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Can a merger of two airlines increase competition

2/19/2023

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 ​I am a very big proponent of competition since I believe it generally leads to lower prices and better quality for the consumer.  In the past I have been very critical of the FTC for allowing some mega companies to merge, such as oil giants Mobil and Exxon.  Keep in mind, in 1934, the Supreme Court broke Standard Oil into 34 separate entities.  Since that time many of those firms have merged to once again become large oil companies.  
The function of the FTC is to promote competition, and challenges anticompetitive business practices and mergers, to make sure that consumers have access to quality goods and services, and businesses can compete on the merits. The FTC does not decide who wins and who loses in the marketplace – consumers do that (from FTC.gov)
Let’s now look at Jet Blue and Spirit airlines that want to merge.  If you look at the four largest domestic airline in the US, American, Delta, Southwest and United, they control about 70-75% of the market.  Jet Blue’s market share is about 5.3% and Spirit 4.9%, and some analysts have questions as to whether Spirit will eventually go into bankruptcy.  
According to JetBlue’s merger plans, the airline will leverage the infrastructure, employees and management of Spirit to schedule 1,700 more flights to 125 cities in 30 countries. This benefits consumers with more choices. JetBlue’s market niche has always been to compete in crowded markets by offering discount prices.  An MIT study found that when JetBlue enters a market, it decreases fares by an average of $32.
Robin Hayes, the CEO of JetBlue recently stated, “You either accept a world where you have four large airlines who will call the shots with about 20% of the market each, and the rest of us have 20% between us. Or you can create a true low-fair, high-quality national challenger to take on these guys.”
I believe that allowing the merger of these two airlines will actually benefit the consumer and lower prices


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Unions and Southwest Management

1/3/2023

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     The older I get, the smarter my father seems to get.  When I was Union President for the Salem, NH Police Union, it was, at best, a tumultuous relationship between the Union and Management, particularly with one Chief who told me that he didn't have to abide by the contract since he didn't negotiate it.  My father would always tell me that you could get more accomplished with honey than vinegar.  This is advice that should be heeded by the Unions of Southwest Air.
​       In 1887, the American Federation of Labor Union was formed and Samuel Gompers was its first president.  He remained president until his death in 1924.  He was very successful and intuitive.  Possibly his most intuitive statement, in my opinion, was when he said that the greatest failure a Captain of Industry can make, is the failure to realize a profit.  At first glance, some people may sit back and think, why would he say that, aren't unions and management arch enemies?
      The answer to that question should be no.  What Samuel Gompers realized was that Union members have a better chance of a good raise, benefits and working conditions, including job security, if the company they work for is profitable.  This holds true today particularly for Southwest the nations largest domestic carrier.
     In the recent meltdown Southwest experienced over the holidays, much to the chagrin of its passengers, they were criticized not only by passengers, the US Secretary of Transportation, but also their labor unions.  Southwest is generally profitable, but I suspect this won't be the case for quarter 4, 2022, and the first couple of quarters in 2023.  The Unions would have served themselves, and Southwest, well if they would have said we are working with management to resolve issues to make Southwest the most passenger friendly and efficient airline in the United States.  However, with their criticism, I suspect there will be many people who have sworn off Southwest in the foreseeable future.
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The Cost of Quarantine

5/10/2020

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​I’ve been asked a number of times on facebook as to how long the economy will take to recover.  The short answer is, I not sure, and it depends.  What I can compute with some certainty is what the cost has been so far of the quarantine, but there are also intangibles.
  
   To figure out the cost we’ll initially look at quarter 1 GDP which declined by 4.8% on an annual basis.  Given GDP in 2019 was $21.429 trillion, that comes out to $1,028.592,000; that’s a trillion with a T, but it doesn’t stop there.  The unemployment rate skyrocketed to 14.7%, the highest since the height of the great depression in 1933 when it was 23%, and the economy lost 20.5 million jobs.  Given that mean pay was $50,000 in 2018 (SSA.gov) and allow for 2 years of 3% raises, that comes to $53,045/12 months is $4,420/month, times 2 months unemployed is $8,840, times 20.50 million comes out to a loss in income of $181,220,000,000; that’s $181.22 billion with a B.  There is a possibility of double counting since many are getting the $600/week stipend from the government which would be part of the CARE act.

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Next is the US government CARE act which gives an extra $600/week in unemployment benefits, which incidentally, is an incentive for people not to go back to work since they are now making more money unemployed than employed.  At the very least, Congress is consistent in their stupidity.  During the great recession, they increased unemployment benefits to 99 weeks.  As a result, the long term unemployment rate (people unemployed for more than 26 weeks) reached its highest rate ever of 47% of all those unemployed; i.e., why work when you can get money for free.  So far, the Care Act 1.0 and 2.0 have cost $2 trillion and they are considering a 3rd money giveaway.  Just for the record, the last time the US was without debt was in 1836.  Between then and 2008, the debt, in nominal figures, increased to $10 trillion.  During the Obama years, it doubled to $20 trillion and it is currently $25 trillion and is expected to be over $26-$27 trillion by the years end.   Just since March 1, the national debt has grown by $1.5 trillion to $24.9 trillion, a 6.4% increase. The budget deficit through March, or the first six months of the fiscal year, totaled $744 billion, on pace to easily eclipse the biggest shortfall in U.S.  To me this is unexcusable given the best economy (what was) in 50 years; but I digress.  

One analyst on CNBC stated that the US would lose 100,000 businesses would fail as a result of the quarantine and mandatory shutdown.  This can be anything from a 1 person cleaning to business to a major airline of cruise line..  Norwegian Cruise Line Holdings recently announced that there is some chance that it may not continue as a going concern.  They are the 3rd largest cruise line world wide.  To be conservative, the average revenue of a small business is $7 million (paychex.com) times 100,000 businesses is $700 billion.

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​  There are other costs, but given only the above, we’re looking at $3.909 trillion.  However, we’re not even looking at the untangibles such as: alcoholism, in NH alone alcohol sales have increased by 15%; suicides, there is a positive relationship between unemployment and suicides, during the great depression suicides more than doubled; obeisity health clubs are closed, divorces, increases in ambulance calls from poisoning (20% nationwide according to the Manchester Union Leader) and the list continues.  
What one must ask is at what point does the cure eclipse the disease.

Speaking of the disease, at the time of this writing, May 8, there have been 78,615 deaths in the US that have been sttributed to covid 19, the key word being attributed.  On April 14, the CDC changed the guidelines and gave directions that any death that has the symptons of covid 19, is to be counted as such even tho a covid 19 test wasn’t performed, and this was done retroactively (it should be noted that Medicare pays a hospital more for a covid 19 death than a non-covid 19 death).  As a result, deaths spiked.  Coincidentally (chart) deaths from pneomonia this year dropped dramatically compared to previous years.  Granted, the quarantine can account for some of that decrease, but not over 1000/week.  Looking at the attached chart that shows deaths by day and a polynomial regression curve, it is approximating a bell shaped curve (chart).  Given it’s asymmetrical, we’re looking at about 96,000-110,000 deaths in the US being attributed to covid 19.  The assumption is that the number of deaths continues its trend which may be in doubt given that some states are opening their economies.  My orginal estimate of deaths was 80,000.  If you subtract 1000 deaths per week from the end of week 8, the 1st week of a 1000 death drop in pneumonia to week 26, the end of June, that’s 16,000 subtracted from the interval now yields 80,000-96,000 covid 19 deaths.

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Now for the $64 question, when will the economy recover?  Analysts on CNBC have said anything from 3 months to 3 years.   The stock market is a leading economic indicator.  The Nasdaq is at the same level it was at the beginning of the year and the S&P 500 and Dow Jones is 30% above its lows.  This is key since it deals with the wealth effect and the amount of money consumers pay.  Many individuals are suffering financially, but many are also not because of the governments benefits to unemployment.  In addition, people on fixed incomes are no worse off and they may be better off since they are getting the $1200 stimulus checks (tax free).  As a result, I’ll predict positive GDP by the 3rd quarter and stocks will be back to their per-covid 19 highs by this time next year assuming no exogenous shocks to the economy.
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Balanced Budget and Term Limits

4/19/2020

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​    In 1836, Andrew Jackson paid off the national debt, and that was the last time, the US was debt free.  In nominal figures, between 1836 and 2008, the US government amassed $10 trillion dollars, during the Obama administration, 8 years, he doubled the debt to $20 trillion.  I was very critical of him then and I’m equally critical of Trump.  In the three years Trump has been president, we are now over $24 trillion in debt.  So much for his promise to balance the budget.  What is particularly disconcerting is that we are in the best economy we’ve had in 20 years.  The last time the economy was this good, the US had a surplus, in other words, tax revenues exceeded spending and this was during the last 3 years of the Clinton Administration and the 1st year of the Bush administration.  The reason for the surplus was the low unemployment rate and as a result, the large amount of income tax received by the government.  However, because the Trump tax cuts (which I love) were not accompanied by spending cuts (which I hate), the yearly deficit, and hence the debt, continued to skyrocket.  A big problem with the debt is Congress.  Since there are no term limits for Congressmen/women, they will generally vote to get re-elected and not what’s good for the economy.  What gets members of Congress re-elected is bringing money into their district and pockets (either by tax cuts and/or welfare) and the budget deficit gets a back seat.  It is time to stop kicking the can down the road.
   In fiscal 2018 the interest that is paid on the debt increased by $62 billion to $371 billion/year.  That represents an increase of 20%, and currently, 8 cents, up from 6.8 cents, of every budget dollar goes towards paying off that interest, and it continues to get worse.  According to the Washington Post, interest costs are the fastest growing part of the federal budget and is beginning to grow exponentially.  The deficit for fiscal 2018 was an estimated $782 billion, up from $666 billion in 2017, according to the CBO. Kevin Hassett, chairman of the White House's Council of Economic Advisers, this week said the White House will release plans on how to attack it according to Bloomberg (I’m not holding my breath).  According to the Wall St, journal, Fiscal 2018 spending exploded by nearly 130 percent, but federal tax receipts rose just 0.4 percent. That's partly because of a 31 percent decline in corporate tax payments and other features included in last year's tax cut bill.  There is something drastically wrong when a company like Amazon makes over $11 billion and profits, and not only doesn’t have to pay any taxes, but gets a $129 million rebate.
The cure for the aforementioned is obvious and are as follows:
• Term limits for Congress; I can’t see this happening in Congress unless all current members are grandfathered.  The alternative would be a constitutional convention.  This requires a positive vote by 2/3’s of the states.  I am convinced that once a congressman/woman is elected, they will do anything to keep their position since it is unlikely they will ever get a better job.  I feel very strongly that Congressmen/women vote to get re-elected, not for what is good for the economy.
• A balanced budget amendment; in good economic times, this is not a problem, however, during a recession, such as now, this tends to be countercyclical and worsen the effects of the recession.  Keynes said that deficit spending is essential in a recession.  What Congressmen/women, and the President, conveniently ignore is the 2nd part of the equation, pay off the deficit during good economic times.  This must also be suspended in times of war.
• Cut spending, close tax loopholes and elect a president who will keep his promise of working towards a balanced budget.  I thought it would be Trump and the Republicans.  I was wrong

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The Coronavirus and the Market

2/29/2020

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​Here we go again. During the financial crisis, I was receiving 2-5 calls/day on what people should do with their retirement account as a result of the market tanking. The exact same thing is happening now in light of the effect the market is experiencing as a result of the coronavirus. Before I answer that question, let's run some numbers.
   In February, 2003, the SARS (Severe Acute Respiratory Syndrome) was identified that affected more than 25 countries (info from WHO).  Since then, a small number of cases have occurred as a result of laboratory accidents or, possibly, through animal-to-human transmission (Guangdong, China).  There were over 8000 cases reported with a mortality rate of 10%; if you were 65 or over, it was a 50% mortality rate.   During that period the Dow dropped about 200 points or 2.5%.
   Next came the bird flu, aka Avian Influenza, in 2005.  Total cases were difficult to confirm, however, according to the NY Times, it exceeded 60%.  That’s correct, 60%.  What did the market do?  It yawned and traded sideways for 10 months with the Dow trading slightly higher than 10,000.
    According to the CDC, there have been 32,000,000 cases of the seasonal flu with 18,000 deaths attributed to the flu with a mortality rate of less than .1%.  
  Enter the Coronavirus.  According to the WHO, there over 85,000 cases in 46 countries; with over 60 cases in the US.  There have been 2,963 deaths with none in the US (info from CNN).  That puts the mortality rate at 3.5%, significantly lower than SARS or the Avian flu.
  Now, getting back to the question of what you should do with your retirement account, do nothing.  The Dow Jones has dropped over 14% which puts it into correction territory.  A correction occurs when the market drops more than 10% and if it should drop 20%, it becomes a bear market.  Since WW2, there have been 26 market corrections and on the average, a market recovers from a correction within 3-4 months (info from CNBC).  Ask yourself a question.  What’s your most valuable asset?  For most of you, it’s your house.  Do you go out and have your home appraised every month?  Of course not, therefore, stop checking your retirement account daily.  Do nothing but do it well.
   One last tidbit.  This is a huge buying opportunity and the stocks I like are the companies that are blue chip and have been hit the hardest such as:  Apple, Exon Mobile, Intel Microsoft, and Royal Dutch Shell.
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An Impeachment Primer

1/23/2020

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    One of my favorite quotes is from Maggie Hassan:  "Any budget that relies on the votes of one political party will fail to meet the expectations of our citizens and the needs of the economy".  I am going to take some artistic license, and substitute impeachment for budget

Andrew Johnson was the 1st president to get impeached.  He was a democrat from Tn. And he wanted, like Lincoln, to extend an olive branch to the southern states which was contrary to the republican controlled Congress.  The vote to impeach, in 1868, was 126 to 47 of which 122 were republican and only 4 were democrats.   At this time, none of the 11 confederate states had representation in Congress. The proceedings were for violating the Tenure in office Act which many said was unconstitutional, but was repealed prior to its day in the Supreme Court.  In the Senate trial, the vote was 35 to 19 to convict.  It fell shot by 1 vote; 35 of 45 republicans voted to convict while 9 democrats and 10 republicans did not.  This was clearly partisan and in retrospect, Johnson was not guilty.

   Next, Bill Clinton was impeached for lying under oath and obstruction of justice.  Once again, impeachment was primarily a partisan vote with over 220 republicans and 5 democrats voting for impeachment.  Only 45 republican Senators voted guilty.  Eight republican Senators voted not guilty.  This was clearly politics, and republicans lost the house in the next election.

    Fast forward to Donald Trump who was impeached in the house, once again on party lines with 229 voting for impeachment and 198 against for Abuse of power and obstruction of justice. It should be clear to all that this will go nowhere in the Senate and it was once again, primarily, along party lines

  The only president who could’ve been impeached, and it have had bi-partisan support, was Richard Nixon.  After being informed by Senate minority leader, R-Barry Goldwater, that he only had, at most, 15 Senators who would vote not guilty during the trial, and overwhelming bi-partisan support in the House to impeach, Nixon resigned.  

   To me the lesson is obvious.  If there is only one party that is for impeachment, then it’s politics and not the rule of law.  At this time I predict the GOP will win the House in November.

    Why, you may ask is a political blog on an economics website?  Simple, if democrats end up controlling both houses and the executive come 2021, I would be buying defensive stocks, treasuries and precious metals because I will predict a recession.
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The High Cost of College Part 1

10/17/2019

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​       For the first time in my life, I am questioning the value of  certain college degrees.  For an economist, life is simple, if the benefit exceeds the cost, do it or buy it or sell it!  Average student debt upon graduation is just under $30,000.  If you go to a state University, such as my alma mater, UNH, a year at college with tuition, room and board, fees and books will cost approximately $35,000, out of state will be $53,000.  A school like Bentley will cost $70,000.  I am aware of some Bentley grads who have graduated with over $200,000 in debt. By 2023, 40% of borrowers are expected to default on their student debt.  More families are saving for college than in the past. Nearly 20 percent of children under age 18 have 529 plans, or other  education investment funds, compared with less than 4 percent in 2001, according to SavingForCollege.com.

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      ​A recent survey of 500 college graduates by GOBankingRates revealed some intriguing data about how Americans really feel about the value of their college degrees:
The survey found that, of the respondents polled:
–36% can’t save for retirement
–32% can’t go on vacation
–28% can’t be financially independent
–21% can’t own their own home
–17% can’t pursue a job they’re passionate about nearly 10 percent of those polled carry more than $50,000 in student loan debt, and 37% more than $15,000.
-25% are working in a job that doesn’t require a degree
That is not surprising when you consider the total amount of student loan debt in America is in excess of $1.5 trillion and impacts nearly 45 million people.
If they could do it all over again:
–1 in 4 graduates said they would choose a different major
–19% wish they had studied harder

As for whether college was worth the debt accrued, 58% of adults said yes

​As for whether college was worth the debt accrued, 58% of adults said yes

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                              Is it worth it?
     It depends on the degree and where you go to college.  Let’s first talk in generalities and then move on to specifics.  Four years at UNH will cost roughly $140,000.  From the attached chart, the average college grad with a bachelor’s degree makes $1173/week or $60,996/year whereas the average high school grad makes $37,024; a difference of $23,972.  Doing some quick math, $140,000/$23,972 = 5.84, your education is paid off.  But keep in mind, the attached chart is for 25 year old grads and a 2017 article reports that by age 34, you will recoup your college tuition costs.  In other words, you will have earned enough money to repay the cost of your degree and make up for your time out of the workforce by the age of 34.
  However being an economist let’s look at it another way an include opportunity cost.  In other words, if I wasn’t going to college, I would be working; so by going to college, I’m foregoing a year’s salary.  Again generalities, as a high school grad, I would be making $28,000/year times 4 years equals $112,000 dollars that I am foregoing by going to college bringing my total cost of college to $252,000.  We know divide this by $23,972 (the difference in earnings at age 25) and breakeven is now 10.5 years.
          

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             ​  Let’s now talk specifics.  Bachelors in Engineering have a starting salary between $60,000 to $80,000, which definitely makes the degree worthwhile.  Business majors are in the vicinity of $53,000 to $65,000.  Generally marketing and management degrees start off at the lower end, and Economics, Accounting and Analytic degrees start at the upper end.  
  But what about some other degrees that are offered, such as Women Studies and Philosophy.  To no surprise, liberal arts majors are at the lower end, generally in the mid-thirties.  Besides Women Studies and philosophy, these include History, English Psychology, Social work and Elementary Education.  Assuming a starting pay of $35,000, compared to a HS graduate of $28,000, I would have a breakeven of $252,000/$7000 of 36 years including opportunity cost, or without opportunity cost $140,000/$7000 of 20 years.  Clearly to me, a Liberal Arts Major at UNH is not worth the cost.   As an afterthought, what jobs does a women studies major qualify?

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      ​
    What then, is a person to do?  There are a number of alternatives.  The first is community colleges which are increasingly turning out students with quality degrees.  In New Hampshire, community college tuition has increased only 2.4% in the past 8 years and a total price for 2 years at a community college is under $15,000, compared to $70,000 at UNH.  For a good student, there is a clear path to a 4 year college after graduating from a community college such as Great Bay in Portsmouth or  Northern Essex College located in Haverhill Ma.  
       Another alternative is an online course from a University such as SNHU, Southern New Hampshire University.  At SNHU, an online course will cost $960, significantly lower than a course at UNH at over $4000.  My personal preference is a face to face class, but given the cost, and the ineptness of some prof’s (especially those with tenure who concentrate on research as opposed to teaching), the benefit exceeds the cost.

​  Two last considerations which will addressed in next month’s blog: why has costs risen so dramatically in colleges and is it worth sending our children to an institution that is a hatchery not for liberalism, but extreme liberalism.  Stay tuned!
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The China Threat

7/31/2019

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            We will be at conflict with China, hopefully not in any kind of shooting war.  Many people would argue that is already the case given the 1 year trade war we’re experiencing with China.  Also, some more astute readers may be aware of the rampant threat of intellectual theft property from the US by China.  This is a major stumbling block on current trade negotiations.  In his book, The Great Zoo of China, Mathew Reilly quotes Adam Fischer in his book, China vs the World.   The following is a paraphrase:

             It is setting records that no other country can match, and at every opportunity the Communist party reports these achievements to the Chinese people through State-controlled media.  China desperately wants to be number 1, the pre-eminent nation on earth.  They have given it a name, “The China Dream”.  But to achieve that dream, China must replace the United States and it must match America’s 20th century achievements in war, space and industry, it must put a man on the moon and it must create companies that are known worldwide.  AND then-then-to truly replace America as the world’s most dominant nation, it must do something even more difficult; it must replace the United States as the Cultural ruler of the planet.    
 
    After leaving Bentley, I went to my alma mata, UNH, to teach.  During my 1st year at UNH, I taught 2 sections in the “Navitas Program”.  This was a program for foreign students (if I was politically correct, I would have said international students), who’s English wasn’t sufficiently adequate to be admitted to UNH.  After 1.5 years of classes, given good grades and passing an English as a second language test, they would matriculate into the University system.  At least 80% of the students are from mainland China.  On a national scale, there are approximately 1 million foreign students in the US and 360,000, 36%, are Chinese.  I have not been able to find how many US students are currently studying in China, but the numbers are low.
      The year and half I spent teaching Chinese students was, to say the least, enlightening.  Chinese students are very polite.  However, they are brought up to fend for themselves.  In other words, your success depends on you.  This includes getting a US education and whatever it takes, which includes cheating.  Cheating is generally accepted, and it is widespread.  Needless to say, I was extremely strict in this area.  Some of the actions I took:  only one student to the bathroom at once and they had to leave their cell phone (this was instituted after the 1st test when there were an exodus of students that suddenly had to take bathroom breaks); I would get a grad student to help proctor and on occasions, I followed a student out the classroom only to find that they carried a second cell phone to contact someone for the test answers; I would not only spread the individual desks apart, I gave 3 separate test, with the same questions but in a different order.  In spite of this, there was still cheating, and I had 5 students either flunked, suspended or expelled. 
   One of the courses I taught outside of Navitas and in the business school was a 1 credit online course in Computing Essentials which was required by all business students.  In this course students had to do various projects and submit them via the Pearson Software.  The software coded each project and if a student copied another students project and submitted it as his/her own it was detected by the software.  The 1st semester I taught the course, over 800 students took the course, and unfortunately, there were 25 students who cheated despite my warnings on how accurate the software is on detecting plagiarism.  Of the 25 students who cheated of which 13 were Chinese students.  To put it in perspective, Chinese students comprised less than 3% of the students taking the course, but accounted for more than 50% of those students who cheated.  Needless to say, all students who cheated flunked the course.  What I found very disconcerting amongst the Chinese students was when they were interviewed by one of the Deans of the business school, 4 of them alluded that I had let some of the “white American” students off.  Fortuitously, the Dean knew that this was clearly not the case.
    Word quickly circulated amongst the close Chinese UNH community that I was very strict on cheaters.  What I found interesting was that in the last 3 years I taught at UNH (prior to retiring) I did not have 1 Chinese student in any of my classes except for the required computer essentials (I was the only prof teaching that class). 
     CNN has also carried a story on Chinese students cheating:    https://money.cnn.com/2014/07/01/pf/college/chinese-students-cheating/
  What I have find particularly disconcerting about Chinese students is the report from the FBI that 10% of Chinese students in the US are in fact spies and reporting to one of China’s intelligence agencies.  This was a story that was also covered by NBC and can be seen at the following link:
​  https://www.nbcnews.com/nightly-news/video/education-or-espionage-a-chinese-student-takes-his-homework-home-to-china-1284568131569?v=railb& 

   This story was also picked up by CNN  https://www.cnn.com/2019/02/01/politics/us-intelligence-chinese-student-espionage/index.html
 
   As I stated in the beginning, we are already in a conflict with China, and given the number of Chinese students in the US, they are getting to know us better than we know them, and this will be to their advantage in the future.
     

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Income taxes explained: OBAMA v TRUMP

6/22/2019

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​On the left is taxes under Obama, I will compute the taxes of a family filing jointly, short form and making $61372, the median US household income for 2017 (info from CNBC). First please notice something the liberal press did not report; the Trump tax law did away with the marriage tax penalty up to $400,000, so only the rich incur that additional tax.
Also please realize we have a marginal tax rate, lower incomes get taxed at a lower rate.
Under Obama a family making $61372 pays the following:
first, the individual deduction was $6000, so filing jointly (2 x 6000), you are now taxed on $61,372-$12,000 or $49,372, the rest is at follows:
1st $16,050 at 10% = $1605
Remaining $33,322 at 15% = $4998.3
Total $6603.3

Under Trump, the individual deduction was increased to $12,000, filing jointly is $24,000, that same couple is now taxed on $61372 -$24,000 or $37,372
1st $19,050 at 10% = $1905
The remaining $18322 at 12% = $2198.64
Total under Trump is $4103.64

Hopefully, this paints the picture!
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China Tariffs and Trade

5/26/2019

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​The Tax Act of 1789 was one of the 1st substantive acts of the new nation and was signed into law by President Washington on July 4th of that year.  It placed an 8% tax on all imported goods.  Tariffs only existed on foreign goods and there is a constitutional provision that states cannot tax the goods of another state (the European Union was eventually structured after this provision in 1958).
     Tariffs were the principal source of the US government’s income (sometimes as much as 90%) prior to the imposition of an income tax in 1917.  There have been many positions on tariffs.  Abe Lincoln stated that he didn’t know much about trade but knew that if an American bought a coat from an English coat maker, the American had the coat and the Englishman had the money.  However, if an American bought a coat from another American, the American had the coat and the other American had the money.  It seems fairly intuitive at first, however, what Lincoln did not take into account was the economic concept of comparative advantage.  Essentially, this is when a country can produce a good with the lowest opportunity cost.  To keep it simple with an example, it means that New England States are better off growing apple and potatoes and trading with Florida for oranges and bananas.  Likewise, China has cheap labor and insufficient natural resources for its 1.3 billion population, whereas the US has technology and resources, hence trade with China, and given its inexpensive cost to produce many goods, electronics clothes etc, the huge trade imbalance (see chart).  

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​As can be seen (chart), tariffs have fluctuated with the lowest being during the Civil War and WW I.  Most notable was the Smoot Hawley tariff of 1930.  Of all the galactically stupid acts that Congress could pass to stave off the depression, this was somewhere in the top 3.  After the stock market crash of 1929, a recession was inevitable, but as a result of the actions of Congress (the tariff) and the FED (shrinking the Money Supply by 30%), a recession was turned into a depression.  The logic behind the Smoot-Hawley tariff was protectionism; in other words, if we make foreign goods more expensive by imposing tariffs, consumers will turn to US made goods.  What Congress and the president failed to realize was that the US, at that time, exported more goods than it imported.  In addition, retaliatory tariffs were placed on US goods.  As a result world trade dropped by 35% and there was considerable damage to the American economy.  Fortuitously, this was quickly reversed and legislators realized the benefits of free trade.

​Since the Smoot-Hawley tariff, there have been a number of agreements world-wide to promote free trade since the 2 GATT’s (General Agreement on Tariffs and Trade).  Then along comes Trump who has addressed huge trade imbalance that the US has across the world, but most specifically China.  U.S. goods and services trade with China totaled an estimated $737.1 billion in 2018. Exports were $179.3 billion; imports were $557.9 billion (www.ustr.gov). The U.S. goods and services trade deficit with China was $378.6 billion in 2018.  The simple fact of the matter is, that given China’s huge positive trade imbalance with the United States, they have much more to lose, and even tho there is some short term pain, it is inevitable that a solution will be reached.  The biggest is China’s continuing theft of intellectual property (stay tuned for next month’s blog on China and Chinese students in the US).  In the Chinese culture, men (it is a male dominated culture) that you are responsible for your own success, and this includes cheating and theft.  In this case US intellectual property and cyber-security.  The Huawei incident speaks for itself.  In a 2017 report, the Officer of the US Trade Representative said Chinese theft of American intellectual property cost between $225 billion and $600 billion annually.
  In retrospect, while there is short term pain (higher prices to consumers and lower profits for businesses), in the long run, the prospects are favorable.  Even tho I voted for Trump (which was more of a vote against Hillary), I don’t defend him, but he had the intestinal fortitude to tackle trade deficits and in the long run, this will be a net positive for the US.
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    John Tommasi is a retired Senior Lecturer of Economics & Finance from Bentley University and  the University of New Hampshire.

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