Bringing Some Sanity To The Immigration Question

Immigrants and and immigration again dominate the headlines. This time the subject is a large group of predominantly Honduran-born people who very publicly trekked across Mexico with the intent of sidestepping formalities and taking up residence in the United States. Matters have reached a point now of people rushing the border amidst tear gas. The scene delivers irresistible drama and high emotion for all. But drama and emotion offer poor bases for thought much less policy making. The country needs a calmer, saner approach to immigration, one that deals in facts and realities more than hopes and fears.

A report prepared by the Census Bureau not too long ago can in this task. It profiles all immigration into the United States as well as other developed, democratic countries.  Its findings bring reason for optimism and caution about the future. Those findings also offer guidance on a much-needed rationalization of this country’s immigration law and with it, presumably, a way to generate a national commitment to enforce those laws. Neither of these elements exists in today’s milieu.

Probably the report’s most encouraging findings are the skill levels it charts among recent immigrants. Contrary to popular notions, it shows that in the last decade, fully one-third of the immigrants legally entering the United States had bachelor’s degrees or the equivalent and some 16% had higher degrees. Those figures rival the native population, which shows some 32% with bachelor’s degrees and 12.6% with higher degrees. Before 1970, when strictly enforced immigration law still relied on ethnic quotas that favored Europeans generally and Western Europeans in particular, less than one-quarter of this country’s immigrants had bachelor’s degrees or the equivalent and less than one-eighth had higher degrees. Although higher education is far from the only measure of skill, it is nonetheless indicative. The country is getting more economically useful people than it once did, people who presumably can integrate better — into the economy at least, if not necessarily into broad American culture.

Of course, the Census Bureau is measuring legal immigration. The people throwing rocks and rushing the border are a long way from legal processes, even if some of them will eventually qualify for legal residence, wither as refugees or through one of the other means available to secure that status. These people, by their own description of themselves, are neither well educated nor especially skilled.  Were they, it would cast doubt on the desperation they claim. But their criminality or need constitutes a separate question from the value of immigration overall and should not color it. Crime and drama on the southern border aside, Census shows that immigration flows look like a good deal for America, at least economically.

Still, these encouraging findings are no cause for complacency. The Census report makes that clear.  It shows that newer immigrant groups tend to carry the highest education and skill levels. When a particular national or ethnic group becomes better established in its host country, the group’s less personally powerful individuals frequently follow. This pattern is evident in the skill levels of different immigrant groups. Asian immigrants to the United States, for instance, still a relatively small group here, have the highest skill levels. Over half have bachelor’s degrees or the equivalent and about a quarter have higher degrees. That is well above the general American population and certainly higher than the populations from which they emerged. In contrast, Latin Americans, which have well-established communities in this country, show only 12.9% with bachelor’s degrees or equivalent and only 4.2% with higher degrees.

Part of this difference may simply reflect the way this country’s law encourages immigration by people with associations among existing residents – “chain immigration,” as it is called. But as Census shows, the tendency for early migrants to have the most skill while later migrants have less is also a natural pattern that would occur regardless of legal biases. Such trends exist in other countries with different laws. With this pattern in mind, the Census report issues a warning that the favorable skills mix it has charted will not likely persist. On the contrary, subsequent waves will tend to bring lower skill and education levels.

Anticipating such a charge, and perhaps also today’s problems at the southern border, the Census report hints at suitable directions for future U.S. immigration law. To keep up the skill and education levels of future immigration waves, it speaks positively of the point systems used by Canada and Australia, two other immigrant nations. Though both these countries allow for compassionate family reunions, they mostly filter immigrants according to the skills needed in the host country. Prospective residents receive preference if they speak the language, English in Australia and English or French in Canada. They get added advantages for years of education and occupational skills they can document. They also get points for any assets they might transfer. In this way, Canada and Australia serve their own economies. They also avoid social discord, since these immigrants, even if they resist integration into the larger Canadian and Australian cultures, do integrate better into the economy, making them content sooner and native communities less frightened and hostile.

To be sure, such policies leave many immigration questions unanswered, most especially the illegal flows, which would likely continue. But they would rationalize the law in an unbiased way, at least where race and ethnicity are concerned. Such an approach would also quiet that element in the country worried over social discord and economic burdens. On both counts, it would help win a widespread commitment to efficient and consistent law enforcement, a commitment that today in the United States has dissipated, both among the general population and with officials. In doing so, it would permit a more compassionate, less fearful approach to refugees. It is at least worth a look. The Census Bureau has served the country well with its effort.

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Italy May Be A Bigger Test For The EU Than Brexit Is

Pity European Union leadership. Today it faces not only Brexit but also a different sort of faceoff with Italy. The latter may well present a greater threat to EU cohesion than the former.

Ostensibly, the battle between Brussels and Rome revolves around the Italian government’s 2019 budget. The still new coalition government in Rome wants to increase Italian government spending 2.7% to accommodate two campaign promises, one made by each of its two members: The left-leaning and populist Five-Star Movement (M5S), led by Luigi Di Maio, promised a kind of universal basic income for the poor. The pro-business and nationalist-leaning League, led by Matteo Salvini, promised tax cuts. While these incongruous policy directions speak to the strange nature of this coalition, it is not the policy mix to which the European Commission objects. Instead, it claims to have rejected the Italian budget on the basis of how it calculates projected deficits. It will, Brussels insists, violate EU rules forbidding any member state from running deficits in excess of 3.0% of its gross domestic product (GDP). Rome has countered with estimates that the deficit for 2019 will come to only 2.4% of Italy’s GDP. Brussels contends, however, that Rome has used much too optimistic growth assumptions.

The reality of this dispute is more complex. On the Italian side, the budget carries a powerful political-economics message. Not only do the parts of the coalition want to deliver on their campaign promises, but they also can see a need in the Italian economy for something other than the budget austerity long dictated by Brussels. They blame past austerity for Italy’s high unemployment rate, verging on 10% of the workforce, and youth unemployment that exceeds 30%. They blame the austerity for the paucity of Italian capital investment and the concomitant threat to productivity growth and the competitiveness of Italian industry. They point to recent months in which industrial production actually declined, albeit at a relatively contained 0.5% at an annual rate. More than this, the new government wants to demonstrate that it will not simply bow to Brussels’ demands as past Italian governments have. Salvini has referred to those previous governments as “puppets.” Di Maio summed up the EU rejection this way:  “This is the first Italian budget that the EU doesn’t like. I’m not surprised. It is the first Italian budget written in Rome and not Brussels.”

From the EU side, there must be something more behind the rejection than simply budget accounting and economic growth projections.  After all, the European Commission has allowed Germany, France, and Spain to run deficits in excess of the rules. Some economists point to Italy’s already high debt load as the reason why the European Commission took such a strict stand. That debt load ranges close to 130% of Italy’s GDP, greater than any other EU member except Greece at 180%. But this high debt burden has existed for years and the EU has allowed previous Italian governments to run deficits in excess of 3% or GDP, most recently that of Matteo Renzi just before the last election. Against these facts, such claims now hardly offer sufficient reason to reject the national budget of a duly elected, if somewhat strange government.  It would seem to have something to do with this particular Italian leadership, probably its defiant attitude. After all the European Commission not only rejected the budget but at the same instance it began to take the virtually unprecedented step of expediting sanctions procedures against Italy.

Whatever has motivated the EU’s leadership in this, the exchange has played into the coalition’s hands. Both parts of the government in Rome from their very different perspectives took an anti-EU stance in the election campaign. Indeed, that position may in fact constitute the only thing these two different parties have in common. They each, one for business and the other for populist reasons, would like to leave the Euro-zone if not the EU or at the very least secure a relaxation in the rules coming out of Brussels. Though fewer Italians express satisfaction with the EU than in most member countries, 44% compared to 66% on average, the government still needs to gin up support for this battle and its anti-EU agenda. Brussels’ typically ham-handed approach would seem well suited to that need. As soon as the Commission rejected the budget, Di Maio went on record with the Italian people in this way: “Considering the damage they did to us first [referring to austerity budgets] we certainly couldn’t continue with their policies.”  He added, “We’ll always choose Italians first.”  Salvini agreed.

Seen from this perspective, feelings in Italy look similar to those behind the Brexit vote in Britain. In both places, the anti-EU feeling has less to do with economics and trade and more to do with imposition from Brussels and a nation’s ability to choose its own policies.  None of this is to suggest that Italy will follow Britain out of the union. However involved Britain is with the rest of Europe, more things tie Italy to its neighbors. Italy’s economy is more thoroughly integrated with the rest of the EU. Italy also has remained a member of the Eurozone from its inception, whereas Britain never joined it. What is more, Italy is a founding member of the union. Britain did not join until the precursor organization to the EU, the European Common Market, had existed for about two decades. The government in Rome must also feel pressure to cooperate as its differences with Brussels have added to its cost of borrowing, raising them to more than 3.3 full percentage points (330 basis points) above comparable rates paid by Germany.

But if Italy’s circumstances make it is less likely than Britain to go its own way, the European Commission owes it to the EU to take a less hostile and less high-handed approach.  Having lost its second largest economy in Britain, the EU cannot afford widespread dissention in what is now its third largest economy and a founding member.  Italy is too big to bully the way the EU has Greece. Most dangerous for the EU, a break with Italy, even a partial one, would constitute a second major economy to move away from the union.

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The White House Looks Better On Trade Than It Seems

Indicative of this impressive change are the current negotiations between the United States and the European Union.  Since July, when these two huge economies stood on the brink of all-out trade war, and European Commission President Jean-Claude Juncker met with President Trump at the White House, both parties have talked amicably of simply removing all tariffs and non-tariff barriers, as well as subsidies.  Such steps remain a long ways off, since the effort will necessarily involve a harmonization of complex regulatory and labeling guidelines. Still, just such talk contrasts with the kinds of discriminatory trade positioning that has otherwise prevailed since the 1980s.

Over this long period, the dominant frame of reference on trade called for what economists refer to as preferential trade agreements (PTAs). The North American Free Trade Agreement (NAFTA) and the Trans Pacific Partnership (TPP) stand as indicative, as does the Transatlantic Trade and Investment Partnership (TTIP). These, and other agreements like them, elaborate reductions in some trade restrictions only for the signatories. Otherwise, these agreements have imposed or would have imposed sometimes-punitive trade barriers on the rest of the world. In contrast to this otherwise exclusive approach, today’s framework aims at across-the-board reductions in trade barriers and distortions of every sort. To be sure, this newer approach must cover much the same detail as the PTAs did, but the approach, unlike the PTAs, implicitly invites other economies to join the effort and enlarge the impediment-free zone.

Indeed, today’s efforts resemble the trade approach taken by the United States during the four decades following the Second World War.  Then, Washington eschewed PTAs in favor of efforts to promote free trade globally.  Under the auspices of the General Agreement on Tariffs and Trade (GATT), the precursor to today’s World Trade Organization (WTO), Washington insisted that all nations simply rid themselves of tariffs and non-tariff trade barriers.  It actually succeeded in large part through a series of negotiations, called “rounds,” the last of which, called the Doha Round after the venue where negotiations began, failed earlier this century when the EU, which constitutes the world’s largest PTA, refused to give ground on agricultural subsidies and preferential treatments, including tariffs.  Given this history, it speaks to how matters may have turned a corner that the EU’s good will gesture last July included easing restrictions on American soybeans.

Especially because the White House and the EU are trying to spread this new framework, it has the potential to put considerable pressure on China. Beijing is already suffering other pressures in its contest with the United States. Its effort to meet Trump’s tariffs dollar for dollar have reached a limit, because China’s exports to the United States are so much larger than American exports to China and because they are much more important to China’s economy than U.S. exports to China are to the U.S. economy. Now this latest turn in the framework of trade talks puts Beijing in a still more awkward spot. By bringing up the need  to harmonize regulatory regimes, recent, more universal efforts have brought to light how much difficulty most nations, including the United States and the EU, as well as Japan, have with Beijing’s approach to trade, most especially its insistence that any firm entering the Chinese economy must have a Chinese partner and that it also must share its technological and commercial secrets. If recent trade directions gain momentum, China would have to lift such rules or risk the kind of trade isolation that its economy can ill afford. Matters have not yet gone far enough to place Beijing at a decision point, but China’s leadership surely knows how these new directions could do so.

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More Women Seek Paid Work And Will Do So Increasingly

American women have begun to “lean in,” as the expression has it. After years, indeed decades of decline, women’s participation in paid work has begun to rise again. The recent wage acceleration no doubt has prompted their return to the workplace, but demographic trends suggest that this recent turn has staying power.

Labor Department data offer considerable drama. Statisticians there calculate that the proportion of women in prime working years, ages 25-54, either working or seeking work outside the home has increased from 73.3% three years ago to 75.2% recently. At first blush, this change might seem small. The figure, after all, still falls far short of men’s participation rate, which verges on 91%, but it nonetheless constitutes a significant move, adding some 1.5 million more women to the workforce an almost 1.0% increase in the amount of available labor.

This is all a remarkable turn from past trends. After 2000, American women bucked international trends and opted out of paid employment. Participation among prime-working age women dropped from 76.6% at the beginning of this period to a trough or 73.3% in 2015. That 3.3 percentage point drop removed some 2.4 million presumably talented workers from the American labor force. Especially interesting was how this long decline flew in the face of international trends. In every other developed country in the world, working-aged women opted for higher participation in paid employment. In the Euro area, for instance, women’s participation rate rose 5 full percentage points. In the United Kingdom it increased some 3.3 percentage points, in Canada some 2.0 percentage points, and in Australia some 4.6 percentage points. Whereas 20 years ago American women led the world in workforce participation, the figures today, even with the relatively recent turn, show that women in most other developed economies now participate at higher rates.

The interaction of wage rates and the cost of childcare tell much about the recent change and the international differences. Though feminist trends have done much to induce a greater sharing of childcare responsibilities between men and women, there is no denying, in the United States and elsewhere, that women still bear much of this burden. If in a larger sense childcare is a joy and not a burden, it nonetheless closes down options for work outside the home unless the wages earned by the responsible parent can more than compensate for the cost of childcare. Until recently wages in this economy failed to meet that need, prompting many women to opt out of the picture. Between 2007 and 2016, for example, the Labor Department calculates that average hourly wages in the United States grew a mere 2.3% a year, while the average cost of childcare rose 3.3%, almost half again faster. Though the wage picture elsewhere in the world was no more robust than in the United States, the social welfare schemes pursued in those countries kept the cost of childcare lower, either through subsidies or paid leave or combination of these and other means. That, no doubt, made the difference.

In the last few years, however, the picture in this economy has changed. As economic growth has brought unemployment rates below 4% of the workforce, businesses now face a shortage of workers, especially trained workers. Accordingly, wages have accelerated. After sluggish growth for years, average hourly wages during the last two years accelerated to an almost a 3.0% annual rate of increase, and in the 12 months through this past October, they rose more than 3.0%. For many women that has tipped the cost-benefit analysis enough to bring them back to paid work, full-time for some, part-time for others. No doubt this wage consideration accounts for much of the recent and dramatic participation change among women in this country. Since businesses still focus a growing need for skilled labor, the wage picture and the participation trend of the last few years seem set to continue for the foreseeable future, at least as long as the current economic expansion persists.

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Brexit: It Just Goes On And On

The hopes of early October have faded. A few weeks ago, Brexit negotiators, from both British and European, talked of having an agreement ready for EU leaders at their meeting in Brussels scheduled for October 17. Since each member would have to vote it up or down, it seemed like a perfect opportunity to begin the process. But it was not to be. Differences about the Irish border and the way the agreement will be enforced proved insurmountable, at least for now. Clearly, a resolution of this matter is going to take a long time, a lot longer than the March 2019 deadline for final separation, especially if the rumors are true and British Prime Minister Theresa May faces an insurrection within her own Conservative Party.

It speaks to how difficult this separation will be that the recent failed negotiations were just the beginning. Her Majesty’s government had hoped to negotiate both the divorce agreement and future trade relations in one package before the actual separation occurred. The government and most of British business wanted to secure a continuation of the common trade area, and the City of London, as well as the government, sought some arrangement that would privilege British finance within Europe. Finance is an inordinately large part of the British economy. But the union, pressured by France and the EU bureaucracy, insisted that things had to occur in two stages. First London and the EU would need to negotiate the terms of the divorce. Only then would the EU consider separate negotiations on trade and financial services. The talks that just failed to meet their deadline dealt with none of these more difficult matters. They were only about the divorce.

And even here, in this most preliminary step, talks foundered. Remarkably, they seemed to go well on the $50 billion divorce bill Britain will likely have to pay. Many expected trouble on this matter. Those in Britain more militantly disposed to separation had opposed this price tag. They will no doubt create tension in the present, almost evenly divided parliament, but the negotiators, on both sides, seemed to accept it. The big problem was Ireland. The Irish Republic is an EU member, and while the U.K. remains one, goods and services will pass freely between the two countries. That will change with separation, which all could accept, except that physical checkpoints at the border between the Republic and the U.K. province in Northern Ireland could cause trouble. The so-called Good Friday agreement that ended the IRA terror in Ireland and elsewhere rests in part on the free passage of people and goods at this border.

Nor can London accept proposals mooted in the negotiations that would allow for free traffic between the Republic and Northern Ireland but would establish checkpoints for other trade routes. Though seemingly an easy, if fudged solution, London could not accept an agreement that would effectively violate the U.K.’s constitutional integrity by dividing the country into two customs areas. The negotiators discussed compromises that would rid both entry areas of checkpoints by having the U.K. regulatory checks before moving goods to Northern Ireland and by conducting other customs and regulatory inspections at business premises instead of at border checkpoints. At this point, however, such fudges remain unacceptable.

In addition to this Irish question (variations of which have bedeviled British politics for just under 1,000 years), there was the enforcement issue. The EU negotiators can see no other arbiter other than the European Court of Justice (ECJ). Negotiators from the British side, cognizant of the resistance Brexit voters have to foreign impositions on British practice, rejected it as an authority for these purposes. A compromise from the EU side would have established an EU-U.K. panel that could refer matters to the ECJ but would not have to do so. Even though such an arrangement would have lifted any forced referral to the ECJ, it nonetheless failed to satisfy the British negotiators. So, with an impasse on this matter as well as Ireland, the negotiators could bring nothing to the EU summit in Brussels on the 17th.

Given the differences within parties on both sides of the negotiations, it is doubtful that even an agreed document would have won endorsement from the governments involved. In Britain, Prime Minister May holds her government together by only the slimmest majority. She also faces considerable resistance within her Conservative Party, from both extreme Brexit advocates on one side and on the other those who would have preferred to remain in the EU. On all these issues, she and her government must walk a fine line. Her position suffers still more, because her government depends on the help from the small Democratic Unionist Party from Northern Ireland, making her extremely sensitive to any compromise concerning the Irish border. Europe has its own disagreements. Because Germany trades a great deal with Britain, Berlin is disposed to a more amicable approach, while France has pushed for even preliminary negotiations to stipulate what the EU will rule out of any future trade relations. Complicating matters still more, the anti-EU bias of Italy’s still-new government impels the remaining members, including France and Germany, to make exit more rather than less difficult.

In such a fraught environment, forecasting is all but impossible. Best guess at this juncture is that negotiations will go on until the last minute at the earliest. Britain has already talked about an extension, and that’s entirely possible. Indeed, discussion at this juncture indicates that London thinks the need will arise. It also seems probable that whatever emerges will include a great deal of fudging. After all, the compromises already put forward, both on the Irish border and enforcement are fudges of a sort that ignore the principle involved in favor of appearances. Such maneuvers, common enough in all such negotiations, also mean that the problems they paper over will reemerge in new forms even after the parties involved seem to have secured “agreements.” And only after all this is worked out will the larger and more complex trade negotiations begin. Brexit and all the anxiety that goes with it seem well set to go on long into the foreseeable future. And if Prime Minister May loses her job, this reality will remain true, though for a time considerable smoke will hide it.

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Household Finances Look Good: No Excesses Here

Figures on household finances paint a picture of remarkable health and, what is more, good cause for optimism about the general economy, at least from this quarter. Real incomes have expanded fast enough to allow households to sustain historically high savings rates, even as families have increased their spending on goods and services. Balance sheets have improved, dramatically in some respects, with asset growth far outpacing that of liabilities. If the economy faces the kind of excesses that threaten the expansion’s durability, they most certainly do not exist in the household sector.

Behind much of this improvement lies the acceleration of household incomes. Real after-tax incomes have expanded steadily at a 2.3% annual rate over the last 20 months or so, a marked step up from the 1.7% growth in 2016. To be sure, real income growth earlier in this expansion did match this more recent accelerated pace, but such growth early in an expansion is typical. What is remarkable and particularly encouraging about this recent strength is that it has arrived even as the expansion has matured. What is still more encouraging is how employee compensation has led the overall advance in incomes. Wages and salaries in the private economy and proprietors’ incomes have risen at more than twice the pace of government supported incomes, whether transfers or the wages and salaries of government employees. The difference is not to designate one source of income as superior to another but rather to show clearly that the recent income growth reflects economic activity and does not spring from an artificial support engineered in Washington, as was the case earlier in this expansion.

Most important to the expansion’s durability is how households have used a good portion of their income growth to strengthen their savings. To be sure, real consumer spending has increased at a 2.3% annualized rate during these past 20-some months, a significant support for the general economic expansion. But the strong income growth has allowed households to increase their base of savings by more than $1.0 trillion a year during this time, a flow that amounts to some 6.8% of their after-tax income. This rate of savings is entirely comparable to the historically high savings rate households had understandably adopted after the shocks of the 2008-09 crisis. Between 2010 and 2016, families saved some 7.2% of their after-tax income flows. This was an impressive rise from the 4.8% averaged in the prior ten years and especially the 3.5% savings rate averaged in the three years leading up to the crisis. Indeed, that paltry rate of thrift both helped create the crisis and then exacerbated it by rendering households unable to cope with the financial stains as they developed. That families, even now after years of expansion, retain a robust rate of savings suggests strongly that they and the economy have good defenses against a recurrence of those hard times.

This level of thrift, as well as improving financial markets, has bolstered household balance sheets dramatically. During the 18 months through this past spring quarter, the most recent period for which data are available, the Federal Reserve reports that financial assets held by households have grown at over an 8.0% annual rate. Of course, the impressive rise in the stock market has contributed meaningfully to this gain. The value of household equity holdings has risen at about a 20% annual rate, from net buying as well as price gains.  But the asset rise has come from more than equities. Cash holdings have grown at an annual rate of almost 7.0% during this time, while the value of owner-occupied housing, by far the biggest line item on household balance sheets, has grown at over a 6.5% annual rate.

Still more important, families have used their robust savings flow to contain the growth of their liabilities. Overall, household liabilities have grown at a modest 3.6% annual rate during this recent period. Consumer credit has expanded at only a 4.8% annual rate, actually slower than averaged in the 2014-16 period, while mortgage debt has increased at only 2.8% a year. This last fact should offer significant comfort to those haunted by the possibility of a recurrence of the 2008-09 crisis. As a consequence of all these trends, household net worth has increased at an annual rate approaching 8.3% during this time, far faster than the 6-6 ½% rate averaged previously. Perhaps more telling, assets overall at last measure stand some 7.6 times the size of household liabilities, up from 7.3 times in 2016 and barely 5.5 times in 2010. On average, Americans own about 60% of their home, well up from 56% in 2015 and a vast improvement from the prevalence of underwater mortgages in 2009 at the close of the crisis.

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Talking SME Finance: Vested UK Hosts Second Breakfast & Brainfood Event

Last Friday, Vested UK gathered leaders in financial services communications and marketing, for another Breakfast & Brainfood event. Our first food for thought in this series focused on consumer optimism, during which Paul Flatters, from futures agency Trajectory, talked us through his insights on topics such as the impact of globalisation, fake news and generational divide.

This time, SME Finance was the talk of the table. The brains that accompanied the nutritious food belonged to Shiona Davies, author of the BVA BDRC SME Finance Monitor, who talked us through the findings of the upcoming report. Not only is this a fascinating topic given that SMEs make up 99% of all businesses and that we’ve worked with many SME finance providers over the years, but being a high-growth SME ourselves this also sparks personal interest.

The biggest question on our communicators’ lips was: how do you communicate to businesses the importance of using external finance for growth, in a society that has been moulded to be embarrassed about money and cautious of debt? How do we change perceptions and behaviours to create greater demand for finance that will bolster economic growth and prosperity.

The hard boiled facts

After the green smoothies and chia seeds kick-started our metabolisms, Shiona began the discussion by hitting us with some hard stats:

  • A stable 8 in 10 SMEs have been profitable since 2015
  • However, since 2012, fewer SMEs of all sizes have innovated, whether launching new products and services or improving business processes
  • Only 34% of SMEs use external finance, most (23%) use only core forms of finance (loans, overdrafts and credit cards)
  • The problem is not that banks aren’t lending – in fact, this statement is factually incorrect, with 85% of applications resulting in a facility. The issue is that 83% of SMEs are happy non seekers with 79% basing their growth plans on what they can afford and 73% who would rather grow slowly instead of using finance to grow more quickly
  • Half of SMEs meet the definition of a Permanent non-borrower, neither using finance nor with any plans to do so while 3 in 10 are using trade credit or credit balances to reduce their need for finance

Shiona’s findings left everyone with the challenge “but what about the headlines that have taught us banks simply aren’t lending to businesses?” Also, if businesses are profitable but are not innovating, what does this mean for the future of UK businesses and the wider economy? The debate had been sparked and the juicy conversation opened up to the room.

Communicating the need for business finance

Discussions began about this lack of perceived demand. Just 2% of businesses declared they had an event where they needed finance in the last six months – but we questioned whether business leaders are simply skeptical about borrowing, or lacking the awareness of the value and opportunity it can add. The answer to this dilemma, we agreed, would structure how we construct SME finance comms, in that our approaches could focus either on raising awareness for the need or tackling the misconception.

It was suggested that there is a mixture of both at play: on the one hand, business owners are also consumers, so an owner’s personal attitude to debt is often a factor. On the other hand, even among the biggest businesses, only around three quarters have a finance specialist; external finance may therefore be used as a last resort rather than as a means for growth. Large businesses are more likely to have accountants and advisers – though they are usually present during emergencies and key finance moments rather than to encourage growth – whereas businesses with 1-10 employees are more likely to live month to month with no financial plan in place.

So the solution, we concurred, was finding a way to both increase awareness and tackle the misconception of business finance, which can be achieved through emphasising the ends rather than the means. Business leaders care more about the extra equipment or new store they can purchase, than they do about the means of getting there, so communication strategies should cater to this end goal. At least, that is, until we as a society become better at talking about our finances and the role external finance can play.

Future food for thought

“Let’s keep calm and carry on for a bit” said Shiona, after the discussion led to how SMEs’ attitudes had changed after the referendum. From my perspective, and everyone else’s it seems, a big aspect of the taboo surrounding business finance is the lack of transparency and knowledge of the various products. When business leaders are focusing on building and maintaining a high growth company, it can be daunting to venture into the realm of financial options which add another layer of responsibility and decision making.

As a country, it turns out, we’ve traditionally been very good at starting businesses but not so good at getting them to 10+ employees – could the lack of finance also be a factor in this?

This concluded the morning nicely with a look to the future of UK businesses. Will people change their attitudes towards finance or will they accept that they have to move slower? If the latter, what will be the impact on innovation and global expansion? What does it mean for broader business? Can we, as communicators, help businesses to understand the need for external finance, as a tool for growth rather than as a last resort? Now there is a lot of nutritious food for deep thought.

Keep your eyes peeled for our next Breakfast & Brainfood event – it’s going to be cereal-sly great!

States That Single Out Their Millionaires For Punishment Always Lose

Some politicians simply cannot resist the lure of a special tax on the very wealthy, something that goes beyond the code’s usual progressivity. Already several states impose such millionaires’ taxes. Whatever the justice or injustice of such measures, they jeopardize government finances in at least two ways: (1) They threaten revenues by prompting the wealthy to flee jurisdictions that impose them, especially now that the federal tax code no longer subsidizes the wealthy in high-tax states and cities. (2) Because incomes of the wealthy frequently emerge from financial markets, the implicit reliance such taxes place on them fosters an unwelcome instability into state budgeting.  Rather than succumb to such temptations, politicians would do better to diversify their tax base, not to excuse the wealthy but to make sure that public finances avoid too great a dependence on them. Pursuing a millionaire’s tax or some such special levy on the wealthy makes for easy campaigning.  The pain of such a law seems to hit only a small part of the electorate, while the politician proposing it can promise to use the proceeds to benefit large blocs of voters.  Such promises are how politicians sold millionaires’ taxes in the six jurisdictions that presently have them: California and New York are the largest.  In New England, there is Maine and Connecticut.  Massachusetts is also considering such a tax. New Jersey and the District of Columbia also impose such special tax levies.  To be sure, one could easily explain these taxes as simply an extension of progressive taxing schemes, but they are seldom sold to the electorate that way.  Proposers almost always aim to burden one group in an effort to win favor with the larger voting bloc.

Things, however, seldom work out as the proposers describe. Typically, many of those burdened by the special taxes simply decamp for other jurisdictions. The very wealthy, after all, have much greater mobility than the average citizen. They often own homes in several locations and, without even giving up their residence in the high-tax jurisdiction, can easily change their official residence simply by suffering the minor inconvenience of rearranging their comings and goings. Such exoduses can leave the states with millionaires’ taxes worse off financially than before they reached for this seemingly easy revenue source.

Of course, it is hard to know what motivates people. No one polls those leaving or those staying and certainly not those from elsewhere who, when choosing a home, avoid high-tax jurisdictions. Tax matters are seldom the only factor in a person’s decision about where to live. Still, it would defy logic to suggest that a special tax has no effect.  Certainly, taxes played a role for one New Jersey resident.  When in 2015 the state passed its millionaires’ tax, its richest resident, a hedge fund manager identified as David Tapper, suddenly declared himself a resident of Florida, where he had long had a home as well.  He later moved the headquarters of his firm, Appaloosa Management, to Miami.  These two decisions, tax experts say, cost the state “hundreds of millions in revenue” over time, from him and his employees.

Other states provide other examples. When one-time New York resident, Tom Golisano, left for Florida, citing high taxes as the reason, New York State calculated that this one decision cost the state revenue $4 million in the following year. Earlier in the century, when California passed the first of several special levies on high-income residents, one-fifth of the seven-figure earners in the state left for less burdensome parts. Economists estimate that the move accounted for the state’s “surprise” 2003 budget deficit. When in 2012 California imposed another disproportionate tax on the wealthy, Census Bureau figures show that it turned what had been a balance of in and out migration by high-income families decidedly negative.

Washington’s recent tax reform will only increase flight risk. Because it limits to $10,000 federal deductions against state and local taxes, it makes state taxes, particularly for high-income people, that much more onerous. Take, for example, a person earning $1 million a year in a state that imposes a 10% tax rate. In the past, the person could write the whole $100,000 tax bill off his or her federal returns. Now, because of the limit, that person must pay federal tax on $90,000 more than previously. Alone this fact increases flight risk from high-tax jurisdictions, but there is more. Because all states and cities base tax calculations on the adjusted gross income reported to Washington, the $90,000 this million earner can no longer write off adds to the adjusted gross income used to calculate state and local tax. Some states, taking account of this effect, have adjusted down their tax rates accordingly. The jurisdictions that have millionaires’ taxes have, however, refused, burdening their wealthy taxpayers that much more and accordingly giving them that much greater reason to leave.

Many downplay the flight risk. They often use the example of Maryland. When in 2008, the state imposed a millionaire’s tax, the number of tax returns reporting a million or more in income fell by one-third. Migration was surely a factor, but those questioning the effect suggest reasonably that a much larger impact came from the huge loses imposed by the financial crises of 2008 and the subsequent recession. No doubt the economic and financial setbacks of the time rendered several Maryland millionaires less impressively wealthy than in the previous year. It is impossible to sort out which effect prevailed without invading the privacy of many Marylanders as well as Marylanders who became Virginians. But even if most of the millionaire shortfall came from losses and not migration, the result nonetheless points to the second problem facing states and cities that go this route.

Millionaires’ taxes invite financial volatility.  By concentrating the jurisdiction’s dependence for revenues on a relatively small group, they open the state’s finances to any problem with any of its members. Business setbacks by very few can then unhinge revenue calculations and so budget planning. Commerce Department statistics show how concentrated on a small group these states are.  On average, they depend on the top 1% of their income distributions pay a third of their total income tax revenue.  California statistics make clear that almost one-fifth of the state’s income tax revenue emerges from just over 5,500 taxpayers. But here, too, there is more. Not only does this practice narrow the revenue base of the jurisdiction, but it focuses it on a group that has particular exposure to the volatile nature of financial markets. The point here is not to excuse the wealthy from taxes or even end the code’s progressively. Rather, the point is to point up the problems implicit in the great dependence that a millionaires’ tax places on this group alone.

There is ample reason to expect the migration effect to intensify later this year and into 2020. During that time, the wealthy in high-tax states will learn the full extent of the tax burdens imposed by the recent federal tax reform. As they shift their residence of record, states that have sought to burden them, in particular, will face burdens of their own. The vulnerability to financial and economic cycles implicit in these tax structures will take longer to become clear. Right now, the market rally and the economy’s renewed strength will likely benefit the wealthy disproportionately and, accordingly, the states whose revenues depend disproportionately on this group’s prosperity.  That benefit will accrue even if some of these people decamp to other jurisdictions. But few can doubt that sooner or later, markets and the economy will face setbacks. When that time comes, as it inevitably will, those states and cities that have tied themselves to millionaires’ taxes or something like them will suffer a particularly difficult revenue shortfall. Let us hope that then their politicians can resist the temptation to double down on the very policies that will have caused their troubles.

Originally published on

The Fed Has Played With Fire: Now Comes A Reckoning

The Federal Reserve (Fed) was always playing with fire when for years it poured liquidity into financial markets and the economy. Of course, for much of the time policymakers had little choice. First, the 2008-09 financial crisis demanded measures that would forestall a succession of bankruptcies, and that meant low interest rates and easy credit. Then, the frustratingly slow economic recovery that began in 2009 seemed to beg policymakers to continue such support. Even as they poured on the liquidity, Fed governors and presidents worried aloud over the chance that the policy would build a dangerous inflationary bias. Now, it seems the Fed’s day of reckoning has arrived.  Inflationary signs have emerged. Monetary policymakers now face a great test to regain control with monetary restraint and at the same time keep markets and the economy from suffering a reverse.

The extent to which liquidity has built up in the financial system can give a sense of what the Fed now confronts. Between 2008, when the financial crisis broke, and 2013, when those fears had largely subsided, the Fed kept interest rates near zero and provided an abundance of credit, in large part by buying bonds, what the Fed referred to as “quantitative easing.” Those bond purchases increased overall levels of liquidity in markets some 250% during this time. The country’s money supply — currency in circulation and checking accounts at financial institutions — increased some 50%. Inflation, despite its historical tendency to rise with increased levels of money and liquidity, remained quiescent. Consumer and producer prices rose at annual rates of only 1.9% in 2013.

At the time, the Fed did allude to the ultimate need for a policy change, a shift toward something less accommodating that would head off any buildup of inflationary pressure. Yet, they did little to change things. On the contrary, policy kept short-term interest rates near zero, and the quantitative easing continued apace. Because the Fed was still buying bonds, its balance sheet expanded some 25% in 2014 and the supply of money rose by a like amount. In the Fed’s defense, it still had to deal with a slow pace of economic growth. The nation’s gross domestic product (GDP) grew only 2.5% in real terms in 2014, slow by any standard but especially for a cyclical recovery. And inflation remained subdued, with consumer and producer prices still rising less than the Fed’s preferred rate of 2.0%.

Since, the Fed has moved to correct policy but only very gradually. It tapered, the pace of bond buying and began to raise short-term interest rates from zero. A lack of restraint seemed only reasonable. The economy, after all, remained weak, growing only 2.25% a year on average in 2015 and 2016. And inflation remained subdued. So the Fed took its time.  Policy took until 2015 to raise short-term interest rates to 0.5%.  After instituting a slowed pace of bond buying in 2015, purchases plateaued in 2016 and 2017.  In 2018, the Fed finally began to sell off these holdings and withdraw liquidity from the system. Even then, its bond holdings fell only 3%. The money supply, however, continued to expand robustly, no doubt as a lagged response to the still huge amount of liquidity left in the system. It has risen 30% from 2014 to the middle of 2018.

This year, however, has challenged the Fed’s decision to pursue gradualism. Economic activity has become considerably more robust. The strengthening began last year but so far this year GDP growth has accelerated to over a 4% annualized rate of expansion in the second quarter with signs of even stronger growth in the third. More significantly, huge increases in employment, averaging over 200,000 new jobs created each month, have brought the unemployment rate down to 4% of the workforce, full employment by any definition. Instead of the former weakness that once justified a very gradual approach to the adjustment of monetary policy, more recent economic strength just about demands a more concerted response from the Fed. And most ominous of all, inflation has picked up. According to the Labor Department, consumer prices have increased 3.5% over the twelve months through August, the most recent period for which data are available. Producer prices have shown a comparable rate of increase.

If the Fed wants to stay ahead of events, policy will have to change faster than it has. The higher rates of inflation, especially since low unemployment rates promise more, have changed the game for Fed policymakers. With consumer prices rising at the rates just quoted, short-term rates today still fail even to keep up. Borrowers pay back in dollars that are worth less than when the loan was made, even after including accrued interest. The same could be said of long-term rates. Ten-year treasuries, for instance, yield about 2.9%, still half a percentage point below inflation. Such comparisons surely describe an environment of easy credit. They show that the Fed, despite its gradualist adjustment efforts, remains more expansive than not.

Policymakers surely feel the urgency, or should.  They know that once an inflationary bias takes hold, it will build on itself.  And when once that starts, policy changes can only right things by shocking the system. Since those who run the Fed want to avoid the need to create such shocks, they must feel a powerful spur to adjust policy more quickly now before the inflation becomes established.  With the economy strong and employment at the full, they should have little reason to worry about a more restrained monetary policy except perhaps for concerns the market rally.

A concerted move on monetary policy now — to raise interest rates faster than previously and slow money and liquidity growth more dramatically — could conceivably reverse the market rally that has already proceeded longer and further than historical norms.  And it might, though the strong economy would offer markets support even with higher interest rates and less generous flows of liquidity.  Still, policymakers owe it to the longer-term future to take such a risk and adjust more definitely now. If they fail to do so and inflation finds a basis to build on itself, the resulting economic and market ills will be much worse.

Originally published on

Communications Ten Years Later

This month, story after story looks at how America has changed in the decade since the Great Financial Crisis, and how we will prepare for the next ten years. These retrospectives fill every cable news network, online magazine, podcasts, and more; we’ve even spent a great deal of time covering the anniversary on our very own Vested blog (1, 2, 3, 4, 5). The bulk of the coverage focuses on how the financial landscape has shifted – or not – since the credit default crisis. But, finance isn’t the only thing that’s changed. Our relationship with journalism and media itself has fundamentally changed over the last decade.

We wrote before about how many of our peers use social media as a tool to access news – 90% of GenY and Zers rely on some social channel to feed them stories. Facebook and Twitter are the most popular channels. Ten years ago, Twitter was just taking off, and its popularity fundamentally shifted the way journalists pitched, reported and promoted news. This means journalists hope not only to give readers the information they want but also present it in a way so it’ll appear on the top of newsfeeds and stand out among the overwhelming amount of media sent our way every day.

This increase both in the quantity and speed of information is a key marker of modern news consumption. This can mean great things for the democratization of information, but it can make it harder for credible news to stand out, and over the years this has meant misinformation, mistrust and the ongoing 2016 – now fight against #fakenews.

As journalists face challenges to increase their quantity of coverage and maintain credibility, their simultaneously facing other pressures: pink slips, diminishing staffs, stagnating pay, and other cost-cutting, and the movement to freelancers (publications don’t have to pay their benefits). A telling data point? In 2007, found that there were 73,810 newsroom employees across the country. In 2017, this number was down to 39,210.

But, the technology that has enabled our current news consumption can also be used to empower the newsroom. As our CEO Dan wrote, artificial intelligence-empowered technology like the Washington Post’s Heliograf can help make sure readers are getting the data-driven stories as fast as possible, while also freeing up time for journalists to focus on the long-form, investigative reporting. At the same time, technologies and networks like Qwoted enable reporters to connect with experts quickly and directly to ensure their stories will always have the credibility and variety they need.

While we are unsure what the next ten years will hold for communications, technology will continue to play a key role.  And all those with interact with media — whether consuming it or, like us, seeking to drive it – will adapt and evolve with it.

My colleague (and fellow Vested graduate) Noah Tager designed the enclosed infographic, which illustrates how finance and communications have changed these past ten years. Be sure to check it out, and share across whatever communications and social platforms you think most worthwhile.