It's Current Events Friday!
In this Let People Prosper episode 72, James Quintero, Dr. Derek Cohen, and I discuss this week's current events. The big stories this week are Governor Abbott's State of the State, President Trump's State of the Union, and property tax hearing held by the Texas Senate Committee on Property Taxes. We dive into each of these issues to consider which government actions preserve liberty and which ones don't.
Regarding property taxes, there's some hope in sight! Senate Bill 2 could provide historic property tax reform (read my written testimony and watch testimony at time 1:13:10) that would put in place a 2.5% property tax revenue rate that would trigger an automatic election in November for a local government that wanted to increase their revenue above that point. This reform is an essential element for any property tax relief of lowering property tax bills like TPPF’s plan to eliminate the school M&O property tax over time by slowing spending growth.
In this Let People Prosper episode 71, I chat with James Quintero and Dr. Derek Cohen of TPPF about the benefits of bail reform (SB 628 & SJR 37), the costs and benefits of the latest version of reforming the Teacher Retirement System of Texas (SB 393) (more on TRS problems here), and what to expect in Gov. Abbott's State of the State (like a possible emergency item of property tax reform).
In this Let People Prosper episode 70, I chat with James Quintero and Dr. Derek Cohen about the recently released bills that would both provide property tax reform with the same language (Senate Bill 2 & House Bill 2). Read TPPF's press release here.
The press conference attended by Governor Greg Abbott, Lt. Governor Dan Patrick, Speaker Dennis Bonnen, Chairman Paul Bettencourt, and Chairman Dustin Burrows shows the unity of this particular measure. These bills would provide property tax reforms to increase transparency, change up the appraisal system, and impose a revenue trigger of an automatic rollback election: (1) if revenue is set to grow by more than 8% for local tax jurisdictions with less than $15 million in total revenue from sales and property taxes, and (2) if revenue is set to grow by more than 2.5% for all other taxing entities.
This is a step in the right direction to slowing the growth of skyrocketing property taxes and we look forward to working with leadership and legislators to lower tax bills by limiting state spending as well.
We also discuss the benefits of SB 523, which would restructure occupational licenses for those with particular criminal records.
In this Let People Prosper episode 69, I sit down with James Quintero, director of the Think Local Liberty project, and Dr. Derek Cohen, director of the Right On Crime project, to discuss the Texas budget, ban-the-box, and annexation.
You don't want to miss this first episode of many where we'll address a number of good, bad, and pretty good bills that influence our prosperity throughout session while giving you a heads up on which bills will be heard in committee so you can make your voice heard.
In this episode we discuss the state's recommended budgets by the House and Senate and how they compare with the Conservative Texas Budget, bad bill of HB 495 related to criminal history, and a prosperity-enhancing bill of HB 347 related to annexation that builds on passage of SB 6 during the 2017 special session.
In this Let People Prosper episode 68, I interview James Quintero, Director of the Think Local Liberty project at the Texas Public Policy Foundation, about reining in skyrocketing local property taxes, increasing local debt transparency, and highlighting frivolous local spending. High taxes and debt are always and everywhere a spending problem. James makes that point clear in this episode. Don't miss it!
Texas leads the nation in economic growth and international trade. Were Texas a country, it would have the world’s 10th-largest economy—a ranking achieved in no small part by the state’s deep involvement in international trade. Local, national, and international trade provide the ability for more extensive specialization, and each is an important component of Texas’ economy.
Great discussion on these issues with Texas Comptroller Glenn Hegar, Leila Afas of Toyota Motor Co., Representative Matt Shaheen, and Doug McCullough of the Lone Star Policy Institute.
Read the TPPF report on how people prosper from NAFTA and trade.
The Texas Teacher Retirement System has had massive debts for years and there is growing concern the system is moving toward insolvency. There are good options the Texas Legislature can pursue to fix the system, but they all require hard choices. Which path will policymakers take, or will they put it off?
Great discussion with Stephen Gassenberger of Reason Foundation, Monty Exter of the Association of Texas Professional Educators, and Josh McGee of the Texas Pension Review Board on TRS issues and potential solutions.
Check out this recent TPPF-Reason publication that provides an overview of issues facing TRS.
Perhaps no issue unites Texans across the state like the need to reduce property taxes. But any property tax reform will have consequences that affect how we fund education, pay for roads, grow our economy, improve access to health care, and more. Experts and policymakers take on this critical question and look for solutions in the 86th Legislature.
Great discussion with Dr. John Diamond from Rice University's Baker Institute, Senator Paul Bettencourt, Judge Glenn Whitley, and Representative Drew Springer.
Read more about TPPF's plan to cut property taxes and find out how much you would save under this plan over time here.
How much money does Texas have and what will it do with it? It’s perhaps the most important question the legislature deals with each session – and it all starts with deciding on the state’s priorities. TPPF convenes the important voices who will help answer that question in 2019.
Watch this fantastic discussion with Chairman John Zerwas, Representative Donna Howard, and Chairman John Whitmire as we discuss key issues facing Texas in the upcoming budget.
In this Let People Prosper episode 67, let's discuss the importance of sustaining and improving the Texas Model of no personal income tax, relatively low taxes, relatively less government spending, and sensible regulation that allow entrepreneurs opportunities not available elsewhere. This can be boiled down to: Institutions Matter. Let's recall previous discussions highlighting these key points while noting how Texas led the way in job creation again in 2018.
In this #LetPeopleProsper episode 66, let's discuss what happened during Week 2 of the 86th Texas Legislature.
My op-ed on the need to ban a personal income tax in Texas in the Victoria Advocate was tweeted by Governor Greg Abbott. That op-ed also noted the need to cut the school maintenance and operations property tax with TPPF's plan of simply slowing government spending growth. And I had another piece in The Hill that noted the benefits of free trade.
Finally, the Legislative Budget Board adopted a spending limit based on population growth and inflation last Friday. Near the end of the discussion (watch starting at 6:20), Chair Jane Nelson notes, at Speaker Dennis Bonnen’s request, that The Honorable Talmadge Heflin said TPPF wouldn’t include Harvey-related money in budget figures. This is correct as long as it is transparent and one-time funding. It's a pleasure to work with him every day. Regarding the recent budgets, we posted a blog post with more information comparing the House and Senate budget recommendations with the Conservative Texas Budget.
In this Let People Prosper episode 65, let's discuss the legislative priorities set by the Texas House and Texas Senate in their recently proposed recommended budgets. While there's much to wade through, here’s what I’ve derived so far from the House and Senate recommended budgets. Of course, there will be many discussions over these budgets during the next several months until a final budget is determined and approved by both chambers, but these recommendations give a good indication of the priorities of each chamber, much like your family's budget.
The first thing to note is that both chambers have prioritized public education and property tax relief to a certain extent. Both chambers have relatively large increases in public education, but the details will need to be worked out throughout the legislative session to determine the allocations to public education spending and tax relief.
In general, there should be a push for spending current resources more wisely within public education before considering any new money. In other words, there could be a large amount of money to buy down the school maintenance and operations property tax as outlined in TPPF's property tax plan (view how much you would save over time with our online calculator).
The House budget noted first in the table below shows that the recommendations for state funds and all funds (state and federal) are greater than the Conservative Texas Budget limits based on growth of 8% in population and inflation in the last two fiscal years. The amounts appropriated for 2018-19 budget are from the LBB's Fiscal Size-Up for an apples-to-apples appropriation comparison. I've also noted the Texas Comptroller's Biennial Revenue Estimate (BRE) amounts. The House budget allocates $9 billion towards pub ed/property tax relief but is contingent on bills passed for those. There aren’t specific allocations of that $9 billion for pub ed or property tax relief.
The Senate budget is noted second and is below our CTB limit for state funds but is above our limit for all funds. The Senate budget provides $6 billion in pub ed/prop relief to the tune of $3.7 billion for increased teacher pay ($5,000) and $2.3 billion for prop relief.
I've excluded $7.1 billion in federal funds from both chambers' 2020-21 budgets for disaster recovery after Harvey as these should be one-time, unexpected expenses.
Overall, the Senate budget is in better shape to meet the CTB limits to keep the average taxpayer's ability to pay for government from unnecessarily growth and doesn't include use of the ESF like the House does of $633 million.
Bottom line: There’s work to do to limit government spending and provide tax relief to #letpeopleprosper.
More on this comparison here.
In this Let People Prosper episode 64, let's discuss the Texas Public Policy Foundation's Policy Orientation, which was a sold out event that helps define the narrative for the 86th Texas Legislature, and highlight the recent spending limit set by the Legislative Budget Board.
The following are the panels that I moderated or participated in some capacity and my key takeaways with resources:
The other big news on Friday was that the Legislative Budget Board (LBB) set the state's spending limit for the upcoming 2020-21 budget. This spending limit is on only general revenue not dedicated by the constitution which is less than half of the total budget. While statutorily the spending limit should be based on growth in personal income, last session the LBB chose the rate based on population growth and inflation. This time the spending limit is 9.89% for the 2020-21 budget, which is based on an increase of 8.39% in population growth and inflation and 1.5% for Harvey.
This is another good sign that the LBB continues to use a measure for the limit that better matches the average taxpayer's ability to pay than the inappropriate growth rate of personal income. This spending limit is in-line with the recent BRE increase of 8.1% in general revenue-related funds and provides funds available to cover needed expenses along with property tax relief. Specifically, the Legislature could use half of the funds of about $4.4 billion for spending and 90% of the rest of the funds of about $4.1 billion to buydown the school maintenance and operations property tax.
In this Let People Prosper episode, let's discuss today's release of the Texas Comptroller's Biennial Revenue Estimate report. This report is key because the state's balanced budget amendment means this estimate provides the projected amount of taxpayer money available for the 86th Texas Legislature to appropriate during the upcoming legislative session that starts tomorrow. The revenue estimate indicates that the Legislature can pass a budget that funds legislative priorities while including taxpayers in the budget process by lowering property taxes within the average taxpayer's ability to pay.
The report notes that the 2020-21 budget will have available an estimated $265.6 billion in all funds (state funds and federal funds) (6.7% increase), $176.9 billion in state funds (7.3% increase), and $119.1 billion in general revenue-related funds (8.1% increase). Included in these amounts is an available fund balance of $4.2 billion remaining from the 2018-19 budget.
The 86th Legislature has a grand opportunity to pass what could be the third straight Conservative Texas Budget (CTB) while prioritizing taxpayers in the budget process to lower property tax bills and improve education.
Specifically, the Conservative Texas Budget Coalition, which includes the Texas Public Policy Foundation and 15 other member organizations, has set conservative spending limits on the 2020-21 budget of $234.1 billion in all funds and $156.5 billion in state funds based on an 8 percent increase in population growth plus inflation over the previous two fiscal years above current appropriations.
There are also 2018-19 supplemental bill limits of $3.6 billion in state funds and about $4.4 billion in all funds to cover unfunded expenses in the 2018-19 budget. But these amounts could be quickly reached as there's a $1.8 billion amount likely needed to fund a delayed payment to transportation and $2 billion in unfunded Medicaid expenses. Legislators will need to appropriate these dollars wisely so the 2018-19 budget can be the second straight CTB.
But the Conservative Texas Budget is a maximum to just keep in line with the average taxpayer's ability to pay. Given skyrocketing property taxes, the Legislature should add taxpayers in the budget process and limit general revenue-related funds spending so that the rest can be used for property tax relief through the TPPF proposal here. Many have claimed that Texas can't afford TPPF's proposal, but this revenue estimate shows that Texas clearly can and must for the sake of prosperity in the Lone Star State.
If the upcoming 86th Texas Legislature limited spending of general revenue-related funds to just 4% growth, that would provide $4.4 billion in new spending on budget items while allowing the rest of the 4% of those funds under the CTB of $4.1 billion to go to lowering the school maintenance & operations (M&O) property tax.
The school M&O property tax is about 45% of the total property tax burden. The $4.1 billion would amount to an almost 8% biennial cut in that portion of the property tax, leaving more money in the pockets of taxpayers. The school M&O property tax would continue to be lowered each session given taxpayers are part of the budget process and fully eliminated within about a decade. This process could be sped up by lowering the rainy day fund cap and using excess funds, which the rainy day fund amount could grow to more than $15 billion, to provide property tax relief.
Although slowing the growth rate of property taxes over time is good step towards reform, taxpayers want lower property tax bills for relief. The TPPF proposal works to lower property tax bills, and the Texas Comptroller's revenue estimate proves that it can and must be done.
In this #LetPeopleProsper episode 62, I wish you all a Happy New Year! Thank you for watching this vlog, subscribing, and sharing it with your family and friends.
Each year I choose a word that keeps me on pace to reach my goals. My word this year is "flourish." I started doing this last year with the word "prosper," which last year was very prosperous for my family, and know that this year will be even better than the last. Try it!
2019 will be a busy year as the Texas Legislature will be in session starting January 8. I look forward to discussing the big issues, like property taxes and spending restraint, and providing updates here with guests along the way. We will also discuss interesting things in Congress with the Democrats taking over the House, President Trump will likely act on trade and regulatory issues, the Federal Reserve will be on the hot seat, and so much more.
May we learn more about our God-given world together. Please send me questions and show ideas along the way. You can always find the show notes on the blog page at vanceginn.com.
Blessings to you and yours! #LetPeopleProsper
Despite the economic success of the Texas Model of fiscally conservative governance, a skyrocketing local property tax burden remains one of the state’s most pressing policy challenges. Property taxes have been growing faster than Texan’s ability to pay for them, increasing the need to eliminate them.
You get less of whatever you tax. This key economic insight suggests the best type of taxation does the least economic harm, achieved by limiting government spending to only securing liberty. The evidence is clear that Texas should never have a personal income tax. There is nearly a consensus that is true, but there is a growing consensus that Texas should eliminate property taxes that keep Texans renters forever.
Property taxes are an inefficient type of tax. They are based on primarily subjective valuations by appraisal review boards and determined tax rates by local tax entities with little to no feedback from citizens. Given the rising property tax burden and its inefficient collection mechanism, they should be eliminated in exchange for a more efficient, slower-growing sales tax based on objective market transactions that would help appropriately remove taxes on capital (i.e. property)—the driver of the wealth of states.
Property taxes are more regressive than a sales tax. Opponents of a sales tax say it is too regressive, whereby people with lower incomes people pay a larger share of their income to taxes than those with higher incomes. The Texas Comptroller’s recent report confirms that both sales taxes and property taxes are regressive, according to the “suits index” (see following two tables), but suggests property taxes are less regressive. However, this analysis (and others like it) do not account for the fact that sales taxes are paid once at purchase yet property taxes are paid annually, hurting low- and fixed-income Texans the most because the costs compound over time. A property tax also keeps people from getting their first home and kicks many people out of their home and business. Appropriately accounting for these cumulative costs indicates a property tax is more regressive.
Texas should ultimately have only a single-legged barstool in the form of a broad-based sales tax. Some talk about the need for a three-legged stool of taxation. These legs include a sales tax, property tax, and a personal income tax. Because Texas appropriately doesn’t have the latter, the argument is that there is a need for the other two. But that’s incorrect. Texas needs the most efficient tax system possible to fund limited government. That’s done by expanding the sales tax base as wide as possible to not pick winners and losers to keep the rate as low as possible.
There are paths to swapping out city and county property taxes with a higher local sales tax rate if the state doesn’t broaden the base. This is also a good option as it provides a direct funding source for local governments’ maintenance and operations if, and only if, they eliminate the property tax with a revenue neutral swap. Ideally, the sales tax rate would not be allowed to ratchet up further after the swap and the property tax could never come back.
The school district maintenance and operations property tax, which comprises about 45 percent of the total property tax burden in Texas, could also be swapped out with a sales tax. A broader sales tax base could allow the rate to fall. Here is an overview of possible rates and sales tax bases to eliminate the school district M&O property tax in Texas with 2017 data, which the ideal option would be to expand the base and not tax property, as property is capital that supports economic prosperity.
Texas should limit spending to limit taxes. While sales tax collections can be more volatile than property tax collections from economic changes, sales taxes better reflects taxpayers’ ability to pay than a property tax that they have little control over. Also, property taxes often don’t reflect the economic climate but rather the whims of appraisal districts and local officials that hurt property holders in the process when their incomes are falling. More importantly though, Texas governments must practice spending restraint so that excessive spending doesn’t drive taxes higher than taxpayers’ ability to pay. High taxes are always and everywhere a spending problem.
This is why there is need to limit spending growth to no more than population growth and inflation, two key measures that reflect the ability to pay from more people and wage growth that’s highly correlated with inflation. By practicing spending restraint, excess taxpayer dollars can be used to lower the sales tax rate after a swap or could even be used to cut the school M&O property tax in the meantime until the elimination of school districts’ maintenance and operations property taxes.
By practicing fiscal restraint and eliminating all taxes in Texas except for a broad-based sales tax, the Texas Model would support even greater prosperity for all Texans.
There's been much discussion about international trade, particularly NAFTA with trade between the U.S. and Mexico, in the news and social media after President Trump's recent tweet-storm against the "bad deal."
But let's cut to the chase: people prosper from trade.
Sure, President Trump is correct that the U.S. is running a trade deficit with Mexico, whereby imports exceed exports, this year that looks to surpass the deficit of $71 billion last year (see charts below); but this net trade balance is useless.
True prosperity should be measured by the trade value of voluntary exchange of people importing and exporting products. This trade value between Americans and Mexicans was $557.6 billion in 2017 and is already $512.3 billion through just October 2018, meaning this year is likely to be even higher.
For another example, Texas has a trade surplus with Mexico, meaning Mexicans purchase more from Texans than Texans do from Mexicans (see figures below). Consider that in 2017 Texas exports to Mexico of $97.7 billion were greater than its exports to the next 10 countries combined. And Texas imports from Mexico of $89.8 B were greater than its exports to the next 5 countries combined. But again, Texas' net trade balance with Mexico of an almost $9 B surplus is useless.
True prosperity is the trade value of exports plus imports of $187.5 billion between Texans and Mexicans that year. In other words, through voluntary exchange people satisfy their desires or they wouldn't trade, providing a win-win situation, not a zero-sum game.
Comparative advantage discussed by economist David Ricardo in the early 19th Century explained that an individual (or country) will produce whatever she is relatively more productive compared with someone else (another country) and thing. This is similar to competitive advantage whereby an individual is not only more productive but can produce at a lower cost, which may not always be the case with comparative advantage. I explain this and more the Let People Prosper episode 46 above.
These concepts work in the real world to provide abundant human flourishing. Those people and countries that practice protectionist measures to limit trade have been poor or made poorer over time--even contributing to the failure of their nation such as in Rome or Germany.
What's important here is to be as competitive as possible so that one can continue to benefit from trade by increasing productivity and finding other ways to lower production costs. This can be done through policy such as reducing excessive government spending to lower taxes and cut onerous regulations--both tax and regulatory relief have been successes of the Trump administration. However, tariffs and other trade barriers and excessive government spending by the Trump administration and Congress continue to raise the cost of production and ultimately hurt all Americans as these policy actions reduce their purchasing power.
For example, the Tax Foundation notes that the Trump administration’s imposed tariffs have cost Americans $42 billion in higher taxes levied on thousands of products and threatened tariffs could cost them another $129 billion. This could total $171 billion in higher taxes which would be more than the average per year cut in taxes of $150 billion by the 2017 Trump tax cuts.
Adam Smith also taught us in the late 18th Century that the extent of the market determines the division of labor and specialization. So, expanding the extent of the market through trade with people in other countries improves both of these measure of worker productivity while holding down the cost of production and therefore prices so that the least among us and everyone else prosper over time.
Sure, some sectors, and the workers in them, that don't change course to compete in the expanded markets will be hurt, but people are still better off given more opportunities to work in other sectors and the advantages of an increased standard of living with more quality, affordable products and services.
For more on the economics of trade and the benefits of NAFTA and trade in general, please read my paper "People Prosper from Trade: NAFTA and Texas."
I also recommend reading papers presented at the Dallas Fed's recent conference on 20 years after NAFTA. The book "Economics In One Lesson" has great stuff on the economics of trade. Another good book that I read recently on trade was "Specialization and Trade" by Arnold Kling--I have a short review of it and other books at my Goodreads page.
In general, we need freer trade to let people prosper. Thanks for reading and sharing with others!
In this Let People Prosper episode 61, let's discuss the U.S. Senate's passage (and soon will be in the House) of a landmark criminal justice reform bill called the First Step Act, the unanimous vote by the Texas Commission on Public School Finance of recommended changes to the system, and the ninth increase by the Federal Reserve of the federal funds rate target to a range of 2.25-2.5%.
These are all key issues. But I'm particularly proud of the work that TPPF's Right on Crime team did to make criminal justice reform a priority for years and ultimately by the Trump administration. The First Step Act "provides reentry programming to help reduce recidivism, includes modest sentencing reforms, increases public safety, and gives those incarcerated a second chance once they have paid their debt to society." This is truly a step in the right direction as far too many are locked up for far too long and then return to a life of crime after because of the lack of a job and social normalcy.
The Texas Commission on Public School Finance provided a number of recommendations on how to improve student outcomes, how to increase teacher pay, how to more efficiently spend taxpayer money, and ultimately how to provide tax reform. Fortunately, the final version included language similar to TPPF's property tax plan that could provide lower property tax payments for Texans across the state. This is what Texans need and deserve to assure that they have every chance possible without unnecessary government barriers keeping them from reaching their hopes and dreams.
Finally, the Federal Reserve raised their overnight lending rate between banks, known as the federal funds rate, to 2.25-2.5%. This is the 9th increase since December 2015 after the Fed had left this rate in a range of 0-0.25% for seven years. The new rate remains near historic lows, as noted in the chart below.
While the stock market tanked after this report, the fundamentals of the economy remain relatively strong. One reason for the decline in the stock market today was because the price of credit increased today. This raise reduces the net present value of longer term capital investments and profitability along with the expectation of at least two more raises next year.
My take is that the Fed left rates too low for too long when you compare it with an indicator of a more market-driven, "neutral" rate derived by the Taylor rule. As you'll notice in the figure below, the Taylor rule suggests a neutral rate above 4%, which is almost twice as high as the federal funds rate. By the Fed's distortion of the markets with imposing an ultra-low interest rate policy and multiple rounds of quantitative easing, there are many assets that are bound to be highly inflated and we should expect corrections in these markets as the rate is raised to a more normal level. This isn't necessarily a bad thing as letting the air out of these inflated markets will help steady the markets and ultimately the economy for a firmer foundation for the long run. Interestingly, stocks remain much higher than they were when President Trump took office, which are positive signs of a growing economy as the economic institutions were strengthened from regulatory and tax relief even as burdens were imposed by excessive government spending and trade protectionism.
More to do to #letpeopleprosper.
What's Next for Healthcare After Texas District Judge Strikes Down Obamacare?: Let People Prosper Episode 60
In this Let People Prosper episode, let's discuss the recent decision to strike down the Affordable Care Act, AKA "ObamaCare," by a federal district judge in Fort Worth, Texas and note that this is a historic moment along with the economics of it (more here and the YouTube videos below).
Here is the press release by the Texas Public Policy Foundation, which led this lawsuit with the stellar work by General Counsel Rob Henneke and 20 states, to note this historic win towards economic freedom, prosperity, and access to affordable quality care for many more people than today.
Ultimately, this will likely be a long process until the U.S. Supreme Court hears the case and possibly overturns ObamaCare, allowing for the opportunity to devolve power to the states and ultimately to the people exchanging in a freer market.
In the meantime, we should expect no changes to insurance coverage, including pre-existing conditions. Long term, we must move to a healthcare system based on markets that allow prices to work with families, charities, and state governments helping the neediest among us and the disabled.
This is a historic time for America! #LetPeopleProsper
In this Let People Prosper episode, I am interviewed by Liz Wheeler on her show the Tipping Point on One America News.
We discuss the high cost of deficits and debt and the need for government spending relief along with the latest farm bill which continues the expansion of welfare.
In this Let People Prosper episode 58, let's discuss education-related issues in Texas of school finance reform, property tax relief, and the Teacher Retirement System (TRS) of Texas pension solvency.
To sum up, taxpayers have increased funding for public schools for years (see here and here) and now it's time for those elevated current dollars to be spent wisely to the classroom for improved education outcomes. School finance also includes property tax relief which should be accomplished by following the TPPF plan of actually lowering property taxes. And the latest TPPF-Reason Foundation paper highlights the mounting problems with the TRS pension that must be addressed soon before the pocketbooks of teachers and all taxpayers are hit.
There's much on the line for education in Texas. Serious discussion about spending taxpayer dollars wisely, lowering property taxes, and assuring the TRS pension system is solvent through reform are essential elements of improving education in the Lone Star State.
In this Let People Prosper episode 57, let's discuss the following: 1) latest news on the stock market volatility from uncertainty regarding international trade and the Federal Reserve actions; 2) my latest co-authored piece at the Dallas Morning News on the economic freedom of Buc-ees and what could be done to increase prosperity; and 3) what's next for Texas' rainy day fund.
In this Let People Prosper episode, let's discuss the large selloff in the stock market as international trade issues along with some signs of slower economic growth and higher interest rates give traders anxiety while incorporating how these influence lower gasoline prices. If you want to learn more, you don't want to miss this full episode. Thanks for watching and sharing with your friends and family! I'm truly blessed to have such amazing support.
While there have been some potential good signs on the trade front with a possible agreement between President Trump and President Xi, there continues to be much uncertainty about the actual agreement and the fact that it is only good for 90 days and does little to reduce higher imposed cost of trade between the two countries. In general, this needless trade dispute is far from resolved and has contributed to a steep drop in the stock market today, but there are some promising aspects of the agreement.
“Just because the U.S. and China have agreed to call a truce in their trade war doesn’t mean that it’s over: This was a classic exercise in can-kicking,” economist Tyler Cowen explains in Bloomberg Opinion. “Nonetheless, most cans have quite a few kicks in them, and overall this is good news for the global economy. Instead of sweeping everything under the rug, as was the case before Donald Trump took office, America and China have found a new way of addressing conflict by talking openly.”
According to the Wall Street Journal, "at the meeting in Argentina, Mr. Trump and his negotiators agreed to suspend a planned Jan. 1 increase in tariffs on $200 billion in Chinese goods to 25%, from 10%, as the two sides negotiate over Chinese economic policies."
Overall, tariffs are a destructive and counterproductive trade policy, and both the U.S. and China should work toward reducing them to zero. There’s a lot of work left to do on this deal to ensure that Americans can trade with the Chinese without taxes and uncertainty that will only drive up prices and decrease prosperity.
This action in the international trade arena has had costs not only of higher prices for Americans because of raising taxes through tariffs but also in raising the value of the dollar. Of course, the dollar market has many factors, which also include the Federal Reserve's potential actions of continuing to raise their overnight lending rate target. As U.S. interest rates go up compared with other countries, which essentially all developed countries have historically low interest rates, and people want to park their currency in dollars to reduce global risk, the value of the dollar appreciates compared with a host of major currencies, particularly the European euro.
When the value of the dollar goes up, the price of oil falls as oil is priced globally in dollars. In other words, a higher valued dollar makes it more expensive for people in other countries to purchase oil so demand falls contributing to a lower price of oil. Also contributing to this is higher inventories of oil from near record levels of production in the U.S. from innovative techniques through fracking.
This has contributed to the lowest level of gasoline prices this year, translating "to savings of about $200 million a day for Americans, said Patrick DeHaan, head of petroleum analysis for GasBuddy. DeHaan predicted that gasoline prices will fall further in coming days, but how long that will last is unclear." Given much of my academic research is in the oil and gas markets, there is much to the story of how the oil market works based on supply, global demand, and precautionary demand primarily driven by geopolitical issues.
Supply is increasing, global demand is waning, and precautionary demand is heightened by the previous two factors outweigh this push upward in price. Considering that gasoline is a byproduct of oil, there is, on average, about a 2% increase in the retail price of gasoline for every 10% increase in the price of oil, and a symmetric response for a decline in the oil price over time.
Ultimately, imposing tariffs on other countries naturally leads them to do the same to us. And families pay the cost. Instead of resorting to flawed mercantilist trade policy, America should lead the way in promoting free trade, which history shows supports freedom and human flourishing. This should also stabilize the stock market from such wild swings driven by policy uncertainty on a the trade and interest rate fronts. Gaining trust in money issues must also come in the form of reining in bloated federal government spending of taxpayer dollars today and in the future from rising debt.
Achieving freer trade, raising interest rates to a more normal level, and reining in government spending would put the U.S. a sounder foundation for economic growth contributing to more job creation and economic opportunity for more people to prosper.
In this Let People Prosper episode, let's discuss my recent trip to Washington D.C., where I spoke at the American Legislative Exchange Council's meetings about the importance of institutions and did an interview with Freedomworks, and then discussed the federal budget with Russ Vought, who is the Deputy Director of the White House's Office of Management and Budget.
Let's also discuss the latest economic reports about the continued strength of the U.S. economy in terms of GDP growth and personal income, and examine trade issues being discussed at the G-20 Summit.
Below are a few pictures from my recent trip to D.C.
Below is the file for my presentation before the American Legislative Exchange Conference's Fiscal Policy Reform Working Group in Washington, D.C. This presentation is based on my TPPF research paper titled "Do Institutions Matter for Prosperity in Texas and Beyond."
I've also provided a more in-depth presentation in this episode of my YouTube series "Let People Prosper" at the channel "Vance Ginn Economics."
Vance Ginn, Ph.D.