-over. The above conditions are an attempt to make sure that states taking advantage of this voluntary program do so in a way that both adds value for all users of the replacement corridors and preserves a seamless Interstate system that facilitates inter-state travel and commerce.

A version of this commentary first appeared in the April 3, 2019 edition of Surface Transportation Newsletter.

Email this author

Posted in Transportation | 1 Comment