Sunday, October 13, 2019

LA Housing vs. San Diego Housing – Who Wins?




Though Los Angeles and San Diego, the two major Southern California housing markets, tend to move in tandem, they have been diverging since January 2019. While the San Diego market has been on a rapid upswing, the Los Angeles market has been inching up, at best.

In terms of the overall growth between August 2016 and July 2019, San Diego led the way, registering a growth of 15.56% while Los Angeles returned a lower 13.61%. 

While the growth rates in both markets in 2016-17 were robust, SD consistently outperformed LA, though not by a wide margin. Even when the time series is split in two halves between August 2016 – December 2017 and January 2018 – July 2019, SD grew faster at 10.25% and 2.72% versus LA’s 9.23% and 0.54%, respectively.

Though the LA market has built a decent support at 278-282 level, it needs to stay above it and any significant breach could quickly force it down to the 268-272 level. On the other hand, given SD's upward sloping trend with higher highs, it can easily break out of the next congestion of 264-266 in the near future, rapidly approaching towards 270. 

Of course, the recent green-shoots could be attributed to the interest rates, meaning the fast decline in interest rates in recent quarters might have contributed to an enhanced activity leading to a short and perhaps temporary upswing in these markets. The reason LA has responded less convincingly than SD is that the former is generally more prone to foreign cash buying which has tumbled in recent months, resulting primarily from the on-going Sino-American trade and tariff concerns. SD, on the other hand, is a more natural market driven by its own market fundamentals.

Of course, the activity of the most recent month, July 2019, could be an aberration due to the lack of (data) liquidity; as the new data points come in, the sudden decline (LA) and spike (SD) might get moderated out.



When two markets are compared and contrasted with the comparable data, the regression line could be quite telling. It shows a near-perfect linear trend. Needless to say, the combination of the high r-squared (0.9814) and the correlation coefficient (0.9906) further confirms the fact that these two SoCal market constituents move in lockstep.




In terms of volatility, the COVs are in close proximity too. (FYI – the higher Standard Deviation does not necessarily point to higher market volatility; the COV is a better indicator of volatility than the Standard Deviation as it is normalized by the Average).                                                 
The SD market is the clear winner here, considering its consistently higher growth rates, better markets internals and recent trend reversal after a good consolidation.             

The above examples are based on Case-Shiller’s seasonally-adjusted indices so the month-over-month comparison is fine. While using the seasonally unadjusted Case-Shiller indices, one should compare July 2019 with July 2018 and July 2017, etc. 

Sid Som, MBA, MIM
President, Homequant, Inc.
homequant@gmail.com


Saturday, October 12, 2019

Making US College Education and Student Loans more Labor-force friendly

According to the most recent (2015) PISA scores which measure the basic skills (reading, math and science) of 15-year-olds, the US ranked 30th in Math among the 38 OECD countries – nothing to write home about, right? We need a sea change in the way our colleges work. Also, we need to rethink the qualification criteria for student loans. Here are some remedies: 

     1. College Accreditation must require Local and Regional Business Participation – One of the perennial complaints of the US college education is that it’s too theoretical. Despite the rising trend of internships, only a small percentage of the graduating students are blessed with this fortune, mostly in highly-sought-after disciplines like the STEM. College accreditation must require local and regional business participation (including representation on the board), allowing meaningful access to the business, science and technology community. Ideally, college charters must stipulate that at least 33% of all credit courses be taught by external experts so the students get to learn how the theories are actually being implemented in ‘live’ environments. Of course, it must be a simultaneous process, meaning teaching theories and practice must take place during the same quarter or semester. For example, students specializing in real estate finance must learn from the top mortgage professionals as to how the various mortgages are originated, including the full array of the paperwork involved (industry standard forms, etc.). Likewise, the STEM students who are considering a career in technical trading must learn from the renowned hedge fund managers and (program trading) algorithm scientists. Colleges and universities must therefore offer majors in line with the availability of the aforesaid local and regional industry experts. Needless to say, there will be no dearth of successful industry people who would be more than willing to teach such classes. This joint venture is a necessity today.

     2. New Professors must have at least 3-5 years of Verifiable Business Experience – Colleges must look for qualified professors (US PhD) with actual hands-on business experience. They will rise above the “canned” case studies as they are often antiquated and out of sync with the marketplace. These new crop of professors will also make better liaison with the industry experts, thus vetting and selecting the most fitting ones (with outstanding technical expertise) to teach applications. These technical experts will be able to explain and demonstrate the pieces that comprise the black box. In other words, these professors would know how to avoid walking into the old trap – inviting generalists. Exposing the young students to such generalists tends to be futile as the missing link becomes more elusive. On the other hand, all professors – new and existing – must be allowed and encouraged to work as consultants so they remain thoroughly conversant with the ever-changing industry standards and practices.

     3. Interest Rates on Student Loans must be tied to SAT Scores and APs – Obtaining student loans should be no different than obtaining home loans. Let’s face it: Two prospective homebuyers (mortgage applicants) with 600 and 800 FICO scores, respectively, will be offered vastly different mortgage interest rates, down payment requirements and origination fees (points) by the same bank. Similarly, interest rates on student loans (to pay for college education) should be a function of the SAT and AP scores (these are comparative metrics while the general academic records aren’t). For example, the student who scores 1,580 (out of 1,600) in SAT and completes six APs with all 5’s must be eligible for a much lower interest rate than his/her counterpart who scores 1,300 in SAT and completes three APs with all 3’s. This merit-based system will incentivize everyone to do well academically from the get-go. By the same token, those who fail to do well in SAT and AP may consider other avenues: community colleges, vocational schools, etc. Simply put, we need an incentive-based school system where performers are greatly rewarded. The current system is backward-bending and requires significant overhaul.   

    4Sallie Mae must publish SAT/AP-based Student Loan Rates to provide Transparency – Sallie Mae, the largest student loan provider, and other large providers like Citi, Nelnet, Wells, etc. must develop and publish SAT/AP-based rates to educate and entice students of the advantages of the high scores. If the high school students (starting in sophomore) are taught that high score equals low rates, they would be working harder, thus gradually bumping up the curve making the system globally more competitive.

     Of course, unlike mortgage rates that change daily, the proposed SAT/AP-based student loan rates would be revised annually on the basis of the new data trends (i.e., changing scores). Hopefully, the rate chart would be prominently displayed in all high school cafeterias as a constant reminder that a little extra push would go a long way. Here is an example. Actual rates must be derived from the recent loan data from Sallie Mae and other major lenders in the field.


(Click on the image to enlarge)
  
     5. Interest Rates on Student Loans must be Significantly Higher for Lateral education (education for the sake of education) – When students stay back in schools and continue to take unrelated courses aimlessly (e.g., 2nd/3rd major or 2nd Master’s, etc.), lenders must discourage such loans by charging significantly higher interest rates related to those credits. If students plan on co-concentrating (e.g., business and economics; social science and statistics; applied economics and math; finance and applied math, etc.), they must declare their intention right at the outset while applying for loans, thus locking in their preferred rates throughout the period, as well as to avoid having to pay a significantly higher rate down the road for the “co” in the form of a second major. Oftentimes, the meaningful co-concentrations help job-seekers narrow the competition down. Likewise, many employers prefer those graduates as they bring in truly complementary knowledge.

     6. Interest-free Student Loans must be provided to All STEM Candidates – Instead of enticing foreign STEM graduates with visa adjustments, we must learn to nurture our own. And, it must start with an awareness movement at the middle and high school. At the core of this movement lies the marketing of the awareness to the female students in that they have “equal access” to this career domain. Until and unless our young ladies are convinced of the equal access, we will have no choice but to depend on the foreign employees. In promoting STEM education, teachers and counselors must also explain to the students that 10’s of thousands of STEM jobs remain unfilled and, as a result, our “volume” employers are forced to hire foreign employees to fill in those slots. Interest-free student loans could be a big incentive to entice more students to look into this colossal and unrestricted career domain. Obviously, once accepted, the qualified yet economically disadvantaged students, irrespective of ethnicity, must continue to receive (full) free STEM education, at both public and private institutions. 
    
     7. STEM Students in State Schools must qualify for Financial Aids ahead of all others – In addition to interest-free student loans, STEM students must receive financial aids ahead of their counterparts. Given the urgent need for STEM graduates in our economy, it does not make much sense anymore to treat all economic needs equally. At this point, college education must be compared with and treated like government services, meaning essential education (like essential government services) must always receive higher weights and protections than the not-so-essential education (like non-essential government services). Simply put, STEM education must be declared, protected and promoted as essential education. Ceteris paribus, the qualified STEM student population must get the first shot at the pool of financial aids and the residual will then be distributed to the other disciplines depending on the needs of the labor force. Of course, it has been assumed that the health and mental care education – another market area with critical shortages here – is part and parcel of the STEM, specifically part of ‘S.’   

     8. Ideally, a Moratorium on Student Loans is needed for Business and Humanities Majors – Due to the easy access to student loans, far too many students – relative to the aggregate market demand – continue to major in business and humanities, resulting in significant disguised unemployment all across the country, arguably reaching a point of moral hazard. In order to reduce the incidence of such disguised unemployment, we need a moratorium on such student loans for a period of time, at least 5 to 7 years, thus allowing enough time to get the excess market supply meaningfully absorbed while the wage level rises back up to the point of equilibrium. This pause will allow Sallie Mae to re-evaluate its existing debt load, meaning if they could use a meaningful stress test to evaluate if they might be approaching the "too big to fail" threshold. Meanwhile, a good chunk of the potential fallout population (business and humanities majors) would be redirected to the STEM universe. Sadly, if this decline is not arrested, the possibility of a bailout would be on the horizon in not too distant future (considering the student loan portfolio in the US has recently eclipsed $1.5T). Absent student loans for business and humanities, only a small percentage of the future student population – mostly from the well-to-do families and foreigners – will opt for these over-subscribed majors. Obviously, neither group would pose any renewed threat to the US labor force or contribute to the accentuation of the aforesaid bailout scenario.     

     9. Encourage Ivy League and other Renowned Schools to Eradicate "Legacy" Admission – The legacy admission system is nothing but a "privileged" quota system. Any quota system is detrimental to the overall growth and equality. Yes, applicants from the poorer families must not be discriminated against, but that financial hand-holding must come in the form of added financial aids. Therefore, the better way to handle that event is to increase the family income limit from $60K to $100K for full free-ships. Even a geo-indexed multiplier could be experimented with (Case in point: The purchasing power of $100K family income in NYC is significantly lower than that of Wichita, KS, so to say). In a free society, merit must never be compromised. For instance, if a particular ethnic group qualifies for 60% of all admissions at Harvard, they must be admitted as such, unconditionally. Of course, to promote STEM education, Ivys and other major schools should offer financial aids to qualified STEM applicants ahead of the other disciplines, for a period of time, until the home-grown STEMs are well-represented on the labor force. 

     10. Last but not least, Professors must be Apolitical in classrooms, leaving their ideology, affiliations and agendas outside (the classrooms) – Most American students take on huge loans for college education so they deserve the highest quality education in preparation for successful careers. Unfortunately, too many professors bring their political rhetoric and viewpoints to the classroom, in an effort to brainwash and indoctrinate students to their personal political agenda. This is totally unacceptable. We must keep our great educational institutions free from such partisan politics. Yes, the professors are entitled to their political viewpoints, without commingling with the education inside the classrooms. Going forward, all new hires must be independently vetted (including all of their social media accounts, going back at least ten years) and any political bias must be seriously investigated. Our labor force needs future industry leaders, not political activists. When our institutions become nonaligned and professors’ non-partisans, our labor force will regain its old glory, becoming the envy of the world, again! Of course, in order to weed out politics from our colleges, we must consider one final option: All professors, including the departmental chairpersons, should be hired and placed on 4-year contracts, instead of career tracks. Competition is the cure-all medicine!   

Again, it’s high time that we make our college education and student loans more labor-force friendly. Our students deserve better!

-Sid Som, MBA, MIM
President, Homequant, Inc.

Link to the Book

Wednesday, October 9, 2019

The Great Income Disparity – The US Case

According to Forbes, “In 1965, America's top 1% controlled about 10% of the nation's after-tax income. That number has now grown to over 15%. The average CEO-to-worker pay ratio has increased from 20-1 in 1965 to a whopping 312-1 in 2017. And middle-class real wage growth has been stagnant for decades.”

Presidential candidates are also weighing in on the fast-growing income inequality in the US. On September 24, 2019 Senator Bernie Sanders announced his “Tax on Extreme Wealth” with a proposal for ultra-wealth tax ranging between 2% and 8% depending on the net worth. Presidential hopeful Andrew Yang’s campaign website Yang2020.com states, “Andrew would implement the Freedom Dividend, a universal basic income of $1,000/month, $12,000 a year, for every American adult over the age of 18. This is independent of one’s work status or any other factor.”

Given this widening income gap between rich and poor and stagnant wages for the middle class, we need some serious socio-economic re-engineering. Here are some:

1. Implement Laureate Yunus’ Microcredit Model to Create Economic Opportunities in Inner Cities Most inner cities in the US lack proper economic opportunities resulting in poverty, often rampant poverty. Thousands of bright people are stuck in poverty in inner cities due to state and local governments’ inability to create any meaningful economic opportunities. One size fits all economic model does not work there; instead, the local governments should try Laureate Yunus’ Microcredit Economic Model, thus financially empowering the local entrepreneurs (who “are too poor to qualify for traditional bank loans”) to turn their neighborhoods around. Though this bottom-up economic model was developed for poor villages in third world countries, it has tremendous potential for our inner cities. In order to maintain the uniformity of the program, it needs to be federally (HUD) funded or insured, with a dedicated chain of private financial institutions operating and managing it, in line with the existing SBA program. Again, for the program to successfully work, governments must not be involved in running it.
   
     2. Proclaim all small and mid-size Downtowns as Enterprise Zones –
     Downtowns of many small and mid-size towns around the US suffered heavily with the out-migration of population to the suburbs. While the theme of revival and revitalization of downtowns has been gaining momentum, it needs to accelerate and become more widespread. In fact, all such downtowns must be proclaimed as Enterprise Zones, enticing businesses and builders to return to take advantage of the long-term income and property tax abatements. Sales tax subsidies could be offered to entice consumers to return to shop in revitalized downtowns as well. Public parks could be privatized in an effort to convert them to esthetically-decent yet income-producing family-oriented amusement and entertainment centers. A well-planned nationwide downtown revival initiative will create enormous economic opportunities and jobs; in fact, it could complement the much-talked about trillion dollar Federal Infrastructure Plan, creating much better synergy than approaching them mutually exclusively.

     3. Build Water and Sewage Treatment Plants – Clean water along with effective sewage system is life’s basic necessity. In fact, providing clean water to citizens is as important as the basic education and preventive healthcare. Therefore, investing in water and sewage treatment plants must also be viewed as preventive healthcare, helping people avoid unnecessary trips to health centers and emergency rooms due to easily avoidable water-borne diseases and lack of sanitation. Private companies must be enticed to build and run these plants in exchange for long-term tax-free revenue. Upon expiration of the initial contracts, governments must auction off the maintenance and revenue rights for lump-sum and upfront revenue. This could be one of the best investments in keeping people healthy while reducing overcrowding at the ER, thus freeing up doctors and nurses to provide more critical medical services. This rising tide will incentivize private companies to make bigger and better (AI and robotics) investments in water treatment and recycling technology, striving to lower the overall development and maintenance costs.

    4. Let the Private Sector Develop a Fair and Equitable Property Tax Assessment System – Property tax is often the major source of revenue for Cities and Towns. The poorly built or haphazard assessment systems tend to be highly regressive, thus heavily favoring the rich. Under such a biased system, the poor and middle-class homeowners subsidize the upscale and high-end properties. The young and prospering cities and towns around the country must therefore consider outsourcing this important public task to the private sector or at least develop it in collaboration with the private sector so it becomes truly fair and equitable. Ideally, the development and managing of this task must be entrusted to the private sector. Obviously, an unfair system discourages home ownership at the rank and file level, uproots seniors and minorities and often pushes the middle class off the cliff. On the other hand, a fair and equitable system spontaneously entices property developers, both residential and commercial, to explore those markets. Likewise, the major developers tend to avoid cities and town with unfair and/or unpredictable assessment systems.

     5. Develop a Competitive yet Investment-friendly Business Climate –
     States down to cities and towns must develop an investment-friendly business climate and learn to compete with one another in order to entice significant domestic and foreign investments, leading to persistent and long-term economic prosperity and an ever-expanding job base. Political leaders must also realize that a marketable local economy requires a marketable labor force along with an attractive business climate comprising lower corporate taxes, growth-friendly corporate and environmental regulations, separation of church and state, developed financial institutions, low crime, cooperative and functional government, etc. Furthermore, in order to attract major corporations to help take the city/town to the next level and reshape the economic landscape, local governments must be as forthcoming and accommodative as is economically possible, considering such an event could bring about epoch-making economic impact locally; Case in point: In 2018, we noticed the absolutely astounding reactions from many cities and towns across the country to the proposed development of Amazon’s HQ2 and the regional centers.

    6. Build more Long-term Care Facilities, not Jails and Prisons – People committing the so-called “serious crimes” must be sent to high-security long-term care centers under the care of qualified psychologists and psychiatrists. If we decide to move to a “merit-based immigration,” the top-notch psychologists and psychiatrists from around the world must top the merit list alongside the STEM professors and highly qualified researchers. This humane approach will help save a ton of taxpayer dollars, finding ways back into those poorer communities. The young and reinvented cities around the country should rethink and redefine crime and punishment from a moral high ground. The lack (perhaps absence of) of economic opportunities often forces poor people to commit petty offences, resulting in unnecessary jail terms. Instead of sending them to jails, they should be assigned to the local clergies, rabbis and imams to perform community service. Similarly, in a civilized world, the building of juvenile detention centers does not pass the muster of moral hazards. Those kids should also be supervised by the local spiritual leaders. This holistic approach will be a much better deterrent than the traditional jail terms. They will thus remain as normal and productive citizens without the useless stigma of jails and detentions. In return, the participating religious institutions must receive government aids and grants for maintenance and conservation of their facilities.

    7. Make College Education Free for STEM Students – This country needs to emphasize science and technology education to maintain global championship. Government colleges must provide free STEM education to all qualified poor students. In order to get into the free STEM programs students must compete and qualify for the available seats, ensuring the acceptance of the best and brightest. Students pursuing other essential disciplines like nursing, teaching, etc. must receive tuition subsidies as well. All other majors (e.g., business, humanities, etc.) irrespective of the students’ financial needs must pay full tuition, thereby forcing the otherwise needy to pursue vocational education in line with the market demand. Again, vocational education must carry full financial aid for the needy. While the local governments must always ensure that the financially disadvantaged students are never left behind, they must simultaneously understand the marketability of the labor force. Taxpayer dollars must never be squandered on education that is contrary to the market demand.
     
     8. Richest 1% Needs to Accept the Generational Reset – The richest 1% now owns 50.1% of the world’s wealth. Given this absurd concentration of wealth, we need this 1% to be self-convinced (like Mr. Warren Buffett) that they are just temporary custodians of their wealth. They must therefore come to terms with the generational reset meaning, at the end of their lives, they must return a sizable portion, if not all, of their wealth back to the society, pulling tens of thousands out of abject poverty each year. In other words, the success or failure of this country is now largely dependent on them. If they are honest and honorable enough to accept this harsh reality, the advancement of the citizenry will gleefully continue; absent which, millions more will continue to drift away in utter poverty. Hopefully, this voluntary return of wealth – and not forced redistribution of wealth – will become a self-fulfilling prophecy in arresting the ever-widening income disparity and mitigating poverty. We just want them to be more humane in feeling the pain and anguish of millions of mothers watching their children go to sleep hungry.

    9. Apply the Same High Moral Standard to the other 99% – We must learn to put the interest of the country ahead of our own. So, the rich and poor alike must also come to terms with the generational reset, voluntarily returning a big part, if not all, of our wealth back to the society. Perhaps, we need a universal ring-tone ‘Mom, I am hungry, I can’t sleep’ which will constantly remind us that millions of children are hungry and that their mothers are starving. That nightly cry is the Via Dolorosa for those mothers – that just never ends. We must never forget that these are our children and their mothers are our daughters and sisters. They are inseparably part of us!

   Sid Som, MBA, MIM
   President, Homequant, Inc.

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Tuesday, October 8, 2019

The Great Income Disparity – The Global Case

According to a recent Credit Suisse report the richest 1% now owns 50.1% of the world’s wealth. Given this absurd concentration of wealth, we need this 1% to be self-convinced (like Mr. Warren Buffett) that they are just temporary custodians of their wealth. When a big chunk of their billions remains wastefully invested in unproductive and ostentatious wealth like $50M yacht and $300M in multiple mansions, it hardly benefits the human race.

The income inequality has been growing by leaps and bounds. The only way we can break out of this cycle is by establishing a whole new outlook: Exploring and inventing forward-looking growth and income opportunities for the so-called 99%. In order to maximize the exploration and harnessing of such growth opportunities, every country should start at the national level, gradually drilling down to the state, local and individual (yes, individual) level. The onus is on all of us.
  
So, what should we do about it?

1. Develop Basic Infrastructure with Private Cooperation – A country with well-developed infrastructure can attract more high quality foreign and domestic investments than their counterparts who are struggling to ramp up their infrastructure. Therefore, instead of selling out their natural resources, the poorer third world and developing countries should intensify the development and expansion of the basic infrastructure by enticing private companies (well-known local and foreign) to provide the leadership in that sector. For example, those companies could be encouraged to build new toll highways and bridges, railroads, metro and light rail, ports, airports, rural electrification, tele-communications, etc. shouldering all costs in return for all revenues (at pre-negotiated resell rates) from those projects for the first 15 to 20 years. It will be win-win. With the rapid growth of infrastructure, the credit ratings of those governments will improve. On the other hand, companies investing in infrastructure will get a steady and predictable revenue stream (revenue for, say 12 to 18 years, post completion).

    2. Let the Revenue Cycle Continue – When the ownership returns to the government, they can once again auction off those projects (revenue rights and maintenance obligations) generating significant upfront revenue to reinvest in derivative infrastructure, e.g., schools, hospitals, national/state parks, etc. In order to maintain the tempo of growth, governments must not get into the business of “running” any basic infrastructural services. Of course, they should be in the front-end (deciding on the location, type, extent, etc.) and back-end (project audit, collection and oversight), but not in the mid-end (actual “running” of the services). At that point, the toll, utility and transportation rates would be much lower (considering they would be paid for) benefiting all consumers, including the new arrival of businesses needing better and faster transportation and communication services.
   
   3. Avoid Bridges to Nowhere – The participation of the private sector will help avoid the building of unproductive bridges to nowhere as they will conduct their own feasibility studies with rigorous cost-benefit projections. With the expansion and renewal of the basic infrastructure, those countries will become more attractive for foreign investments. Since they are inherently foreign exchange poor, enticing foreign investments with more competitive infrastructure will be the path forward. As the multi-national companies find out the growth of investment-friendly infrastructure in those countries vis-à-vis their surrounding peers, they will be more eager to explore direct and joint venture investments there. Needless to say, those companies are also constantly looking for new markets to explore and penetrate!

   4. Entice Neighbors to Follow the Successful Example – Of course, with the rising prosperity comes the border issue. A good leader sets examples that others are spontaneously enticed to follow. Today, we live in a world of economic cooperation and free trade so building a Chinese wall around the country’s border does not lead to lasting economic prosperity; rather, the prosperous countries must encourage the poorer neighbors to follow the successful example and shore up their own basic infrastructure, thus paving the way for a concerted regional revitalization and growth. This is how the refugee problem (from the neighboring countries) will be best avoided.

    5. Develop Regional Economic Zones – As the regional renewal gains momentum, countries must work together on creating their own economic zones, letting goods and services flow freely across borders without the costly and unnecessary taxes, tariffs and other economic barriers. With economic zones in place, it would be easier to convince corporations to build toll-ways, bridges, waterways, etc. across borders, offering better scalability and enhanced economy of scale. Countries must experiment with and use (macro economic) growth models that are sustainable. In fact, G-7s down to BRICS must aid and cooperate with the countries that become signatories to an international economic model emphasizing regional growth, renewal, cooperation and development of economic zones.   

   6. Create Tax-free Enterprise Zones – With the rapid growth and expansion of the basic infrastructure, countries will need to set up tax-free or, at least, tax-abated enterprise zones around the country. It does not make sense to build all infrastructures around a handful of big cities, making them even more overcrowded. It must be a distributed and decentralized economic model, with the emphasis on enterprise zones, including affordable housing. 10-15 year tax abatement is a good incentive to attract an array of big and diverse group of companies from around the world, vertically integrated with the growing infrastructures. A decentralized model would help people live close to their roots – an ideal way to keep employee turnover and absenteeism low, with morale always high. New payroll taxes along with the derivative revenue taxes would initially compensate for the lost corporate income taxes. Upon expiration of the tax abatement period, the corporate income tax revenue would start to kick in, enriching the exchequer by leaps and bounds.

   7. Invite Private for-profit to Build Institutes of Higher Technical Education – As those countries start to develop the service sector (atop the manufacturing sector), a steady flow of qualified employees with higher technical education would be needed. Again, instead of the local governments getting involved and controlling this layer of education, the private for-profit companies could be invited to build and run the institutes, with initial concentrations in enterprise zones, as an added enticement. While the acceptance must always be merit-based, governments must significantly subsidize all economically disadvantaged students, to avoid having to implement a quota system down the road. Furthermore, the interested students must have equal access to all competing schools across the economic zone. Again, a steady flow of technically qualified local employees is critical in enticing companies to invest in the service sector.

    8. Manage Natural Resources Properly – While the local governments should stay away from running all non-essential services, they must be involved in properly managing their natural resources along with all essential services like military, law and order, taxes, basic education, healthcare, clean water, etc. Countries that are built on moral (not religious) high grounds are more attractive to investors. For example, in many third world countries in Africa, Asia and Latin America, young women do not have equal access to education (which is a crime against humanity!). “Equal access to education” is a primary metric all foreign companies must use in evaluating the investment climate of a country, thus forcing those evil regimes to return to the basic decency and morality we must all follow and promote. While evaluating direct foreign aids, foreign governments must also use this as one of the primary “humane” metrics.

    9. Negotiating Trade Deals – When a rich country borders with poorer countries, it is prudent to consider the collective economic interest of the region while negotiating trade deals. Case in point: Whether we build a wall on the southern border or not, while re-negotiating trade deals with Canada, Europe, Japan, China and the rest of BRICS, etc., the US must wrap around the economic interests of the Central American countries. Their growth and prosperity is in our best interest. For example, many successful companies from around the world would be interested in the US market but they might not be able to initially meet our wage levels. If a common trade deal is in place, those companies would set up their initial shops – manufacturing, processing, assembly, IT, research, etc. – in one of the Central American countries with lower wage levels, with unrestricted access to the US market. No doubt, given time, they would be setting up shops here, hiring locally and paying our prevailing wages. Meanwhile, we have to consider Central America as our enterprise zone, enticing and redirecting vast amounts of second-tier economic activities from around the world to them (we are losing
   those businesses, anyway!). Let Central America be our nurturing ground. It will be win-win. Once we have a level playing field, they will be our full world partners, not just our enterprise zone. In not too distant future, we will have fast-track lanes at the border for them. 

   No human crisis is ever solved by building walls; they are solved by creating meaningful and cooperative economic opportunities. And, it’s never too late! 

  -- Sid Som, MBA, MIM
  President, Homequant, Inc.
  homequant@gmail.com
   
 Link to the Book

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Monday, October 7, 2019

Let's Reduce Dependence on H-1B Foreign Workers

Studies show that almost 2 million H-1B visas have been distributed between 2000 and 2018. Here are some basic facts about the H-1B visa program:

a. The program was created by the Immigration Act of 1990
b. It allows employers to hire foreigners to work on a temporary basis, for up to 6 years, with two 3-year back-to-back stints
c. It allows foreigners to work in jobs that require highly specialized knowledge and a bachelor’s degree or higher.
d. Visas are awarded to employers on a first-come, first-served basis, with applications accepted each year beginning in April
e. If the number of applications exceeds the annual cap set by Congress (currently at 85,000) during the first five business days of April, visas are awarded through a lottery system
g. Though it's a temporary non-immigrant visa, many workers have been allowed to adjust to permanent status with green cards (adjustment data are unavailable).  

How to Steadily Reduce Dependence on H-1B Skilled Foreign Workers – A 5-Point Solution

   1. Provide Corporations Significant Tax Benefits to Hire Local STEM Graduates – Instead of incentivizing the US corporations to hire more of H-1B workers, the federal government should allow them significant tax incentives to hire the local STEM (Science, Technology, Engineering and Math) graduates at the prevailing rate. This special tax incentive should last, say, up to five years (or the longevity of the employee, whichever comes first), thus vastly negating the incentive to hire foreign workers at a reduced rate. Of course, in order to neutralize the arbitrage (lower hiring rate vs. additional tax advantage), it must remain effective for the proposed tax incentive period (could be more or less). This tax incentive will also encourage the future STEM students, foreseeing a fast leveling playing field. Without this assurance, it would be difficult to entice local students to venture into the STEM field. Today, the qualified American workers are training their far-less qualified foreign counterparts to take their jobs. Hopefully, the tax incentive would force corporations to hire local STEMs while a renewed interest among future students would reinvigorate the field, the sum of which would reduce the dependence on H-1Bs.      

2. Introduce Higher Educational Qualifications for H-1B Applicants –
According to the 2018 Congressional mandate, 65,000 H-1B applicants need only bachelor's degrees while another 20,000 require master's or higher. Unfortunately, a bachelor's degree in SE Asia (which accounts for 80%+ applicants) is not equivalent to an US bachelor's. In order to effectively meet the US standard, Congress should consider transposing the degree requirements, meaning 65,000 applicants with master's+ and 20,000 with bachelor's. It makes no sense to displace a truly qualified American degree-holder with a much lesser qualified foreign degree-holder. That is why the replacement wages tend to be much lesser for foreign workers. Since H-1B is meant for the highly skilled foreign workers, Congress should gradually move to an all-master's+ requirement, at least leveling the playing field.

3. Until Higher Educational Requirements are Established, Congress must Insist on Degree Evaluation by ETS (and Other Entities) – While Congress debates on upping the ante on degree requirements, they must require that the foreign degrees are properly vetted and evaluated, a priori, by well-known education evaluation organizations like Educational Testing Service (ETS), thus forcing the sponsoring organizations to prove that their selected candidates, at least, satisfy the basic educational requirements. This simple yet independent step will surgically (identify and) disqualify many applicants from the export-oriented private schools as they will not meet the US degree requirements. Ideally, Congress must additionally require all applicants to pass a US-administered standardized test (good for 3 years), along the lines of Foreign Medical Graduates Exam (FMGE). Conversely, these requirements will work to the advantage of the truly qualified candidates as they will pre-qualify themselves (by getting their degrees evaluated and passing the exam in advance). Needless to say, the rouge employers will not be able to abuse the truly qualified workers either (by forcing them to work outside of the US labor laws, etc.).

4. Let the Sponsoring Companies Recruit Foreign Students Graduating from the Major US Universities First – Foreign students graduating from the major US Colleges and Universities are more valuable candidates for these unfilled jobs than their all-foreign counterparts. There are other advantages to this hiring approach too:
(a) No need for the equivalency assessment;
(b) Since the vast majority of them undergo internship or practical training in the US, they are already used to the requirements of the American workplace and work ethics;
(c) Graduates from the major US schools are at least as good as the best and brightest from foreign nations;
(d) They will command the prevailing wages, negating the aforesaid arbitrage that many sponsors have been trading on;
(e) Rouge sponsors will be discouraged;
(f) Will foster the enrollment of foreign student population, benefiting the US Schools;
(g) Better English proficiency (both verbal and written) and so forth.

5. Let the Annual H-1B Quotas Steadily Decline as we Promote STEM Education – 
If we switch to a merit-based immigration, H-1B will be a thing of the past. Whether that comes to pass or not, the rapid and aggressive promotion of STEM education here will help lower the quotas steadily. Hopefully, the current 85,000 level would decline by 10,000 annually, leading to a total phase-out in 8-9 years. In fact, if we are able to promote STEM education in keeping with the needs of the labor force, this phase-out could take place even sooner. Of course, the promotion (of the positives) of STEM education must start early in high school so the students are always in the know of the unrestricted domain of opportunity the STEM universe offers. 

The advantages of lessening the dependence on H-1B are numerous:
a) Producing thousands more of home-grown engineers, scientists and technologists (by far, the best on earth!) every year;
b) No need for a debate everyday whether the spouses of the H-1Bs must be given work permits or not;
c) Our politicians won't be able to convince us of the need to admit 85,000 (yes, per year!) foreign engineers and scientists at the expense of our own;
d) The Housing boom and the list can go on and on. 

- Sid Som, MBA, MIM
President, Homequant, Inc.

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