RealClearMarkets Articles

In the Spring of 1944, the world’s attention was rightly focused elsewhere. American and British troops were stuck at the Anzio beachhead in Italy, surrounded by Germans. The Red Army was flooding into the Ukraine. While the US Navy and Marines were island hopping Japanese strongholds throughout the Pacific, the Empire of Japan launched Operation Icho-Go in central China in the vain attempt to halt American bombers launching strikes from the region on its home islands.

And there was that massive buildup in England toward what everyone knew was the coming invasion of Europe.

While the youth of so many nations slugged it out in faraway places amidst devastating carnage and often total destruction, officials gathered in the US to begin planning for a new postwar order. There were political discussions about a great number of topics, how a defeated Germany and Japan might be dealt with, but also the more mundane mechanical necessities.

The Treasury Department had organized, convened, and otherwise supported working groups of financial professionals in cities across the country. Boston, Chicago, Philadelphia, St. Louis, New York. In each place, experts had gathered in the early months of ’44 to figure out the best way to solve one factor which may have been the greatest contributor to World War II.

In its March 25th edition, the New York Times estimated that more than 1.7 million people were given a cancer diagnosis last year. Think about that for a minute.

Think about the agony that fathers and mothers suffered in hearing the bad news, not to mention how excruciating it must have been for some who had to relay the bad news to worshipful children. All of this leaves out the brutality of being sick in the first place, the sleepless nights, the physical pain, the emotions, etc.

So let’s ask a simple question. What if Chinese scientists come up with a cure for cancer? Will Americans shun the cure for it somehow signaling “the fading of American pre-eminence on the world stage”? The previous question is rhetorical, but the words are real. They’re the musings of University of Pennsylvania academics Ezekiel Emanuel, Amy Gadsden and Scott Moore.

The Penn trio view “China” as a threat in consideration of the “research areas that will determine military and economic superiority in the coming decades.” That those who can predict the source of future economic growth are generally billionaires in the investment world doesn't seem to concern these rather self-serious professor types, but that's a digression. For now, their so-called solution so that the U.S. “can compete and win in the century ahead” is for the U.S. to “meet strength with strength, and the best way to do that is to renew a longstanding American advantage: innovation.” As readers can probably imagine, the financial fix for the alleged Chinese threat is more government spending on technology research. They believe $66.5 billion isn’t enough; that the feds need to increase the previous number by many multiples.

The General Accountability Office (GAO) delivered a dose of bad news just before Tax Day. “The federal government’s current fiscal path is unsustainable,” warns the government’s accountants. Among other gloomy tidings, within about 15 years publicly held debt will soar beyond its all-time high of 106% of GDP, seen at the end of World War II. That is more than double the average since 1946. Meanwhile, GAO forecasts, the Medicare hospital trust fund will be depleted by 2026, and by 2034 so will Social Security’s trust fund. Those programs’ trusteessound a similar alarm. By law, this will force a major cut in benefits.

What is particularly worrying about this is that there isn’t much new in the report. The GAO and the Congressional Budget Office (CBO) have been issuing similar dire warnings for years. But nothing seems to change in the desire – or lack of desire – of Congress to take decisive steps to address the long-term budget problem.

Perhaps that should not be a surprise. Fixing the structural imbalance would require taking actions that are politically painful for lawmakers today (raising taxes, reducing benefits etc.), while the economic and political payoff would be many years in the future. And with interest rates, inflation and unemployment are so low, and the stock market doing so well, the public is hardly clamoring for austerity.

How can we change the political dynamics and get the public and Congress to face up to GAO’s warnings? I think it requires a three-part strategy.

In 2016, presidential candidate Donald Trump vowed to bring a businessman’s perspective to critical issues facing the country.

American voters, frustrated by big government’s chokehold on economic progress, welcomed the idea. It was an attractive notion: a new vision, decisive action, and rapid results on issues that affect Americans the most.

Decisive action, however, must be accompanied by adherence to sound principles, because failure can invite unintended consequences or make problems worse. It would be wise for federal regulators and the Trump administration to keep that in mind as they prepare to lead the nation’s health care system into uncharted territory.

Steep Price of IPI Indexing

Ever had the experience of realizing that one leg of a three-legged stool is too long, and needs to be pared? Then you shave it down, and it’s too short, so the other two need to be pared? Pretty soon, you have no stool. That is one of the biggest problems with protectionism. It soon becomes a vicious cycle, with protectionists forced to self-inflict more damage in a futile attempt to repair the setbacks they had already wrought on the economy.

President Trump demonstrated that again Tuesday with an early morning tweet complaining about the negative impact his own tariffs (otherwise known as taxes) have had on Harley-Davidson. Doubling down, he is now threatening to impose more of the same taxes that undermined Harley in the first place.

Quoting a - newscaster, Trump tweeted: “Harley-Davidson has struggled with the EU, currently paying 31 percent. They’ve had to move production overseas to try and offset some of that. Tariffs, which they have been hit with will rise to 66 percent in June of 2021.”

But the EU tariffs are retaliatory tariffs. They are a response to a U.S tariff that Trump imposed. Typically, protectionist actions soon become a series of mistakes, with each new one caused by the last. Do Americans want to make another costly error?

Can you imagine JR Ewing sitting on a mat saying “Namaste”? 

Most people would not associate oil executives or the energy industry with yoga. But at Hart Energy’s DUG Permian Basin conference last week, yoga sessions were offered on the agenda for the first time. Attendees got to practice their downward dog pose before learning about the latest drilling practices.

“We’ve got a bunch of old dinosaurs that are retiring,” Matthew Hembree told Bloomberg. The owner of several mineral and land companies then added, “I think our industry is evolving.”

Mr. Hembree is right—energy is evolving. And nowhere is that more apparent than in the Permian Basin.

We all complain that so much is happening so fast these days it’s hard to keep up. The plethora of events that could have a negative impact on the financial markets is being ignored in the United States, however, and investors seem to be assuming that everything going on will somehow be resolved favorably. The S&P 500 index is up 15% so far this year in spite of a world-wide economic slowdown and political turmoil in the United States, the United Kingdom and almost everywhere else. To reflect on the major issues facing the markets and their possible resolution, however, is useful. In the end, I expect that earnings and interest rates will be the determining factors and that geopolitical issues will cause temporary angst but not have a lasting effect on market performance.

At the beginning of the year we anticipated that the S&P 500 would be up 15% in 2019. As the year began, the index was selling at less than 15 times earnings and investor sentiment was clearly negative. These were near-perfect conditions for, at the least, a strong market rally. Now the index is selling at 18 times trailing earnings and sentiment is optimistic, which would suggest that equities might have a more difficult time between now and year-end. If the events I discuss below don’t work out favorably, we can expect some market turbulence going forward. To start, perhaps considering a few important developments that have gone right in the last few months would be worthwhile. The Federal Reserve has decided to pause on its policy of raising interest rates and shrinking its balance sheet; the government shutdown has ended; there is some better economic news out of China, which is the primary engine of world growth; and inflation has remained low almost everywhere. There are some signs that the second half might be better for the U.S. and Europe.

So what are the issues worth a look? Here are a few: the yield curve inversion, the Affordable Care Act, Brexit, the 2020 election, friction in the Democratic Party, the Chinese threat to American competitiveness, the timing of the next recession, Federal Reserve policy this year, the direction of oil prices, European growth, the dollar, government debt at all levels, climate change and why have we had no inflation in major developed economies.

I will try to cover most of these issues while providing some analytical support for my views, but this is primarily an essay designed to express the opinions of Joe Zidle, our Chief Investment Strategist, and myself (designated by “we”) or just myself (designated by “I”). Each section is covered in a deliberately provocative way to spur you to respond mentally with your own view. The positions described are those of us in Blackstone’s strategy group and do not reflect the opinions of the firm itself. Each is covered briefly; any one of them could well be the main subject at a monthly essay in the future.

Flossmoor is a suburb outside of Chicago. And it’s one that long had interesting rules when it came to cars. For instance, it was illegal for pickup trucks to be parked in the town’s residential areas unless they were in a garage, or something was being unloaded from them.

Interesting about the restriction is that it lasted for 44 years, only to be overturned this past January. Tested in Flossmoor, this experiment in a suburban laboratory of sorts didn’t spread nationally.

Flossmoor’s now old rule about cars came to mind while reading about Burger King’s test marketing of the “Impossible Whopper” in and around St. Louis, MO. The new Whopper is meatless, yet was created to taste like meat.

So newsy is the rollout of what’s supposed to mimic the flame-grilled goodness of the Whopper, that the Washington Post sent its hamburger specialist (Tim Carman) out to the Gateway City to test it. Carman knows his subject well, and is a fan of Burger King in particular. In a column for the Post last year, Carman rated the regular Whopper above the offerings at McDonald’s and Wendy’s.

Newly elected Wisconsin Gov. Tony Evers says he wants to renegotiate the state’s deal with Foxconn. “Clearly, the deal that was struck is no longer in play.”

Under the agreement, Foxconn stands to reap $4 billion from Wisconsin taxpayers. President Trump once actually called the Foxconn deal the “eighth wonder of the world.” But the only wonder is why public officials entered into the deal in the first place. They are learning that any deal a political jurisdiction makes with Foxconn is likely to change before its eyes.

Foxconn has broken a string of promises it made to entice former Governor Scott Walker into promising billions.

Foxconn promise: 13,000 jobs.
Reality: “Difficult to imagine right now.”

At first blush, the 2019 Social Security Trustees Report contains little news.  Most of the projections are little changed from a year ago. The retirement and survivors trust fund is projected to run dry in 2034, the same as last year.  But someone focusing only on these headline numbers would miss some remarkable news—that a crisis in the Disability Insurance (DI) program has largely disappeared.  In 2015 the DI trust fund was expected to run out of money in just over one year.  If that happened 11 million DI beneficiaries would have faced an abrupt benefit cut of nearly 20 percent.  The 2019 projection indicates that the DI program can pay all scheduled benefits for the next 33 years—without any tax increase.

What accounts for this turnaround?  First, to stave off impending benefit cuts Congress boosted DI revenues for three years, enough to allow scheduled benefits to be paid until 2022.  It gave Congress time to decide what to do over the longer run...raise revenues, curtail access to the program, or find ways to help beneficiaries return to gainful economic activity.  But, compared to the long-run funding gap, this temporary revenue increase was microscopic.  The financial problems were not new; DI outlays had been running ahead of revenues since 2009, and members of Congress had been unable to agree on what to do about it.  The 2015 action, though vital, looked like the cliché, ‘kicking the can down the road.’

What happened next has stunned actuaries, economists, and analysts of all stripes.  The number of people applying for disability benefits dropped...and kept on dropping.  Some decline was expected as the economy recovered from the Great Recession and demand for workers increased.  But the actual fall in applications has dwarfed expectations.  In addition, the share of applicants approved for benefits has also fallen.

At first, the Social Security Actuaries couldn’t quite believe that the fall-off in applications was anything other than a temporary deviation from longer-term trends.  So, in 2018, the Trustees tweaked only their short-term projections, those covering the next decade, but they did not alter their assumptions for the rest of the 75-year projection period.  Even this hesitant step led them last year to project that DI revenues would cover all scheduled benefits until 2032. 

“The correct answer, I am afraid, is that we have virtually no economic use for national accounts, partly because we cannot be in control of our economy and partly because our economy has a dynamism which outpaces such accounts.” Those were the words of Sir John James Cowperthwaite, Financial Secretary of Hong Kong from 1961 to 1971.

Cowperthwaite famously harbored a dislike for government statistics given an unrelenting aversion to government intervention in the economy. The production of economic statistics would perhaps cause politicians to “do something” in response to measures indicating economic trouble, so Cowperthwaite avoided them altogether. Considering how desperately poor Hong Kong once was, it’s not unreasonable to suggest that Cowperthwaite was on to something. An economy is not a blob, or an organism that can be massaged or nursed, rather it’s just people. People have needs and they produce in order to fulfill them by exchanging their production with others. Where people are broadly free economically, their production has a tendency to be substantial.

All of this came to mind while reading a recent column by the Washington Post’s Catherine Rampell. Smart and witty as she plainly is, there’s an odd reverence for experts, and in particular experts in government, that informs much of what Rampell writes. Because they’re at the Fed, central bankers are wise in eyes of Rampell despite their track record of being routinely incorrect about the economy. This isn’t a knock on Fed officials as much as it’s a statement of the obvious. Anyone with a really good feel for the economy’s direction wouldn’t toil at the Fed for well below 1 percenter wages. They’d earn millions and billions as investors, and would do this despite still being wrong much of the time. As top macro traders would surely relay to Rampell, they’re incorrect nearly as often as they’re correct. Often stupendously so.

Rampell’s reverence for government and its experts extends to the statistics they produce. As her April 16th column emphatically stated, “[O]ne basis of a democracy – not to mention a healthy economy – is good official statistics so that people can make informed decisions.” Except that what Rampell presumes about statistics isn’t true. And the previous statement has nothing to do with conspiracy theories about government officials having it in for Republicans, or affection for Democrats. Instead, it has everything to do with Rampell seemingly being unaware of what she doesn’t know.

A seminal study by highly-respected economists a few years ago found that the “China Shock” reduced U.S. manufacturing employment by up to 1.5 million jobs between 1990 and 2007. Now, a report last month concludes that American jobs didn’t disappear – they just moved to the services  sector and to areas where human capital is very high. In other words, capitalism has been behaving exactly we should want it to – continually re-allocating capital to achieve maximum efficiency.

A fresh study by a team of academics (Nicholas Bloom, Kyle Handley, Andre Kurmann and Phillip Luck) has found in effect that the China Shock is more like the kind employed in heart treatment – it improved the way our system works.

Let’s look at the regional variations, and the change in the nature of jobs. The semi-skilled manufacturing jobs that moved to China actually provided a boost to American employment in high-end areas such as the West Coast and New England – because that is where the new technologies have been developed. Jobs did not simply move from the U.S. heartland to China, they moved from some parts of the United States to others – from the Rust Belt to the Sun Belt. They didn’t just move to China, so much as they moved via China – to Americans better able to meet consumer needs in the 21st century. The end product? Better jobs, at better pay, for higher levels of skills and entrepreneurship – encouraging economic efficiency and growth. The job shift from low-end manufacturing to high-end services is no different than the shift a century or more earlier from low-end agriculture to higher end manufacturing. The economy, and the people who make it up, are much better off for the transition – as their great-grand children will be as a result of the shift in this century. The shift simply demonstrates that how we earn our income depends on how we spend it, and how efficiently we produce.

Anyone who sees only American job losses as resulting from the economic growth of China is only looking at one side of the balance sheet. In regions that employ highly-skilled workers in the industries of the future, such as Silicon Valley, we see growth and more jobs. In regions that try to hang on to the past, such as Ohio’s Mahonning Valley, we see stagnation and fewer jobs. Skills and entrepreneurship are being rewarded; the lack of the same is being penalized – just as they were when the shift from agriculture to manufacturing rewarded those who grasped the opportunities that were being offered. In other words, capitalism is following the same pattern that has lifted us out of the poverty of the past.

The short answer is that the 30-year mortgage amortizes extremely slowly, making it nearly twice as risky as a similar loan with a 20-year term. And the 30-year loan compounds risk-layering by promoting the use of higher combined loan-to-value and debt-to-income ratios (DTI). 

The Housing Lobby unabashedly supports the broad availability of the 30-year mortgage, and even wants it extended to manufactured housing.  This is because Housing Lobby sees the slow amortization as a feature that reduces monthly payments, making home “more affordable”.   They choose to ignore the bug--the 30-year loan, when combined with other risk factors, drives up home prices when the supply of homes is tight, especially for buyers of entry-level homes.  Since 2012, lower priced entry-level homes have risen by about 55%, while move-up homes have risen by about 31%.  This means lower priced entry-level homes that cost an average of $103,315 in 2012, cost a whopping $160,138 in late-2018. Thus, rather than making housing more affordable as its supporters claim, 30-year loans make housing less affordable. But more on this entry-level home pricing penalty later.

Let’s review the facts about the 30-year loan:

Fact 1: In December 2018, 30-year loans constituted 99% of all government guaranteed loans to finance a home purchase.  Government agencies guaranteed 85% of home purchase loans. 

The report of the U.S International Trade Commission is in. In most respects, USMCA is a marginal improvement over NAFTA. Anyone who trumpets USMCA now has no choice but to admit that NAFTA was good for the United States.

President Trump’s most consistent talking point about NAFTA is it would bring auto production back to the United States (although it never really left.) But the ITC found otherwise. It determined that there would actually be a net job loss in auto production (although there would be an increase in auto parts production.) The ITC also estimated there would be a modest increase in U.S GDP of 0.35 percent. It would increase jobs in the United States by about 176,000 - about as much as an average month during Barack Obama’s presidency.

Trump described the agreement as truly groundbreaking, but what exactly was the United States saved from by reforming NAFTA? Say hello to the new deal; pretty much the same as the old deal - the one Trump called the “worst deal in history.”

In other words, President Trump slapped a new name on an old deal, gained in some respects, lost in others, and ended up a baby step from where things started.

“Fortunes cannot grow; someone has to increase them. For this the successful activity of an entrepreneur is needed. The capital reproduces itself, bears fruit and increases only so long as successful and lucky investment endures.” – Ludwig von Mises, Socialism, p. 340

In a recent edition of the New York Times, it was reported that there were 1.7 million cancer diagnoses last year. Imagine for a moment the agony that followed the doctor visits during which the bad news was relayed, the subsequent sleepless nights for those diagnosed along with their family members, not to mention the life-altering cruelty of death itself.

And while all of the above doesn’t come close to articulating the trauma associated with a cancer diagnosis, along with what ensues, it’s a useful way to pose a basic question: assuming someone of remarkable mind were to divine a cure for cancer, would anyone reading this opinion piece blanch at such an advance? The question is rhetorical. No sane person would look askance at that which would spare so many so much emotional and physical agony.

Ok, but what if the genius behind the cure for the modern “Captain of Men’s Death” (the phrase once used to describe pneumonia) were set to become a billionaire many times over for his advance. Would anyone look askance? The question is yet again rhetorical.

Which "political belief are you scared to share with friends?" So asks a March survey at FiveThirtyEight. What a strange question -- particularly in a prosperous nation born out of coffeehouse debates and political pamphleteering. I can't imagine why any thoughtful adult would be reluctant to share their politics with a true friend. Furthermore, since opinion shapes politics through voting, we should want to discuss our opinions. However, that poll question doesn't hold a candle to the reluctance of many pundits and political figures on the right to speak up for capitalism on moral grounds. With socialism en vogue on the American left even as its latest iteration is obliterating Venezuela, this is an ideal time to make the case for the only system that justly rewards creativity and hard work, while simultaneously making us richer.

Granted, Trump said, "We will never be a socialist country," during his State of the Union; and Mitch McConnell defeated the Green New Deal 57-0 in the Senate. But how persuasive was Trump's taunt, or the Senate debate? Mike Lee's (R-UT) remarks were possibly the best. He rightly noted that the Green New Deal is unserious, but his jokes were tame compared to the ridicule it so rightly deserves. Unfortunately, in the rest of his remarks, he accepted the questionable premise that "climate change is no joke," and iced the socialists' cake by suggesting that people who can't manage a simple press release shouldn’t run the national economy.

Instead of implying that Alexandria Ocasio Cortez's biggest flaw is incompetence, Lee should have asked, "By what right does anyone presume to order Americans about?" The best answer to our crop of socialist ingénues since Ocasio-Cortez's office wafted its first press release came from a freshman representative in her own party, Although she is no Ayn Rand, Vietnam-born Stephanie Murphy, in one sentence, gave the Green New Deal all the consideration it deserved: "The idea that in the greatest ... capitalist system in the world, we're having [a] casual conversation about socialism, offends me." Murphy also described herself using two terms, neither of which occurred in Lee's quarter-hour time on the floor: proud capitalist. Sadly, she almost immediately raised the possibility of "undo[ing] the whole system." I’d be on board for reforming our actual system too, the sclerotic mixed economy, to make it truly capitalist, but I doubt this is what she had in mind.

Speaking of Rand, her book, Capitalism: The Unknown Ideal, explains in the last two words of its title why so few proudly call themselves capitalists. Murphy is exhibit A. She shows her imperfect understanding of capitalism when she speaks of making "sure everybody, no matter what zip code they're born in, has a fair shot." -- as if the right to pursue happiness isn't that fair shot. But Murphy is a Democrat. We shouldn’t expect her to make a positive case for capitalism. And as for the right, we increasingly see a failure to appreciate capitalism and an abject one to speak of it as an ideal. Conservatives seem willing to attack socialism for any number of non-essential reasons rather than speak up for capitalism. Ocasio-Cortez is incompetent, as Mike Lee is quick to point out – but that implies that her plan to rob and enslave Americans might be hunky dory in better hands. Countless other pundits rightly decry socialism as impractical, citing the many times it has impoverished nations and people. Unfortunately, warning only that socialism is impractical has proved … impractical … as its advocates rely on moral grounds. (Spoiler alert: Socialism is impractical because theft and injustice are immoral.) One pundit declares in the Wall Street Journal that, "Climate alarmism isn't popular with the public,” and concludes, “Republicans don't need an alternative." It is true that climate change is not a good excuse to adopt socialism but consider how little of the Green New Deal is about climate. These other issues aren't going away, and if people think that socialism is a moral way to solve them, guess which solution they will choose?

For every coal and steel worker in the U.S. today, there are twenty-five retail workers. One out of every eight “American” jobs is in retail. This rates mention mainly because online shopping, along with brick & mortar advances of the Amazon Go variety promise to render redundant a high portion of retail jobs in the not-so-distant future. As is, more and more of us utilize self-checkout at our favorite grocery stores, and in superstores like Walmart. Considering the rather prosaic farm, some of the more advanced tractors of today do the work that 30 humans did not too long ago. 

Such is the genius of investment. It saves us from needless exertion. Lest readers forget, before tractors and chemical advances like fertilizer, most people were born into a life of farm work. By necessity. Most human effort was directed toward the creation of food. It was a matter of survival until automation and science made it possible for exponentially more food to be produced with exponentially fewer workers.

Thank goodness investment freed so many from work that likely suffocated their true talents. Considered through a modern lens, what a shame if Jeff Bezos, Steven Spielberg, and Patrick Soon-Shiong (creator of Abraxane, a drug developed to fight pancreatic cancer) had been born 150 years ago. Odds are they would have had no choice but to work in agriculture. What a waste of immense talent. Automation of yesterday's work has brought incalculable good to the world. 

All of this came to mind while reading Wall Street Journal commentator Greg Ip’s latest defense of the Federal Reserve. Ip was responding to critiques of the groupthink that is the norm inside a central bank staffed with individuals who near monolithically believe prosperity is the driver of inflation. Ip is defensive mainly because he too believes what is so plainly untrue.

President Trump said last week that “the race to 5G is a race that America must win.” What he hasn’t said is why. The truth is, it makes little or no difference which country’s telecom companies achieve 5G first. What matters is which national economy takes advantage of it best.

5G – which is about 100 times faster than 4G – will make a big difference in our lives. It will facilitate self-driving cars, remote surgery, more efficient agricultural methods – including the opportunity to turn around the increasing mortality rate of bees – and communication between machines in homes and factories. “Smart cities” that use the Internet of Things – such as connected street lamps and traffic lights – will be able to benefit from 5G’s faster speeds and constant data connections. But it makes little difference which country’s telecom companies develop it first. The U.S and Chinese industries are indeed competing; but what they are competing over is who can provide efficiencies to companies in all industries, all over the world. If Chinese telecoms get there first, and provide the services that U.S. companies need, is that a bad thing or a good thing for the U.S. economy?

How well a country fares with 5G depends less on getting there first, and more on taking advantage of what it has to offer by marshalling the skilled and entrepreneurial people and the financial capital to maximize its potential. Is it really important, or even beneficial, for the United States to build a 5G network before China? Japan was the first country to offer 3G, but that hasn’t impeded Apple from using it to dominate the smart phone and apps market. Which of the components of your smart phone are there because they were developed by the Japanese? Do you know? Do you care? Do you have any reason to, as long as you – and tens of millions of your fellow Americans, are reaping the benefits?

5G may very well lead to the creation of 3 million jobs, as Trump claims. But would the United States be able to scoop up all of them, even if it does indeed “win” the race? No, and neither would China. Both countries would still be well-positioned to derive the economic benefits and other advantages the technological breakthrough will offer. GM will still be able to advance its goal of leading the self-driving space, even if Chinese telecommunications giant Huawei participates among the providers. Americans will still benefit from remote surgery, U.S. smart cities will still be able to benefit from constant connection and faster speeds, and the American environment will still benefit from improved protections for bees, regardless of whether the technology companies involved are based in Shanghai or Silicon Valley.

This tax season, some Americans will receive a financial boost from federal and state refunds while others will face unexpected payments. It presents an opportune moment to consider the ways in which our tax policies could be changed to better support work and families. In response, we highlight three types of reform that would promote work, focusing on secondary earners, caregivers of young children, and low-wage workers.

Remove the Tax Penalty for Secondary Earners

Working women earn less than men on average. In late 2018, median weekly earnings for women were 80 percent of median weekly earnings for men, measured before taxes and for full-time workers. Surprisingly, the gap between women and men’s earnings is even larger when measured after taxes. The tax treatment of married couples raises the tax rate faced by the spouse who is the lower earner (also known as the secondary earner). Because secondary earners are predominately women, this increased average tax rate tends to lower married women’s labor force participation.

Research by economist Sara LaLumia and others shows that joint taxation—the practice of taxing total household income—suppresses participation of married women relative to a system of individual taxation. Particularly for families with large gaps in earners’ wages (see the figure below)—and for those who face Earned Income Tax Credit (EITC) phaseout and loss of other benefits—the after-tax return to work is low. By making work less valuable, existing tax policy leads many women to leave the labor force entirely. LaLumia describes a set of options for changing the tax treatment of married couples to address this problem.