Category Archives: Economics

Miscellaneous economy stuff

Commercial Space Flights

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…and accidents. Last week an Orbital Sciences commercial rocket, launched on an ISS resupply mission from NASA’s Wallops Island, VA, facility, exploded shortly after launch. There were no injuries. A few days later, Virgin Galactic’s SpaceShipTwo exploded shortly after release from its mother ship; this time, one of the pilots of SpaceShipTwo was killed and the other injured.

The handwringing has begun. These two accidents may spell the end of commercial manned space flight. They may be the death knell of commercial rocket flight. They may spell doomsday.

Nonsense.

Both of those programs are in early development stages; accidents and failures are a normal, if unfortunate, part of the process. That a man died in one of them is especially unfortunate, but that also is a risk that’s run in this sort of development.

Another commercial rocket company has been flying resupply missions to the ISS for two years—not always glitch-free, but successfully. It remains on track to begin flying manned resupply missions to the ISS in the 2017 time frame.

NASA’s manned space flight program lost astronauts to space capsule fires while on the ground; it lost astronauts to Shuttle explosions both on launch and on return to orbit. It almost lost astronauts when an explosion occurred on an Apollo capsule that was in space, headed to the moon.

Our aircraft development programs have lost pilots to accidents during development, and we have lost passengers to crashed production commercial airliners, including one that disappeared last spring while enroute from Kuala Lumpur to Beijing.

Certainly Orbital Sciences and Virgin Galactic need to learn what went wrong on these flights, as did NASA need to do and aircraft developers need to do. Airlines need to understand what went wrong regarding their accidents. All need to correct those things. They did, and they do, and OSC and Virgin Galactic will, too. It’s all a normal part of development.

Commercial space flight, whether manned or unmanned, is not at risk from these two accidents, but only from the angst being drummed up by the doomsayers.

When, not if, commercial flight becomes routine—whether for tourism or for operations—we’ll all be the better off for having gotten another industry, seeded by government, out of government’s hands.

Another Case for Tax Reform

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British Prime Minister had this to say Thursday (if that link doesn’t work, the Daily Mail has a good summary and paraphrase):

We know the economic case for cutting taxes: in a competitive world we cannot afford to carry on as a bloated, high-taxing, welfare-heavy nation.

We have to direct our resources to incentivising work through tax cuts and not incentivising welfare through extra benefit entitlements.

We have to fight the notion that you can endlessly suck more taxes out of businesses and bite the hand that feeds…. For me, the simplest way to help with living standards is this: allow people to take home more of their own money.

And

Every single pound of public money started as private earning. Every million in the Treasury represents a huge amount of hard work: early morning alarms, long commutes, hours spent on the factory floor, the office, the hospital ward, or the classroom.

The Wall Street Journal rightly offered kudos for this awakening, but they missed a key point.

[T]he case for tax cuts is as much about freedom as it is about spurring growth.

True enough. But freedom is what allows those spurs to exist. Freedom is what allows economic growth to occur. Freedom is what allows prosperity.

In A Separate Report….

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Overall household spending [Note: household spending is different from the consumer spending I referenced in yesterday’s article, and this is a different report from the one I referenced yesterday] fell 0.2% from August, the first decline since January and only the third since the recession ended in mid-2009, the Commerce Department said Friday. The drop reflected a big decline in purchases of big-ticket items such as cars.

Falling demand for cars, household appliances, and other big-ticket (read: expensive—have you priced refrigerators or dryers lately?) items: is this a one-time blip or a trend resulting from pent-up demand being momentarily released? The old family beater finally wore out, and the family had to buy another car? That’s consistent with anemic consumer spending generally these last several quarters. Still, it could be a blip, and household spending (not the same as consumer spending, but close enough for the context) could be discovered to have resumed its slow growth when October’s numbers are published.

Meanwhile,

Americans’ overall income—including money from wages, investments, and government aid—climbed 0.2%, the smallest increase of the year.

And

Inflation-adjusted household spending on durable goods fell 1.9% from August, the sharpest decline since September 2009.

That’s at the consistently very low inflation rates, too. This is what we’re actually spending (or not) in terms of buying power—how far our paychecks go—and it’s a long-term trend. These wage and adjusted spending numbers don’t comport with hopes of higher spending, and so of real economic recovery in the near or medium-term future.

And this:

Friday’s report also showed US inflation remains below the Federal Reserve’s annual 2% target. The price index for personal consumption expenditures—the Fed’s preferred inflation measure-rose 0.1% from August and 1.4% from a year earlier.

Low inflation is good, but inflation this low is reflective of low demand. See above, regarding income, for an idea of future recovery.

Economic Improvement?

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Our GDP grew at 3.5% last quarter compared to the prior year’s 3rd quarter, against economists’ expectations of a 3.0% growth rate. That’s good, right?

Why did it grow?

Part of the growth came from trade: imports fell sharply. Net trade is a definitional component of our GDP, and net trade consists of Exports less Imports. A reduction in imports, then, by definition elevates GDP.

This particular reduction, though, reflects a reduction in buying goods and services from overseas, which is entirely consistent with another trend: Americans aren’t buying stuff at any high rate, still.

In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.

[Note that the larger subject of the cite’s linked-to Elizabeth MacDonald article concerns our economy’s bailout impeded recovery.]

A larger part of the fall-off in imports, though, is the drop in oil imports. This also reflects a couple of factors: oil imports (imports generally) are measured in dollar prices, and the price of oil is down quite a bit from increased supply. The reason oil imports are down is due partly because we’re bringing smaller volumes of the stuff, but also because we’re spending less on what we do bring in. These two factors—reduced buying generally and the reduced price of oil—greatly reduce the impact of reduced imports generally on our economy. Imports are down because personal consumption is down and because it costs less to buy what we do import. These aren’t reflective of a sound economy.

The other side of that increased supply, though, is increased domestic production of oil (and of natural gas). Lower prices that result from that, both globally and domestically, are good for our economy, but the impact on the global price of oil—those import costs—really has little to do with hard goods being imported, or not.

There’s another factor in that apparently sound quarterly GDP growth rate: government spending in the form of defense spending. Government spending is another definitional component of our GDP, so whenever government spending increases, so does our GDP, regardless of any impact on our actual economy—the private sector, where Americans live and operate. I won’t go into how government spending crowds out private spending; that’s well covered in earlier articles of mine and in articles written by far sharper individuals than me.

It’s the particular government spending, defense spending, that’s of interest in this latest GDP growth number. Defense spending grew at its fastest rate in five years. There are sound reasons for that growth, but defense spending is highly volatile, as heavily influenced as it is by, not just big ticket items, but by huge ticket items, also. These huge ticket items include Navy and Air Force spending for (enormously expensive) ships and aircraft. Next quarter’s spending, next year’s spending, could easily be wildly different from the just concluded quarter’s.

Other factors in last quarter’s GDP growth rate are less encouraging—and they reflect conditions in our actual economy.

Growth in business investment—R&D, capital improvement, plant construction, and so on—slowed and fell well short of expectations. Business investment is a reflection of business owners’ expectation of future economic conditions; they’re unwilling to spend money today if the demand for their goods won’t be there tomorrow. Lack of such investment also means an anticipation of business income being unavailable for pay raises for existing jobs or for hiring for new jobs.

Also, consumer spending decelerated to a 1.8% rate. That’s us not spending (and not buying foreign goods).

That GDP number turns out not to be all it’s been cracked up to be.

European Taxes

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…and, by extension, the goal of this administration’s Europe-wannabe tax schema.

Matthew Karnitschnig and Robin van Daalen, in The Wall Street Journal, interviewed the newly retired Marius Kohl, who was for 22 years the Attendant—head—of Luxembourg’s Sociétés 6, or Companies 6, the Luxembourg government agency that, among other things, determines the annual tax owed by each of roughly 50,000 Luxembourg-registered holding companies.

It’s a wide-ranging interview and well worth the read, but I want to focus on one small bit of it.

One outcome of Kohl’s stewardship is that Luxembourg became a corporate tax haven: companies registered there generally paid little in the way of taxes. This especially stands out against the EU average headline corporate rate above 21%, rates running as high as France’s 33%, and Luxembourg’s own 29%.

Naturally, the EU is dismayed with this, and with Kohl’s departure, it’s pushing Luxembourg to “fix that.” Luxembourg is being unfair, say the EU’s functionaries, and it should raise its corporate tax to be more in line with the rest of the EU.

Notice that. The EU declines to compete with Luxembourg (or with Ireland, whose official rate of 12.5% is being raised with the Irish government surrender to EU pressure) for business and associated employment. Instead, Luxembourg must make itself less competitive, must lower itself to the EU’s plain.

Because, it really isn’t people’s money, its government money that government kindly lets people use some of. Because, people are just piggy banks for the men of government, we’re not really in this for our own benefit.

This is where the US is headed, for all that President Barack Obama is talking about lowering our own corporate rate from 35% to 28%.   Obama, after all, is holding out for more taxes raised elsewhere in return.