Read It And Eat 17/04

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Major Headlines

• The SQE’s Made A Mistake, 175 Mistakes To Be Exact

  • The SQE [Solicitors Qualifying Exam] is a new and main process for qualifying as a solicitor in England and Wales. This is aimed to take down the barriers of entry to make the career change into the legal career that the LPC brought about. They have been in existence for a little over 2 years and just made a major mistake. How the SQE works is that the candidate takes the SQE 1, which consists of the functioning legal knowledge (FLK) test which is split into FLK 1 & FLK 2. and then the candidate has to wait until they are marked have been notified that they have passed the SQE 1 before applying to write the SQE 2. SQE 2 and once the candidate passes both SQE 1 & SQE 2 they have a few more hurdles to scale such as showing and proving qualifying work experience and the character and fitness test etc but in essence the hard part is over. One hundred and seventy five candidates were originally told they had failed their SQE1 exams following publication of their results in mid-March. Now, over a month later, Kaplan has reissued their results and these candidates have now passed. These candidates are expected to receive a £250 goodwill payment, paid for by Kaplan. In a press conference, Zoe Robinson said: “175 candidates incorrectly told they failed an assessment when they had actually passed. In total, 182 outcomes were incorrect. We have reissued the results to all candidates. Everyone will have updated results; albeit their outcome may not change. Many will see small changes in their scores. The highest change is five marks either side. 303 have moved up by one quintile. 164 have moved down by one quintile.” The mistake arose due to an administrative error following recent changes to the way candidates receive their results. Rather than their results being presented as a percentages, they are given a standardised score out of 500. In a joint statement, Kaplan and the SRA addressed that no other previous SQE assessment has been affected by this error. The chief executive of the Solicitors Regulation Authority (SRA) has called “the most serious operational mistake that we’ve made in the last two and half years.” [Legal Cheek]
    

• Corporate Defaults At All Time High

• A few weeks ago I wrote about the dangerous game that Private Equity was playing with the economy and the it seems that they have begun to see the consequences of their actions, from the fact that PE have begun to sell their stakes at a discount to its value. Corporate debt defaults soared last year and could be a problem again in 2024 as cash-strapped companies deal with the burden of high interest rates, S&P Global Ratings reported Tuesday. The number of companies that failed to make required payments on their debt totalled 153 for 2023, up from 85 the year before, an increase of 80%. It was the highest default rate outside of the Covid-related spike in 2020 in seven years. Much of the total came from low-rated companies that had negative cash flows, high debt burdens and weak liquidity, S&P said. From a sector standpoint, consumer-facing companies — media and entertainment in particular — led the defaults. The S&P said there could be hard times ahead for corporate America, which, according to the Federal Reserve, is carrying a $13.7 trillion debt load. Company debt has jumped 18.3% since 2020 as companies took advantage of the Fed slashing interest rates in the early days of the Covid-19 pandemic. “In 2024, we expect further credit deterioration globally, predominantly at the lower end of the rating scale (rated ‘B-’ or below), where close to 40% of issuers are at risk of downgrades,” the firm wrote. “We expect financing costs to remain elevated despite the prospect of rate cuts. And while borrowers have reduced their 2024 maturities, a large share of speculative-grade debt is expected to mature in 2025 and 2026.” [Financial Times]

• A New Extinction Event: The Meteor (AI) and The Dinosaurs (Investment Analyst Roles)

• Artificial Intelligence is the meteor that is coming to make many roles extinct on impact. As companies optimise to boost efficiency and optimise shareholder value by doubling down on Artificial Intelligence and increasing layoffs on jobs that would be replaced by AI. The finance industry has since been slowly trimming its workforce and relying more on AI to make its decision and after periodically testing and fine-tuning their AI, they have begun the process of phasing out entire entry level roles. AI is reportedly going to replace Investment Banking Analyst roles, the advent of artificial intelligence models speed up laborious entry-level number crunching. That combination explains why warnings over risks to employment posed by AI--which usually focus on lower-paid jobs--may result a dramatic reduction in the number of  junior investment bankers. While many businesses will likely harness the power of AI to perform many repetitive, boring, and often thankless functions, the world's major investment banks are already doing it. According to a New York Times report, top U.S. financial firms including Goldman Sachs, Morgan Stanley, and JPMorgan are particularly keen to use those generative computer programs to replace thousands of young people recruited each year as trainee analysts. People who started in those job and scaled the heights of wealth and career success include Michael Bloomberg, Steven Schwartzman, and the world's most (in)famous bond salesman-turned-journalist, Michael Lewis. The Times describes it as "endless hours to learn the building blocks of corporate finance, including the intricacies of mergers, public offerings and bond deals." That's done through crunching changing numbers, repeatedly formatting text, and agonising over "language on esoteric financial documents that may never be read by another soul.” The easy idea... is you just replace juniors with an AI tool" Deutsche Bank chief strategy officer for technology, data and innovation Christoph Rabenseifner told the Times. Of course, substituting people with AI also means cutting jobs--a lot of them. Investment banking executives told the paper the machine learning programs, which will get smarter as they hoover up more data, may allow them to reduce current "hiring of junior investment banking analysts by as much as two-thirds, and slash the pay of those" who do sign on. Those employers stand to save hundreds of millions of dollars and reduce headcount through AI tech. The upside for employees? People who do join the big banks may find their jobs are a lot more energising and rewarding, and their upward career paths less clogged with rivals, “May” being the operative word. [The New York Times]

• Iran Hits Back

  • What happens when you airstrike another countries consulate in Syria that ends up killing senior commanders in the countries army? A strong military retaliation. This is what occurred over the weekend. Israel poked the bear by target airstrikes on the Iranian consulate in Syria. Thirteen people were killed, including Brig. Gen. Mohammad Reza Zahedi - a senior commander in the Quds force, the overseas branch of Iran's elite Republican Guards (IRGC). Iran launched an unprecedented large-scale drone and missile attack at Israel on Saturday night. More than 300 projectiles – including around 170 drones and over 120 ballistic missiles – were fired toward Israel in an immense aerial attack overnight, but “99%” of them were intercepted by Israel’s aerial defence systems and its “partners,” according to the Israeli military. The reprisals marked the first time the Islamic Republic has launched a direct assault on Israel from its soil, marking a dangerous new inflection point in the fast widening Middle East conflict. Iran has warned that it will respond with “stronger and more resolute” actions if Israel retaliates over this weekend’s strikes, according to Tehran’s ambassador to the United Nations. In a phone call with Israel Prime Minister Benjamin Netanyahu on Saturday night, US President Joe Biden made clear the US would not participate in any offensive operations against Iran – as he reaffirmed “America’s ironclad commitment to the security of Israel,” a senior White House official told CNN. [CNN]

MINOR NEWS

• Top firms are borrowing more as clients take longer to pay legal fees. [Solicitors Journal]

• Hong Kong approves spot Bitcoin and Ethereum ETFs. [CNBC]

• Tesla cuts its full self-driving subscription prices in U.S. and Canada. [Reuters]

• Former AT&T Office Tower sells for $3.6 million a 98% discount from 2006 peak. [CoStar]

• The DOJ to sue Ticketmaster parent company Live Nations for antitrust violations. [The Independent]

• Goldman Sachs beats analyst Q1 estimates, with a 28% profit bump of $4.13 billion. [Reuters]

• Charles Schwab beat analyst Q1 earnings. [Invezz]

• Tesla to layoff 10% if global workforce. As stock hits pre-pandemic lows. [The New York Tines]

NEWS OF THE DAY

Reaganomics

This is a portmanteau of the word Reagan and Economics, coined by radio broadcaster Paul Harvey. It refers to the economic policies promoted by the United States President, Ronald Reagan during his time in office that lasted from 1981-1989. His economic policies called for widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets. These policies were introduced in response to a prolonged period of economic stagflation that began under President Gerald Ford in 1976. For people who supported and/or benefitted off it, it was seen as a visible display of free market economics at work, and for everyone else, it was known as a catastrophic failure, aka Voodoo Economics.

The crux about these economic policies was the emergence  of the of the largest wealth gap that the United States had seen. It was the catalyst, the result of which has permeated the entirety of modern capitalist systems, whereby the CEO’s and other executives/employers on average make 400 times their average salaried employee. In fact, the current Starbucks CEO makes 1,000 times more than their workers.

Reaganomics proposed that decreases in taxes, especially for corporations would stimulate economic growth and prosperity. If the expenses of corporations are reduced, the savings would inevitably then "trickle down" to the rest of the economy, spurring overall growth. Reagan believed that by reducing the tax burden on individuals and corporations, they would be incentivised to invest, innovate, and generate economic growth. This approach was rooted in the belief that a strong private sector would ultimately benefit all levels of society. Reagan also pursued deregulation across various industries, believing that reducing government intervention would spur competition, innovation, and efficiency.

Objectives Of Reaganomics.

At the beginning of the Reagan Administration, the U.S. economy was suffering through years of stagflation (another portmanteau of stagnation and inflation), whereby high inflation was accompanied by high unemployment, which led to the stagnation of economic growth. To beat the high rate of inflation, the Federal Reserve (the Fed) increased the short-term interest rate and Reagan proposed a four-pillared economic policy intended to reduce inflation and stimulate economic and job growth. When President Reagan took office, he promised to rebuild the nation's defence, restore economic growth, and trim the size of the federal government by limiting its role in welfare, education, and housing. He pledged to end exorbitant union contracts to make American goods competitive again, cut taxes drastically to stimulate investment and purchasing power, and to decontrol businesses strangled by federal regulation. Even though his policies trimmed little from the size of the federal government, they failed to make American goods competitive in the world market, and led to increased consolidation rather than competition, many Americans believed that he had improved the country's economic situation.

1. Reducing Government spending on Domestic Programs

To curtail government intervention, Reagan’s administration cut or reduced funding to multiple domestic welfare programs, including Social Security, Medicaid, Food Stamps, education, and job training programs. In a deeply controversial move, he also ordered the Social Security Administration to tighten enforcement on disabled recipients, ending benefits for more than a million recipients. These sort of budget cuts were really detrimental to the middle and lower class because Social Security aid, Medicaid and Food Stamps were and are still heavily relied on by the middle and lower class, to beat inflation and also survive in harsh economic conditions.

Though Reagan ordered government spending cuts to domestic programs, he increased defence spending by 35% to achieve "peace through strength" in his opposition to Communism and the Soviet Union. It is important to note that the U.S. defence budget for 2023 was greater than the defence budget of China, Russia, India, Saudi Arabia, the U.K., Germany, France, South Korea, Japan and Ukraine COMBINED. Thus, American defence spending has always been on the rise in both peace and expectedly war times. It is also important to note that the Pentagon, which is the headquarters of the United States Department of Defence, has failed its independent audit of its accounting systems for the sixth consecutive year as of November of 2023. In essence, the United States has prioritised propping up their military defence over the health, welfare and wellbeing of its own citizens and this is the longstanding effect of the failure that was Reaganomics. In essence, he robs Peter to pay Paul. What is the point of a bloated defence budget to protect its citizens if the majority of its citizens are living paycheque in paycheque at best and are destitute and bankrupt?

1. Reducing Taxes for Individuals, Businesses and Investments

In his first year of his presidency, Reagan lowered taxes significantly. Income taxes of the top marginal tax bracket was dropped from 70% to 50% and at the end of his presidency, the income tax rate was beaten down to 28%. That means that the ultra-rich were taxed at 70% before he came into office, then 50% in his first year which was further lowered to 28%. The corporate income tax rate was reduced from 48 percent to 34 percent. The individual tax brackets were indexed for inflation, and most of the poor were exempted from the individual income tax. These measures were somewhat offset by several tax increases. An increase in Social Security tax rates legislated in 1977 but scheduled for the eighties was accelerated slightly. Some excise tax rates were increased, and some deductions were reduced or eliminated. More important, there was a major reversal in the tax treatment of business incomes.

A complex package of investment incentives was approved in 1981 only to be gradually reduced in each subsequent year through 1985. In 1986 the base for the taxation of business income was substantially broadened, reducing the tax bias among types of investment but increasing the average effective tax rate on new investment. It is not clear whether this measure was a net improvement in the tax code. Overall, the combination of lower tax rates and a broader tax base for both individuals and business reduced the federal revenue share of GDP from 20.2 percent in the fiscal year 1981 to 19.2 percent in 1989 fiscal year. Understandably, during the Reagan administration, there was a significant decrease in inflation, with the inflation rate dropping from 13.5% in 1980 to 4.1% by 1988.

Unemployment was 8.5% in December 1981, then rose to 10.8% by December 1982. Congress cut the top tax rate from 70% to 50% in 1982. This helped spur growth in gross domestic product for the next several years. The economy grew 4.6% in 1983, with a decrease in unemployment to 8.3%. In 1984, economic growth rose by 7.2%, while unemployment fell to 7.3%. In 1985, the economy grew 4.2%, and unemployment fell to 7% by December. In 1986, growth was a healthy 3.5% by the end of the year, but the unemployment rate was 6.6%. It was still higher than the natural rate of unemployment. Reagan cut the tax rate again, to 38.5% this time, in 1987—growth remained similar at 3.5%, and unemployment fell to 5.7%. Corporate tax rates were cut from 46% to 40% in 1987, but the effect of this break was unclear. Additionally, the tax treatment of many new investments changed. In 1988, Reagan cut taxes again to 28%. Growth rose to 4.2%, and unemployment fell to 5.3% in 1988.

1. Reduce the Amount of Government Regulations

Reagan was adamant on releasing the government regulations and the governments’ influence on the markets, thus the idea of free-markets was highly supported and this came through supply-side economics. Supply-Side economics is a theory that maintains that increasing the supply of goods and services lead to economic growth. That is, businesses that aim to increase production need to spend money. They hire more people, expand factories, buy more raw materials, and find more outlets for their goods. Government officials who subscribe to this theory advocate tax cuts for corporations and wealthy individuals. They argue that this is a way to put more money in the hands of producers who will increase their spending to the benefit of consumers and workers.

In contrast to Demand-Side Economics, or Keynesians Economics could be seen as the opposite of supply-side economics. Demand-side economics maintains that increasing the demand for goods and services is the key to economic growth. A demand-side economic policy might call for large-scale government spending on infrastructure projects in order to increase related production, purchases, and hiring.

A capitalist free-market economy is an economic system where prices for goods and services are set freely by the forces of demand and supply and are expected by its supporters to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets, private ownership of productive enterprises. Many capitalist free-markets draw their inspirations from Adam Smith’s invisible hand theory.

Reagan removed price controls on oil and gas, reduced restrictions on the financial services industry, and relaxed the enforcement of the Clean Air Act. The Department of the Interior also opened large areas of public land for oil drilling. In 1982, Congress passed the Garn-St. Germain Depository Institutions Act for savings and loan banks to deal with rising inflation and interest rates by further deregulating deposit rates. The Environmental Protection Agency relaxed its interpretation of the Clean Air Act; and the Department of the Interior opened up large areas of the federal domain, including offshore oil fields, to private development.

The results of deregulation were mixed. Bank interest rates became more competitive, but smaller banks found it difficult to stay resilient against larger institutions. Natural gas prices increased, as did production, easing some of the country's dependence on foreign fuel. Airfares on high-traffic routes between major cities dropped dramatically, but fares for short, low-traffic flights skyrocketed. Most critics agreed, however, that deregulation had restored some short-term competition to the marketplace. Yet in the long-term, competition also led to increased business failures and consolidation. In essence to the banks, bankers and the people who are in the upper percentile of the wealth bracket – the 1% – were the biggest beneficiaries of the policies. However, the combination of tax cuts and deregulation was a catalyst for economic growth and job creation. Several industries experienced expansion, including finance, technology, and manufacturing. During this expansion, business had more capital and flexibility, which led to job creation. Consequentially, money did not necessarily trickle down to the pockets of individuals in the lower levels of the economic ladder.

1. Overhaul of The Monetary Policy

Federal Reserve Chairman Paul Volcker had steadily raised the federal funds rate to 20% in 1980. While very unpopular, these high interest rates worked to end double-digit inflation. Reaganomics took the stance that the supply of money had been growing too fast in the years previous, so the monetary policy developed to support the program was to reduce the growth rate of the money supply to more "modest" levels. This growth reduction complemented the Federal Reserves' policy of raising interest rates to reduce borrowing and spending, while increasing savings.

Monetary policy was somewhat erratic but, on net, quite successful. Reagan endorsed the reduction in money growth initiated by the Federal Reserve in late 1979, a policy that led to both the severe 1982 recession and a large reduction in inflation and interest rates. The administration reversed its position on one dimension of monetary policy: during the first term, the administration did not intervene in the markets for foreign exchange but, beginning in 1985, occasionally intervened with the objective to reduce and then stabilise the foreign-exchange value of the dollar.

Most of the effects of these policies were favourable, even if somewhat disappointing compared to what the administration predicted. Economic growth increased from a 2.8 percent annual rate in the Carter administration, but that was misleading because the growth of the working-age population was much slower in the Reagan years. Real GDP per working-age adult, which had increased at only a 0.8 annual rate during the Carter administration, increased at a 1.8 percent rate during the Reagan administration. The increase in productivity growth was even higher: output per hour in the business sector, which had been roughly constant in the Carter years, increased at a 1.4 percent rate in the Reagan years. Productivity in the manufacturing sector increased at a 3.8 percent annual rate, a record for peacetime.

Most other economic conditions also improved. The unemployment rate declined from 7.0 percent in 1980 to 5.4 percent in 1988. The inflation rate declined from 10.4 percent in 1980 to 4.2 percent in 1988. The combination of conditions proved that there is no long-run trade-off between the unemployment rate and the inflation rate (see Phillips Curve). Other conditions were more mixed. The rate of new business formation increased sharply, but the rate of bank failures was the highest since the thirties. Real interest rates increased sharply, but inflation-adjusted prices of common stocks more than doubled.

Was Reaganomics a Disaster or Effective?

While economists remain divided into various elements of Reaganomics, the suggestion that wealth would "trickle down" has so far remained unrealised. On the contrary, economic studies have found that tax cuts, such as those enacted by Reagan, tend to exacerbate economic inequality rather than reduce it. Reagan failed to achieve some of the initial goals of his initial program. The federal budget was substantially reallocated—from discretionary domestic spending to defence, entitlements, and interest payments—but the federal budget share of national output declined only slightly. Both the administration and Congress were responsible for this outcome. Reagan supported the large increase in defence spending and was unwilling to reform the basic entitlement programs, and Congress was unwilling to make further cuts in the discretionary domestic programs. Similarly, neither the administration nor Congress was willing to sustain the momentum for deregulation or to reform the regulation of health, safety, and the environment.

Reagan left three major adverse legacies at the end of his second term. First, the privately held federal debt increased from 22.3 percent of GDP to 38.1 percent and, despite the record peacetime expansion, the federal deficit in Reagan’s last budget was still 2.9 percent of GDP. Second, the failure to address the savings and loan problem early led to an additional debt of about $125 billion. Third, the administration added more trade barriers than any administration since Hoover. The share of U.S. imports subject to some form of trade restraint increased from 12 percent in 1980 to 23 percent in 1988.

In essence, he succeeded in 3 of the 4 economic pillars that was he was set out to accomplish in terms of being beneficial to the majority of the American public. If you think about it, it was as if he was not really considering the long-term effects of his policies nor his legacy, he was focused on being what America needed within the two terms and within those two times over. His focus was on easing inflation and unemployment in the short-term by any means necessary. On his foundation’s website they say “Millions had good jobs and were able to keep more of the money for which they worked so hard. Families could reliably plan a budget and pay their bills. The seemingly insatiable Federal government was on a ‘much-needed diet. And businesses and individual entrepreneurs were no longer hassled by their government, or paralysed by burdensome and unnecessary regulations every time they wanted to expand.” And that in essence “the American dream has been restored.”

Modern day Republican economic ideologies have not deviated much from Reaganomics, with propositions such as tax cuts to massive corporations to incentivise them to build within America and hire locally. An example is the tax cuts in the Bush Administration in 2001 and the tax cuts in the recent Trump administration of 2019. They also tend to have a bigger appetite for war or the preparation for it and therefore, have a ballooned defence budget.

Gen-Z Word Of The Day

Eat/ Ate-Down

1. An expression of appreciation for an action or an outfit. Often used in black spaces.

2. To slay, "kill it" or do very well. Most likely related to the phrase "eating it up", meaning enjoying something to the fullest. This is normally used in the context of showing off how great you look or some kind of performance.