New-Home Sales, Case Shiller Index On the Rise

The Mortgage Corner–II

As if to confirm U.S. housing starts and building permits’ jump to their highest levels in nearly 7-1/2 years, the sales rate of new single-family houses in April 2015 rose even higher at a seasonally adjusted annual rate of 517,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. “This is 6.8 percent above the revised March rate of 484,000 and is 26.1 percent above the April 2014 estimate of 410,000,” per the Census Bureau.


Graph: Calculated Risk

It means home construction is returning to pre-recession levels, as is the demand for more housing, which will spur more housing construction. The sales rate is rising fast enough to drop housing inventories to 4.6 months, at the low end of inventories.

The south was the biggest gainer, with construction up 5.8 percent. Also, the median price rose to $297,300 for a strong 8.3 percent year-on-year gain. So sales have finally reached the long term trend line, which should signal a longer term recovery as buyer’s enthusiasm tends to feed on itself, according to Behavioral Economist and Nobelist Dr. Robert Shiller.


Graph: Calculated Risk

As if to confirm the rising enthusiasm of buyers, the S&P Case-Shiller Home Price Index continued its climb to post-recession highs, with San Francisco now up 10.31 percent year over year, Denver and Dallas up 10 percent and 9.3 percent, respectively. Denver and Dallas housing prices have almost doubled since the Great Recession, per the above graph. San Francisco’s prices are just now approaching their bubble high.

“Home prices have enjoyed year-over-year gains for 35 consecutive months,” says David M. Blitzer, Managing Director & Chairman of the Index Committee for S&P Dow Jones Indices. “The pattern of consistent gains is national and seen across all 20 cities covered by the S&P/Case-Shiller Home Price Indices…”

Of course lower interest rates were also a factor, as I’ve said, with housing affordability increasing this year, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

In all, 66.5 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $65,800, said the report. “This is up from the 62.8 percent of homes sold that were affordable to median-income earners in the fourth quarter.”

What is another catalyst? Housing formation is recovering, which is largely due to Millennials moving out of their parents’ homes, or higher education venues. Based on unusually low household formation numbers of past several years, “there’s a ton of people living in basements,” Fundstrat Global Advisors’ Tom Lee said in a recent interview with CNBC’s “Trading Nation.” “Two quarters of pretty decent household formation isn’t getting everybody out of the basement. I think this means we have multiple years where household formations are well over 1.3 million, 1.4 million.”


Graph: CNBC

That’s why household formation will be the key to future housing growth.  The millennials’ population size has now reached that of the baby boomers, their parents. And many have yet to reach home-buying age. Household formation had dipped as low as 360,000 per annum in recent years, due to the housing bust. So this is yet another sign of a growing pool of potential homebuyers.

Harlan Green © 2015

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Higher Minimum Wage Strengthens Labor Unions

Popular Economics Weekly

Unions may have been weakened by Republican efforts to abolish labor’s collective bargaining power, (in order to weaken their support of Democratic Party policies), but that may be changing as unions have found a new cause—working to raise minimum wages.

Los Angeles is the latest city to raise the minimum wage—to $15/hour in 5 years. Los Angeles is the fourth city, and by far the largest, to enact a $15 minimum in the past year, reports the New York Times. The others are Seattle, San Francisco and Emeryville, Calif. (near San Francisco). A $15 minimum has been proposed in New York City, Washington, D.C., and Kansas City, Mo.

And labor unions in the service industries are behind the push. This is exactly what unions are good at—encouraging higher wages in non-union businesses to match union benefits, such as at MacDonalds, Walmart, and even Facebook. The vote by the Los Angeles City Council was 14-1 in favor. This means it is now on the national agenda.

The $7.25/hour national minimum wage was last set in July 2009. And, according to the University of California Davis Center for Poverty Research, in 2013:

  • Five Southern states (Louisiana, Mississippi, Alabama, Tennessee and South Carolina) have no minimum wage laws.
  • Four states (Wyoming, Minnesota, Arkansas and Georgia) have state minimum wage rates that are lower than the federal rate, so the federal minimum wage applies.
  • Twenty states have laws that set the minimum wage at the federal rate.
  • Twenty-one states and the District of Columbia set their rates higher than the federal rate. Currently the state of Washington has the highest minimum wage rate at $9.32 per hour.

Unions had been stymied by outright banning of collective bargaining, or even the requirement that members don’t have to pay dues when joining a unionized shop in many of the right to work states—25 at last count, all controlled by Republican legislatures. It is a I win-You lose bargain that Republican legislatures have made with workers in their own states. The outright suppression of workers’ wages only weakens economic growth, and indeed the reddest states with the strongest anti-union laws are also the poorest.

Several other cities, including San Francisco, Chicago, Seattle and Oakland, Calif., have already approved increases, as we said, and dozens more are considering doing the same. In 2014, a number of Republican-leaning states like Alaska and South Dakota also raised their state-level minimum wages by ballot initiative.

The 67 percent increase from the current California state minimum will be phased in over five years, first to $10.50 in July 2016, then to $12 in 2017, $13.25 in 2018 and $14.25 in 2019. Los Angeles businesses with fewer than 25 employees will have an extra year to carry out the plan. Starting in 2022, annual increases will be based on the Consumer Price Index average of the last 20 years. The LA City Council’s vote will instruct the city attorney to draft the language of the law, which will then come back to the Council for final approval.



This can only strengthen collective bargaining efforts in other states, a plus for union organizing efforts. Household incomes for most Americans have been declining since 1979. The above columns show real annual income growth from 1947-79 (blue) , and from 1979 to 2015(red) . It highlights the tremendous income inequality for the poorest Americans since then, partly due to the current national minimum wage of $7.25/hour.

“The effects here will be the biggest by far,” said Michael Reich, an economist at the University of California, Berkeley, who was commissioned by LA city leaders to conduct several studies on the potential effects of a minimum-wage increase. “The proposal will bring wages up in a way we haven’t seen since the 1960s. There’s a sense spreading that this is the new norm, especially in areas that have high costs of housing.”

The groups pressing for higher minimum wages said that the Los Angeles vote could set off a wave of increases across Southern California, and that higher pay scales would improve the way of life for the region’s vast low-wage work force.  Actually, it is already happening nationally, and popular even in the right to work states that have suppressed workers’ rights for so long.

The push for a $15-an-hour minimum wage is not confined to populous coastal states, said the New York Times. In Kansas City, Mo., activists recently collected enough signatures to put forward an August ballot initiative on whether to raise the minimum wage to $15 by 2020. The City Council is deliberating this week over how to respond and could pass its own measure in advance of the initiative.

Of course, there is an additional bonus to state budgets for raising the minimum wage. It takes many of those income earners at the bottom off state assistance programs like Medical, food stamps, and even welfare rolls. Why shouldn’t everyone support such a grand bargain?

Harlan Green © 2015

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Housing Construction Surge—Sign of Better Times?

The Mortgage Corner

U.S. housing starts jumped to their highest level in nearly 7-1/2 years in April and permits soared, hopeful signs for an economy that is struggling to regain strong momentum after a dismal first quarter. And that is exciting economists that say it could mean better economic growth ahead.


Graph: Calculated Risk

This is while Total existing–home sales, which are completed transactions that include single–family homes, townhomes, condominiums and co–ops, declined 3.3 percent to a seasonally adjusted annual rate of 5.04 million in April from an upwardly revised 5.21 million in March. But despite the monthly decline, sales have increased year–over–year for seven consecutive months and are still 6.1 percent above a year ago, reports the National Association of Realtors.

The strength in housing is in stark contrast with weakness in consumption, business spending and manufacturing, which have prompted economists to lower their second-quarter growth estimates and raised doubts that the Federal Reserve will raise interest rates before the end of the year.

Of course lower interest rates are the main factor in housing activity, as housing affordability has been increasing this year, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

Groundbreaking for new construction surged 20.2 percent to a seasonally adjusted annual pace of 1.14 million units, the highest since November 2007, the Commerce Department said on Tuesday. The percent increase was the biggest since February 1991. March’s starts were revised up to a 944,000 unit rate instead of the previously reported 926,000 unit pace.

And privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,143,000. This is 10.1 percent above the revised March rate of 1,038,000 and is 6.4 percent above the April 2014 estimate.

“The rebound in permits points to solid starts and construction in the months ahead. After the weather-related weakness in starts during Q1, we think the April data are consistent with housing activity returning to normal,” wrote Barclays economists.

Whereas NAR chief economist Lawrence Yun says existing-home sales in April failed to keep pace with the robust gain seen in March. “April’s setback is the result of lagging supply relative to demand and the upward pressure it’s putting on prices,” he said. “However, the overall data and feedback we’re hearing from Realtors® continues to point to elevated levels of buying interest compared to a year ago. With low interest rates and job growth, more buyers will be encouraged to enter the market unless prices accelerate even higher in relation to incomes.”

Existing sales have been above the 5 million annual rate for 2 consecutive months and home prices are rising, which mean supply is still a problem and why there will be increased demand for new home construction.

The median existing–home price for all housing types in April was $219,400, which is 8.9 percent above April 2014. This marks the 38th consecutive month of year–over–year price gains and is the largest since January 2014 (10.1 percent). So with demand far exceeding supply, properties sold in April faster (39 days) than at any time since July 2013 (42 days) and the second shortest time (37 days in June 2013) since NAR began tracking in May 2011.

“Housing inventory declined from last year and supply in many markets is very tight, which in turn is leading to bidding wars, faster price growth and properties selling at a quicker pace,” says Yun. “To put it in perspective, roughly 40 percent of properties sold last month went at or above asking price, the highest since NAR began tracking this monthly data in December 2012.”

Need we say more about the prospect for higher housing starts this year, and what it should do for economic growth? New-home construction in particular gives a big boost to employment in the various industries—such as insurance, building materials, professional services—that service the housing market.

Harlan Green © 2015

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Dr. Robert Shiller–Why the Weak Recovery?

Popular Economics Weekly

Nobelist Robert Shiller, winner of the Nobel for his research in Behavioral Economics, or the psychology that drives economic behavior, has come up with the latest reason this economic recovery has been so weak to date. GDP growth has averaged just 2 percent since the end of the Great Recession.

It has to do with what Lord JM Keynes called ‘animal spirits”, or the psychological fact that fear breeds more fear, so that it can grip a whole country, as it did during our Great Depression, and perhaps is doing so again.

“The same could be said today, seven years after the 2008 global financial crisis, about the world economy’s many remaining weak spots,” said Dr. Shiller. “Fear causes individuals to restrain their spending and firms to withhold investments; as a result, the economy weakens, confirming their fear and leading them to restrain spending further. The downturn deepens, and a vicious circle of despair takes hold. Though the 2008 financial crisis has passed, we remain stuck in the emotional cycle that it set in motion.”

In fact, over the last two decades, like that of many other developed nations, US growth rates have been decreasing. In the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent. But it is much more due to the fact household incomes have declined for most Americans after inflation, and so now spend more than they save to even maintain their current standard of living.

Doctor Shiller’s answer is to restart our vision of going to the moon and beyond; that is, using public spending on national projects that both inspire our body politic and restore our leadership in the sciences.

“Government-funded space-exploration programs around the world have been profound inspirations,” says Dr. Shiller. “Of course, it was scientists, not government bureaucrats, who led the charge. But such programs, whether publicly funded or not, have been psychologically transforming. People see in them a vision for a greater future. And with inspiration comes a decline in fear, which now, as in Roosevelt’s time, is the main obstacle to economic progress.”

But he doesn’t go into what may be behind the fear—what economists now call consumer confidence or sentiment. We measure confidence in particular to gauge just how Main Streeters feel about their future economic prospects for jobs and financial security. And the main determinate of their current still low confidence level has to be the fact that most Americans have not seen any change in their financial conditions for decades.

The result is record economic inequality that is plaguing growth as it did in 1929, the real cause of the Great Depression. The result of that inequality is money not flowing to where it can be spent productively and so do the most good—to consumers or government that will spend and/or invest in productive enterprises, rather than put it into tax shelters for their heirs, as most of the wealthiest seem to be doing today.


Graph: Business Insider

This is evidenced by the personal savings rates of the different income brackets. For instance, the wealthiest 1 percent now save more than 50 percent of their income, whereas the poorest 20 percent save none.

What do they do with their savings? Mostly hoard it. According to the new Billionaire Census from Wealth-X and UBS, the world’s billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires’ holding an average of 19 percent of their net worth in cash.

“The apparent safety of cash, reinforced by the painful psychological experience of the 2008-09 global financial crisis and the subsequent troubles within the European Monetary Union, likely reinforces the tendency to favor this cautious allocation strategy,” said Simon Smiles, chief investment officer for Ultra High Net Worth at UBS Wealth Management.

And House Republicans are once again proposing repeal of the inheritance tax, now for the $5million in inherited wealth and above set that still have to pay it. The Center for Budget Policies and Priorities tells us the effect of this loss in taxes:

· Cost $269 billion in reduced revenues over 2016 to 2025, according to the Joint Committee on Taxation (JCT), adding $320 billion to deficits when counting additional interest on the national debt.

· Do nothing for 99.8 percent of estates. Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax. This is because of the tax’s high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015. Repeal would bestow a tax windfall averaging over $3 million apiece, or more than a typical college graduate earns in a lifetime, on the roughly 5,400 wealthy estates that will owe the tax in 2016.[2] The 318 estates worth at least $50 million (some of which are worth hundreds of millions of dollars) would receive tax windfalls averaging more than $20 million each.

· Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show.[3] Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top. Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country’s wealthiest estates, who also tend to have very high incomes.[4]

It’s sad that we even need to have this argument on whether such inequality is a bad thing, given Dr. Shiller’s worries that we are re-experiencing what happened during the Great Depression.

Harlan Green © 2015

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Fannie and Freddie Didn’t Do It!

Financial FAQs

As if further confirmation was needed that Fannie Mae and Freddie Mac were not even a minor cause of the housing bubble and consequent bust, the latest judgment against Nomura Securities for selling fraudulent mortgages to Fannie and Freddie should be icing on the cake; settlements that now total more than $14 billion in fines for almost all the major banks and lending institutions.

The charge is old. Critics, (mainly those caught selling fraudulent loans to Fannie and Freddie) have long maintained that the GSE’s encouraged too many people to buy homes by offering all manner of payment assistance, and even guaranteeing subprime mortgages from the likes of Countrywide Financial (that was subsequently bought by Bank of America).

A U.S. judge on Monday ruled that two more large financial entities, including Nomura Holdings Inc., made false statements in selling mortgage-backed securities to Fannie Mae and Freddie Mac ahead of the 2008 financial crisis.

U.S. District Judge Denise Cote in Manhattan ruled for the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, in a ruling that could allow the U.S. regulator to recover around $450 million.

This is one more example of how almost all of the major financial institutions jumped on the bandwagon that encouraged the housing bubble—lending money to both qualified and unqualified borrowers and then misrepresenting their quality to the main guarantors of US housing finance.

Cote, who presided over a non-jury trial, said the FHFA was entitled to judgment against Nomura and the Royal Bank of Scotland Plc, which underwrote some of the $2 billion in mortgage-backed securities, in light of misstatements they made in offering documents.

Such originators were the real problem. Nomura Securities is just one of a growing list of mortgage lenders that have had to settle fraud charges that the loans submitted to Fannie and Freddie weren’t the quality loans they had certified—16 at last count totaling more than $14 billion in fines, as we said. Their loans had not in fact conformed or even followed Fannie and Freddie’s qualification standards, including verification of income and even whether they held real jobs, when they sought their guarantee insurance.

The result was the demonization of the GSEs as undercapitalized and incapable of fulfilling their mandate to make housing more affordable to Main Street Americans. I have been writing about the resistance of US Treasury—and maybe White House—to any recapitalization of Fannie and Freddie’s corporations to cushion them from another such housing downturn, corporations that were set up in the 1930s and 40s respectively to encourage home owning.

And in successfully fulfilling their mandate, they were a major factor in creating middle class Americans’ wealth, much of which was destroyed during the Great Recession. FDR’s Home Loan Corporation came to the rescue during the Great Depression, and we should be doing the same for housing in order to aid our recovery from the Great Recession.

Then why does Treasury, and even the White House oppose recapitalizing them, in spite of their now record-breaking profits? Because Treasury seems to believe there is a better alternative. However, that is yet to be seen and the GSEs are guaranteeing more than 60 percent of originations these days, while making the Treasury literally $$billions.

The Federal Housing and Finance Authority has just issued an update on their plans to ‘reform’ the GSEs. It is a proposal to form a Common Securitizing Platform (CSP) to replace competing Fannie Mae and Freddie Mac platforms that securitize its mortgage pools.

“The objectives in developing a Single Security are to establish a single, liquid market for the mortgage-backed securities issued by both Enterprises that are backed by fixed-rate loans and to maintain the liquidity of this market over time,” says the FHFA. “Achievement of those objectives would enhance the liquidity of the TBA market and further FHFA’s statutory obligation to ensure the liquidity of the nation’s housing finance markets.”

The question then is what comes next? The Treasury says their overall objective of not recapitalizing Fannie and Freddie is to induce private originators to guarantee a larger majority of mortgages. So will Banks and other private loan originators then step up to the plate and issue pools that can be either purchased or guaranteed by the CSP, which up to now they have been reluctant to do, without the GSEs’ guarantee?

And if the Treasury dissolves the GSEs, as it says it ultimately intends in order to put, “private capital at risk ahead of taxpayers,” can private issuers of said mortgage-backed-securities be the guarantors, without substantially raising their fees and profit margins, which will raise interest rates, as well? There was a reason Fannie and Freddie conforming mortgage rates were so affordable. They had lower capitalization requirements, in part because of the superior quality of their mortgage underwriting standards, and consequent low delinquency rates.


Graph: Calculated Risk

Then who will enforce the very successful underwriting standards now required by Fannie and Freddie that has brought down the default rates close to historical standards? It is the real issue that was exposed in the lawsuits. Who will police the banks and private mortgage originators that the record shows will evade those standards when it suits them?

Harlan Green © 2015

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2015 Housing Construction Will Surge

The Mortgage Corner

We believe housing construction is about to bloom this spring, due to growing employment. For starters, an additional 45,000 construction jobs were added to nonfarm payrolls in April. This is even though construction spending to date has been flat, according to the Commerce Department. The U.S. Census Bureau of the Department of Commerce announced that construction spending during March 2015 was estimated at a seasonally adjusted annual rate of $966.6 billion, 0.6 percent below the revised February estimate of $972.9 billion. But the March figure is 2.0 percent above the March 2014 estimate of $947.3 billion.

And sales of new single-family houses in March 2015 were at a seasonally adjusted annual rate of 481,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development, which is slow because of winter weather, but it is still 19.4 percent above last year’s March 2014 estimate of 403,000.

And, housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,039,000, 5.7 percent below the revised February rate of 1,102,000, but is 2.9 percent above the March 2014 estimate of 1,010,000, signaling more construction ahead. And the single-family component is up 4.4 percent from February, which is double the multi-family component. Single family construction employs many more workers per unit.

This is while overall employment could be returning to pre-recession levels, as we said last week. The U.S. churned out 223,000 new jobs in April, and the unemployment rate slid to 5.4 percent from 5.5 percent, which means the US economy’s deep freeze was temporary. It was a short hibernation, in a word, but we are still not out of the Great Recession woods, as we said last week.


Graph: Marketwatch

The Small Business Optimism Index also increased 1.7 points from March to 96.9, reports the NFIB, with the employment component especially strong. Small business does 50 percent of all hiring, so this is another sign of a healthy jobs market. Twenty-seven percent of all owners reported job openings they could not fill in the current period, up 3 points from March. And a net 11 percent plan to create new jobs, up 1 point and a solid reading.


Graph: Calculated Risk

Lastly, the Labor Department’s most recent JOLTS report showed 5 million job openings, and a higher Quits rate, meaning more workers were able to quit their current job to find a better position. Quits are up 14 percent year-over-year. These are voluntary separations, as we said (see light blue columns at bottom of graph for trend for “quits”), and the number of job openings are up 19 percent YoY, which is another sign of a robust jobs market.

The bottom line is housing construction should begin to expand in the spring and summer. This will ultimately relieve the problem of lack of inventory, and should help first time homebuyers by relieving price pressures that have been increasing as housing stocks have declined.

Harlan Green © 2015

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Repubs Anti-Science Agenda Endangers US

Financial FAQs

Last week, the House Science, Space, and Technology Committee, headed by Texas Republican Lamar Smith, approved a bill that would slash at least three hundred million dollars from NASA’s earth-science budget, says the New Yorker’s Elizabeth Colbert. “Earth science, of course, includes climate science,” Representative Eddie Bernice Johnson, a Texas Democrat who is also on the committee, noted. (Smith said that the White House’s NASA budget request favored the earth sciences “at the expense of the other science divisions and human and robotic space exploration.”)

This is just the Republican’s latest effort to cut more funding from those government agencies that provide climate data to help us predict all kinds of natural disasters, such as hurricanes and tornadoes. Have they forgotten Hurricanes Sandy, or Katrina, or the record number of tornadoes that have hit the Midwest and South? House Republicans are now passing bills that are dangerous to everyone’s health, in a word.

It is becoming more obvious why the Republican Party have been so anti-science; in fact anti-all scientific research. It enables them to deny any reality that will decrease the profits of their supporters, such as the Koch Brothers with a net worth of $100 billion, no matter the danger to the environment. They have been denying climate change of any kind in order not to have to put CO2 scrubbers on their power plants that emit so much heat.

Representative Johnson tried to get the cuts eliminated from the bill, but her proposed amendment was rejected. Defunding NASA’s earth-science program takes willed ignorance one giant leap further, says Colbert. It means that not only will climate studies be ignored; but weather data won’t be collected that helps to predict the increasing number of natural disasters.

It takes Republicans’ efforts to dumb down their electorate to a whole new level. Their intentions were first apparent when Wisconsin’s Tea Party Governor Scott Walker recently proposed turning the University of Wisconsin into a trade school, after the Republican-led legislature banned collective bargaining of school teachers, in an effort to dumb down their public educational system.

His latest salvo was directed at the University of Wisconsin. He proposed not only to cut its budget, but proposed downsizing its mission from that of higher education to supply more workers, whoever they might be. Walker’s new budget proposal would slash $300 million from the University of Wisconsin system over the next two years. That’s a 13 percent reduction in state funding.

The vote on the NASA bill came just a week after the same House committee approved major funding cuts to the National Science Foundation’s geosciences program, as well as cuts to Department of Energy programs that support research into new energy sources. As Michael Hiltzik, a columnist for the Los Angeles Times, noted, the committee is “living down to our worst expectations.”

This willful ignorance of anything scientific endangers much more than our health and worsening environment. It endangers all scientific research—solely in order to protect the profits of their wealthiest supporters.

The practical implications of the proposed cuts are certainly disturbing. (It’s going to be hard for D.O.E. to find new energy sources if it isn’t even looking for them.) But perhaps even more distressing is the mindset that led to them. The “I’m not a scientist” line that all Republican candidates to date have espoused is basically a declaration of willed ignorance, said Colbert.

It highlights the dangers that such an agenda presents not only to scientific research, but to the health and well being of all Americans.

Harlan Green © 2015

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