While Jamie Dimon tried to maintain his traditionally optimistic outlook in his annual letter to shareholders, there was a distinct undertone of pessimism in the latest 45 page letter released earlier today, in which he writes that while the U.S. is "truly an exceptional country," probably stronger than ever before, he cautions that "something is wrong - and it's holding us back."
Here are the highlights from the gloomy passage reposted below in its entirety.
Dimon's letter notes that the economy has been growing much more slowly in last decade or two than in the 50 years before then, with real median household incomes in 2015 2.5% lower than they were in 1999 and the percentage of middle class households shrinking, yet not even someone as intelligent as Dimon can bring himself to fully admit that much if not all of it has to do with America's relentless debt binge, and the gargantuan debt load accumulated and carried by Americans, whether in the form of personal, student, auto debt, be it corporate debt which is at a record high, or, naturally, the sovereign debt which is on the distrubing side of 100% as a percentage of GDP.
Among other things, Dimon observes:
- Over last 16 years, U.S. has spent trillions on wars when it could have been investing that money productively.
- Since 2010, when the government took over student lending, direct government lending to students has gone from ~$200b to >$900b, creating dramatically increased student defaults, population that’s "rightfully angry" about how much money they owe, particularly since it reduces ability to get other credit.
- Healthcare costs are essentially twice as much per person vs most other developed nations.
- Labor force participation is too low.
Dimon also writes that the regulatory environment is "unnecessarily complex, costly and sometimes confusing;" says poorly conceived and uncoordinated regulations have damaged economy, inhibiting growth and jobs. He also says that he isn’t looking to throw out entirety of Dodd-Frank or other rules; "it is, however, appropriate to open up the rulebook in the light of day and rework the rules and regulations that don’t work well or are unnecessary."
Furthermore, the JPM CEO sees need for "consistent, transparent, simplified and more risk-based capital standards" and says that it’s clear banks have too much capital, and more of that capital can be safely used to finance the economy,
Finally, in the most amusing twist, Dimon sees "Too Big to Fail" as essentially solved and adds that taxpayers won’t pay if a bank fails as shareholders and debtholders are at risk for all losses. Just like in the case of Monte Paschi a few months ago, right?
We will certainly check back on that #timestamp in several years.
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Here is the full excerpt from Dimon (link to full letter):
It is clear that something is wrong — and it’s holding us back.
Our economy has been growing much more slowly in the last decade or two than in the 50 years before then. From 1948 to 2000, real per capita GDP grew 2.3%; from 2000 to 2016, it grew 1%. Had it grown at 2.3% instead of 1% in those 17 years, our GDP per capita would be 24%, or more than $12,500 per person higher than it is. U.S. productivity growth tells much the same story, as shown in the chart [below].
Our nation’s lower growth has been accompanied by – and may be one of the reasons why – real median household incomes in 2015 were actually 2.5% lower than they were in 1999. In addition, the percentage of middle class households has actually shrunk over time. In 1971, 61% of households were considered middle class, but that percentage was only 50% in 2015. And for those in the bottom 20% of earners – mainly lower skilled workers – the story may be even worse. For this group, real incomes declined by more than 8% between 1999 and 2015. In 1984, 60% of families could afford a modestly priced home. By 2009, that figure fell to about 50%. This drop occurred even though the percentage of U.S. citizens with a high school degree or higher increased from 30% to 50% from 1980 to 2013. Low-skilled labor just doesn’t earn what it used to, which understandably is a source of real frustration for a very meaningful group of people. The income gap between lower skilled and skilled workers has been growing and may be the inevitable consequence of an increasingly sophisticated economy.
Regarding reduced social mobility, researchers have found that the likelihood of workers moving to the top-earning decile from starting positions in the middle of the earnings distribution has declined by approximately 20% since the early 1980s.
Many economists believe we are now permanently relegated to slower growth and lower productivity (they say that secular stagnation is the new normal), but I strongly disagree.
We will describe in the rest of this section many factors that are rarely considered in economic models although they can have an enormous effect on growth and productivity. Making this list was an upsetting exercise, especially since many of our problems have been self-inflicted. That said, it was also a good reminder of how much of this is in our control and how critical it is that we focuson all the levers that could be pulled to help the U.S. economy. We must do this because it will help all Americans.
Many other, often non-economic, factors impact growth and productivity.
Following is a list of some non-economic items that must have had a significant impact on America’s growth:
- Over the last 16 years, we have spent trillions of dollars on wars when we could have been investing that money productively. (I’m not saying that money didn’t need to be spent; but every dollar spent on battle is a dollar that can’t be put to use elsewhere.)
- Since 2010, when the government took over student lending, direct government lending to students has gone from approximately $200 billion to more than $900 billion – creating dramatically increased student defaults and a population that is rightfully angry about how much money they owe, particularly since it reduces their ability to get other credit.
- Our nation’s healthcare costs are essentially twice as much per person vs. most other developed nations.
- It is alarming that approximately 40% (this is an astounding 300,000 students each year) of those who receive advanced degrees in science, technology, engineering and math at American universities
are foreign nationals with no legal way of staying here even when many would choose to do so. We are forcing great talent overseas by not allowing these young people to build their dreams here. - Felony convictions for even minor offenses have led, in part, to 20 million American citizens having a criminal record – and this means they often have a hard time getting a job. (There are six times more felons in the United States than in Canada.)
- The inability to reform mortgage markets has dramatically reduced mortgage availability. We estimate that mortgages alone would have been more than $1 trillion higher had we had healthier mortgage markets. Greater mortgage access would have led to more homebuilding and additional jobs and investments, which also would have driven additional growth.
Any one of these non-economic factors is fairly material in damaging America’s effort to achieve healthy growth. Let’s dig a little bit deeper into six additional unsettling issues that have also limited our growth rate.
Labor force participation is too low.
Labor force participation in the United States has gone from 66% to 63% between 2008 and today. Some of the reasons for this decline are understandable and aren’t too worrisome – for example, an aging population. But if you examine the data more closely and focus just on labor force participation for one key segment; i.e., men ages 25-54, you’ll see that we have a serious problem. The chart below shows that in America, the participation rate for that cohort has gone from 96% in 1968 to a little over 88% today. This is way below labor force participation in almost every other developed nation.
If the work participation rate for this group went back to just 93% – the current average for the other developed nations – approximately 10 million more people would be working in the United States. Some other highly disturbing facts include: Fifty-seven percent of these non-working males are on disability, and fully 71% of today’s youth (ages 17–24) are ineligible for the military due to a lack of proper education (basic reading or writing skills) or health issues (often obesity or diabetes).
Education is leaving too many behind.
Many high schools and vocational schools do not provide the education our students need – the goal should be to graduate and get a decent job. We should be ringing the national alarm bell that inner city schools are failing our children – often minorities and children from lower income households. In many inner city schools, fewer than 60% of students graduate, and many of those who do graduate are not prepared for employment. We are creating generations of citizens who will never have a chance in this land of dreams and opportunity. Unfortunately, it’s self-perpetuating, and we all pay the price. The subpar academic outcomes of America’s minority and low-income children resulted in yearly GDP losses of trillions of dollars, according to McKinsey & Company.
Infrastructure needs planning and investment.
In the early 1960s, America was considered by most to have the best infrastructure (highways, ports, water supply, electrical grid, airports, tunnels, etc.). The World Economic Forum now ranks the United States #27 on its Basic Requirements index, reflecting infrastructure along with other criteria, among 138 countries. On infrastructure, the United States is behind most major developed countries, including the United Kingdom, France and Korea. The American Society of Civil Engineers releases a report every four years examining current infrastructure conditions and needs – the 2017 report card gave us a grade of D+. Another interesting and distressing fact: The United States has not built a major airport in more than 20 years. China, on the other hand, has built 75 new civilian airports in the last 10 years alone.
Our corporate tax system is driving capital and brains overseas.
America now has the highest corporate tax rates among developed nations. Most other developed nations have reduced their tax rates substantially over the past 10 years (and this is true whether looking at statutory or effective tax rates). This is causing considerable damage. American corporations are generally better off investing their capital overseas, where they can earn a higher return because of lower taxes. In addition, foreign companies are advantaged when they buy American companies – often they are able to reduce the overall tax rate of the combined company. Because of this, American companies have been making substantial investments in human capital, as well as in plants, facilities, research and development (R&D) and acquisitions overseas. Also, American corporations hold more than $2 trillion in cash abroad to avoid the additional taxes. The only question is how much damage will be done before we fix this.
Reducing corporate taxes would incent business investment and job creation. The charts on page 36 show the following:
- That job growth is highly correlated to business investment (this also makes intuitive sense).
- That fixed investments by businesses and capital formation have gone down substantially and are far below what we would consider normal.
And counterintuitively, reducing corporate taxes would also improve wages. One of the unintended consequences of high corporate taxes is that they actually depress wages in the United States. A 2007 Treasury Department review finds that labor “may bear a substantial portion of the burden from the corporate income tax.” A study by Kevin Hassett from the American Enterprise Institute finds that each $1 increase in U.S. corporate income tax collections leads to a $2 decrease in wages in the short run and a $4 decrease in aggregate wages in the long run. And analysis of the U.S. corporate income tax
by the Congressional Budget Office finds that labor bears more than 70% of the burden of the corporate income tax, with the remaining 30% borne by domestic savers through a reduced return on their savings. We must fix this for the benefit of American competitiveness and all Americans.
Excessive regulations reduce growth and business formation.
Everyone agrees we should have proper regulation – and, of course, good regulations have many positive effects. But anyone in business understands the damaging effects of overcomplicated and inefficient regulations. There are many ways to look at regulations, and the chart below and the two on page 38 provide some insight. The one below shows the total pages of federal regulations, which is a simple way to illustrate additional reporting and compliance requirements. The second records how we compare with the rest of the world on the ease of starting a new business – we used to be among the best, and now we are not. The bottom chart on page 38 shows that small businesses now report that one of their largest problems is regulations.
By some estimates, approximately $2 trillion is spent on regulations annually (which is approximately $15,000 per U.S. household annually). And even if this number is exaggerated, it highlights a disturbing problem. Particularly troubling is that this may be one of the reasons why small business creation has slowed alarmingly in recent years. According to the U.S. Chamber of Commerce, the rising burdens of federal regulations alone may be a main reason for a falling pace in new business formation. In 1980, Americans were creating some 450,000 new companies a year. In 2013, they formed 400,000 new businesses despite a 40% increase in population from 1980 to 2013. Our three-decade slump in company formation fell to its lowest point with the onset of the Great Recession; even with more businesses being established today, America’s startup activity remains below prerecession levels.
While some regulations quite clearly create a common good (e.g., clean air and water), it is clear that excessive regulation does not help productivity, growth of the economy or job creation. And even regulations that once may have made sense may no longer be fit for the purpose. I am not going to outline specific recommendations about non-financial regulatory reform here, other than to say that we should have a permanent and systematic review of the costs and benefits of regulations, including their intended vs. unintended consequences.
The lack of economic growth and opportunity has led to deep and understandable frustration among so many Americans.
Low job growth, a lack of opportunity for many, declining wages, students and lowwage workers being left behind, economic and job uncertainty, high healthcare costs and growing income inequality all have created deep frustration. It is understandable why so many are angry at the leaders of America’s institutions, including businesses, schools and governments – they are right to expect us to do a better job. Collectively, we are the ones responsible. Additionally, this can understandably lead to disenchantment with trade, globalization and even our free enterprise system, which for so many people seems not to have worked.
Our problems are significant, and they are not the singular purview of either political party. We need coherent, consistent, comprehensive and coordinated policies that help fix these problems. The solutions are not binary – they are not either/or, and they are not about Democrats or Republicans. They are about facts, analysis, ideas and best practices (including what we can learn from others around the world).