PART 2:  “WE MUST HAVE A PROPER DIAGNOSIS OF OUR PROBLEMS – THE ISSUES ARE REAL AND SERIOUS — IF WE WANT TO HAVE THE PROPE PRESCRIPTIONS THAT LEADS TO WORKABLE SOLUTIONS” {PART 2 of 4 – Excerpts FROM JAMIE DIAMOND, CEO J.P. MORGAN CHASE, ANNUAL LETTER – Public Policy} 

“Slogans are not policy, and, though simple and sometimes virtuous-sounding, they often lead to policies that fail. Well-intentioned but poorly designed policies generally have large and unintended negative consequences. Policy should always be extremely well designed.

In my view, too often we don’t perform the deep analysis required to fully understand our problems. One of the reasons is that we often have too short term an orientation; i.e., looking at how things have changed year-over-year or even quarter-over-quarter. We frequently fail to look at trends over a multi-year period or over decades – we miss the forest for the trees. It’s also important to point out that many economic models that are used to design policy have a hard time incorporating or accounting for the effect of certain factors that can be pivotal but are too complex or qualitative to model.

I have tried to come up with a list of critical factors that greatly affect the health of an economy over many years (such as education, infrastructure, healthcare, etc.). The list is below, and when you look at how we have performed in these areas, it’s rather condemning. Our shortcomings in these areas clearly have impeded the prosperity of the U.S. economy and have failed many of our fellow citizens over the past two decades or so.”

WHAT IS HOLDING BACK OUR NATION’S PRODUCTIVITY AND ECONOMIC GROWTH AND REDUCING OPPORTUNITY? 

• INEFFECTIVE AND OUT-OF-TOUCH EDUCATION SYSTEMS
• SOARING HEALTHCARE COSTS
• EXCESSIVE REGULATION AND BUREAUCRACY
• INABILITY TO PLAN AND BUILD INFRASTRUCTURE
• PREVIOUSLY UNCOMPETITIVE TAX SYSTEM FOR BUSINESS 
• CAPRICIOUS AND WASTEFUL LITIGATION SYSTEM
• FRUSTRATING IMMIGRATION POLICIES AND REFORM
• INEFFICIENT MORTGAGE MARKETS
• DRAMATIC REDUCTION IN LABOR FORCE PARTICIPATION
• STUDENT LENDING (AND DEBT) 
• LACK OF PROPER FEDERAL GOVERNMENT BUDGETING AND PLANNING

INEFFECTIVE AND OUT-OF-TOUCH EDUCATION SYSTEMS

 “Many of our high schools, vocational schools and community colleges do not properly prepare today’s younger generation for available professional-level jobs, many of which pay a multiple of the minimum wage. We used to be among the best in the world at training our workforce for good jobs, but now we are falling short. This is a huge reason for both inequality and lack of opportunity. Our inner-city high schools are failing their communities and are leaving too many behind. In some inner-city schools, fewer than 60% of students graduate, and of those who do, a significant number are not prepared for employment and are often relegated to a life of poverty. Proper training and retraining would also help in our rapidly changing technological world. Finally, skills training has become increasingly important over time, and the negligence of our education systems to be responsive to employers’ current needs has to have reduced GDP growth.”

SOARING HEALTHCARE COSTS

“These now represent almost 20% of GDP — more than twice the cost per person compared with most developed nations. While we have some of the best healthcare in the world, our outcomes are not twice as good as those of the rest of the world. Some studies say that gains in life expectancy in the last 50 years were a significant contributor to U.S. national wealth (and health), possibly equal to half of GDP growth, as people were healthier and lived longer, which generally improved the quality of the labor force and productivity. This may no longer be true. Obesity costs our country $1.4 trillion a year because it drives so many illnesses (i.e., heart disease, diabetes, cancer, stroke and depression). Even worse, 70% of today’s youth (ages 17–24) are not eligible for military service, essentially due to poor academic skills (basic reading and writing) or health issues (often obesity or diabetes). And out-of-pocket healthcare expenses for the average American have skyrocketed over the last 20 years, causing huge anxiety, particularly for low-income families who have been hit with the highest increases in healthcare costs.”

EXCESSIVE REGULATION AND BUREAUCRACY

 “Excessive regulation for both large and small companies has reduced growth and business formation without making the economic system safer or better. The ease of starting a business in the United States has worsened, and both small business formation and employment growth have dropped to the lowest rates in 30 years. By some estimates, approximately $2 trillion is spent on federal regulations annually, which is about $15,000 per household. We need good regulations, and we have to get better at effectively implementing them – accomplishing the desired good outcomes – while minimizing unnecessary costs and bad unintended consequences.”

INABILITY TO PLAN AND BUILD INFRASTRUCTURE

“It took eight years to get a man to the moon (from idea to completion), but it now can take a decade to simply get the permits to build a bridge or a new solar field. The country that used to have the best infrastructure on the planet by most measures is now not even ranked among the top 20 developed nations, according to the World Economic Forum’s Basic Requirement Index, which reflects infrastructure along with other criteria. We are falling behind on airports, bridges, water, highways, aviation and more. One study examined the effect of poor infrastructure on efficiency (for example, poorly constructed highways, congested airports with antiquated air traffic control systems, aging electrical grids and old water pipes) and concluded this could all be costing us more than $200 billion a year. Philip K. Howard, who does some of the best academic work on America’s infrastructure, estimates it would cost $4 trillion to fix our aging infrastructure — and this is lessthan it would costnotto fix it. In fact, a recent study by Business Roundtable found that every dollar spent restoring our infrastructure system to good repair and expanding its capacity would produce nearly $4 in economic benefits. What happened to that “can-do” nation of ours?”

PREVIOUSLY UNCOMPETITIVE TAX SYSTEM FOR BUSINESS

 “Over the last 20 years, as the world reduced its tax rates, America did not. Our previous tax code was increasingly uncompetitive, overly complex and loaded with special-interest provisions that created winners and losers. This was driving down capital investment in the United States and giving an advantage to foreign companies, thereby reducing productivity and causing wages to remain stagnant. The good news is the recent changes in the U.S. tax system include many of the key ingredients to fuel economic expansion: a business tax rate that will make the United States competitive around the world along with provisions to free U.S. companies to bring back profits earned overseas.”

CAPRICIOUS AND WASTEFUL LITIGATION SYSTEM

“Our litigation system now costs 1.6% of GDP, 1% more than what it costs in the average OECD (Organization for Economic Co-operation and Development) nation.”

FRUSTRATING IMMIGRATION POLICIES AND REFORM

“Forty percent of foreign students who receive advanced degrees in science, technology and math (300,000 students annually) have no legal way of staying here, although many would choose to do so. Most students from countries outside the United States pay full freight to attend our universities, but many are forced to take the skills they learned here back home. From my vantage point, that means one of our largest exports is brainpower. We need more thoughtful, merit-based immigration policies. In addition, most Americans would like a permanent solution to DACA (Deferred Action for Childhood Arrivals) and a path to legal status for law-abiding, tax-paying undocumented immigrants — this is tearing the body politic apart. The Congressional Budget Office estimates the failure to pass immigration reform earlier this decade is costing us 0.3% of GDP a year.”

INEFFICIENT MORTGAGE MARKETS

“The inability to reform mortgage markets has dramatically reduced mortgage availability. In fact, our analysis shows that, conservatively, more than $1 trillion in additional mortgage loans might have been made over a five-year period had we reformed our mortgage system. J.P. Morgan analysis indicates that the cost of not reforming the mortgage markets could be as high as 0.2% of GDP a year.”

DRAMATIC REDUCTION IN LABOR FORCE PARTICIPATION

“Wages for low-skilled work are no longer a living wage — the incentives to start work have been declining over time. Add to this the education issues already mentioned above. Two other contributing factors are that many former felons have a hard time getting jobs, and an estimated 2 million Americans are currently addicted to opioids (in 2017, a staggering 48,000 Americans died because of opioid overdoses). Some studies show that addiction is one of the major reasons why many men ages 25–54 are permanently out of work.”

STUDENT LENDING (AND DEBT)

“Irrational student lending, soaring college costs and the burden of student loans have become a significant issue. The impact of student debt is now affecting mortgage credit and household formation – a $1,000 increase in student debt reduces subsequent homeownership rates by 1.8%. Recent research shows that the burdens of student debt are now starting to affect the economy.”

LACK OF PROPER FEDERAL GOVERNMENT BUDGETING AND PLANNING

“This inevitably leads to waste, inefficiency and constraints on multi-year planning. One striking example: It may cost the military at least 20% of its spending power when budgets are not approved on time and continuous spending resolutions are imposed. And we don’t do some basic things well, like account for loans and guarantees properly and demand appropriate funding of public pension plans.

It is hard to look at these issues in their totalityand not conclude that they have a significant negative effect on the great American economic engine. My view is if you add it all up, this dysfunction could easily have been a 1% drag on our growth rate. Before I talk about some ideas to address these issues, I would like to discuss one major debate currently in the echo chamber.”

IS CAPITALISM TO BLAME? IS SOCIALISM BETTER?

There is no question that capitalism has been the most successful economic system the world has ever seen. It has helped lift billions of people out of poverty, and it has helped enhance the wealth, health and education of people around the world. Capitalism enables competition, innovation and choice.

This is not to say that capitalism does not have flaws, that it isn’t leaving people behind and that it shouldn’t be improved. It’s essential to have a strong social safety net – and all countries should be striving for continuous improvement in regulations as well as social and welfare conditions.

Many countries are called social democracies, and they successfully combine market economies with strong social safety nets. This is completely different from traditional socialism. In a traditional socialist system, the government controls the means of production and decides what to produce and in what quantities, and, often, how and where the citizens work rather than leaving those decisions in the hands of the private sector.

When governments control companies, economic assets (companies, lenders and so on) over time are used to further political interests – leading to inefficient companies and markets, enormous favoritism and corruption. As Margaret Thatcher said, “The problem with socialism is that eventually you run out of other people’s money.” Socialism inevitably produces stagnation, corruption and often worse – such as authoritarian government officials who often have an increasing ability to interfere with both the economy and individual lives – which they frequently do to maintain power. This would be as much a disaster for our country as it has been in the other places it’s been tried.

I am not an advocate for unregulated, unvarnished, free-for-all capitalism. (Few people I know are.) But we shouldn’t forget that true freedom and free enterprise (capitalism) are, at some point, inexorably linked.

Successful economies will create large, successful companies.

Show me a country without any large, successful companies, and I will show you an unsuccessful country – with too few jobs and not enough opportunity as an outcome. And no country would be better off without its large, successful companies in addition to its midsized and small companies. Private enterprise is the true engine of growth in any country. Approximately 150 million people work in the United States: 130 million work in private enterprise and only 20 million people in government. As I pointed out earlier in this letter, large, successful companies generally provide good wages, even at the starting level, as well as insurance for employees and their families, retirement plans, training and other benefits. Companies in a free enterprise system drive innovation through capital investments and R&D; they are huge supporters of communities; and they often are at the forefront of social policy. Are they the reason for all of society’s ills? Absolutely not. However, in many ways and without ill intent, many companies were able to avoid – almost literally drive by – many of society’s problems. Now they are being called upon to do more – and they should.

STYRON POWERS’ CONCLUSION

Imagine if we had Federal and State Governments that would partner with Education, R&D and Industry leaders to address the below list of root causes?  If you cannot image that with today’s politicians, simply look at China.  China is a strategic country that is targeting dominating the U.S. and the world in both national wealth and military power.  Consequently, China deploys its best and brightest (can you honestly describe our Congressional leaders with those two words) to design and implement decades long strategies on all the below issues and many more.  

• INEFFECTIVE AND OUT-OF-TOUCH EDUCATION SYSTEMS
• SOARING HEALTHCARE COSTS
• EXCESSIVE REGULATION AND BUREAUCRACY
• INABILITY TO PLAN AND BUILD INFRASTRUCTURE
• PREVIOUSLY UNCOMPETITIVE TAX SYSTEM FOR BUSINESS 
• CAPRICIOUS AND WASTEFUL LITIGATION SYSTEM
• FRUSTRATING IMMIGRATION POLICIES AND REFORM
• INEFFICIENT MORTGAGE MARKETS
• DRAMATIC REDUCTION IN LABOR FORCE PARTICIPATION
• STUDENT LENDING (AND DEBT) 
• LACK OF PROPER FEDERAL GOVERNMENT BUDGETING AND PLANNING

We have two choices. 

• Elect leaders who are financially, technically and socially competent, who behave like adults and collaborate with each other, regardless of political party affliction, to solve our problems. 
• Continue to elect the same bumbling idiots and watch the decline of our nation.

We know which one China is betting on.  More importantly, which one are you willing to work to support.

You can read Jamie Diamond’s entire annual letter by clicking the below link.

https://reports.jpmorganchase.com/investor-relations/2018/ar-ceo-letters.htm?a=1

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DISCLAIMER

I am a proud nerd (my beautiful wife and daughter told me so) investment and finance blogger, with University Rutgers, MBA and Harvard University, Advanced Management education.  

I started my first business at ~13 years of age. I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you.  I am NOThowever, a licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or financial advisors.