Category Archives: Economics

Miscellaneous economy stuff

Debt Forgiveness and Bankruptcy

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Christine Lagarde, Managing Director of the IMF, insists as Spiegel Online International reports, that

For Greece to recover…creditor countries would have to forgive the government in Athens a large share of its debt.  “Nothing else will work[.]”

After all,

given that Greece will be unable to reach the target [of debt to GDP, originally 120% by 2020] on its own, European creditors have little choice but to forgive a portion of the debt they hold, Lagarde insists.

Additionally,

Senior troika representatives, including ECB Executive Board member Jörg Asmussen, Thomas Wieser, the president of the Euro Working Group, and IMF representative Paul Thompson, are campaigning for a debt haircut, especially among smaller member states.  Their goal is to reduce Greece’s 2020 debt level from the 144 percent of GDP that it would likely be without any kind of debt forgiveness, to just 70 percent.  To achieve the latter number, creditor countries would have to waive half of their claims.

The proposed haircut (of which the just concluded deal is a down payment) is a default, as was the prior haircut forced onto Greece’s many private creditors.  And here we are again.

These worthies are conflating default and forgiveness with bankruptcy, and that’s why we’re here again.

Default must come through a Greek bankruptcy, not through the EU, or the IMF, condoning irresponsibility by saying, “Forget it; consider our erstwhile loans to be grants.”  Forgiveness, which approaches a bankruptcy outcome, doesn’t achieve the new beginning that a bankruptcy would; it merely condones past irresponsibility without an actual write-off and fresh start—albeit with a poorer credit rating.  But what’s the Greek credit rating, functionally, now?  “The situation in Greece is scaring away private investors.”

And all of this shows the original folly of bailing out Greece.  And the similarly original folly of the tactic in the US.

The Lies Continue

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By why would we be surprised?

President Obama returned to campaign mode on Monday – casting Republicans as against the middle class by saying their failure to accept his offer for a limited extension of tax breaks will essentially ruin Christmas for consumers and retailers.

“Stop holding the middle class and our economy hostage over a disagreement on tax cuts,” the letter [he sent to Congress Monday] states, as Congress returns…to try to reach a deal that would avert the $500 billion mix of tax increases and budget cuts set to take effect in early January.

Because, of course his way is the only way, and those Evil Republicans are blocking him, again.  And never mind that it’s Obama who’s holding not just the middle class, but our entire economy, hostage against his getting his ransom from a tiny group of Americans whom he hates so much.

Here’s the Obama compromise: he’s repeating that he won’t sign a bill that doesn’t raise tax rates on those Americans.

And this:

A growing number of Democrats say they are willing to let the country go off the fiscal cliff if a deal cannot be reached by Jan. 1 that raises taxes on the top two percent of earners while protecting costly entitlement programs.

Led by Senator Patty Murray (D, WA), Democrats have pushed the idea that the cliff is not as bad as the hype, with it being more of a “slope” than a “cliff.”

Senator Charles Schumer (D, NY) backs Murray, also saying that Democrats can’t cave in.  He and other Democrats believe that Obama won a mandate for increased taxes with the presidential election.

Also weighing in on Monday in a New York Times Op-Ed was billionaire investor Warren Buffett, who has said he think the country will be just fine going over the fiscal cliff.

The Progressive compromise, generally, remains, “Do it our way,” and Progressive bipartisanship means Republicans doing it the Progressives’ way.

Taxes and Widows and Orphans

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Included in President Barack Obama’s demand to raise tax rates on those Americans he hates so much is a raise in tax rates on dividends, unless the Republicans pay Obama’s price.  Obama’s ransom, after all, is simple: raise the rates on the Evil Rich, or the rates will go up for everyone.  Nice economy you got there….

Here’s what happens to dividends if Obama gets either one of his choices.

Presently, qualified dividends (which are most of the dividends about which you and I care) are taxed at a 15% rate for stockholders who are in a 25% or higher income tax bracket, and at a 5% rate for those investors in a lower bracket.  If Obama gets his way on tax rates generally, those rates will rise to ordinary income rates: those in the 39.6% bracket, for instance, will pay 39.6% on their dividend income (not 15%), those in the 15% bracket (which will reappear if Obama holds out for his ransom and the Republicans refuse to fold) will pay 15% on their dividends (not 5%).  Notice that: if Obama gets his way, the poor will get the highest tax bump.

Think the poor don’t invest?  Where are the savings of the retired, and of the stereotypical widows and orphans?  In safe, stable, income-producing vehicles—mutual funds that invest heavily in dividend-paying  stocks funds (or interest-paying bond funds).  These folks—on fixed incomes—are going to see a significant bump in their tax bill because a significant share of their income is dividend income.

Two top dividend mutual funds currently have a yield, courtesy of their dividend-paying stock holdings, of between 2% and 3%.  That’s not a lot of margin on which a retiree—or a widow or an orphan—can afford to see a tripling of his tax bite.

Of course, these folks could switch entirely to funds that pay interest rather than dividends, but with the Fed artificially suppressing interest rates, where’s the value in that?

Republicans need to find some courage.  The House needs to pass, this session, a budget (again) that includes lower rates across the board and spending cuts in the amount necessary to bring Federal spending to less than Federal revenues, with the difference mandated to paying down the debt.  Let the Democrats, led by our President, defend their refusal to pass this bill in the Senate and sign it into law; let them explain why they prefer the catastrophe of the Obama tax increases and sequestration.

And Republicans need to get serious about taking their message to all Americans.

An Empirical Demonstration

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Investor’s Business Daily provides one.

Renting a 20-foot truck one-way from San Francisco to San Antonio, for example, will cost $1,693. But the U-Haul tab to go in the opposite direction is just $983.

Hmm….

This figure compares, across just a few parameters, the outcome of big government, high taxes, and profligate spending—California—with the outcome of limited government, low taxes, and (more) disciplined spending—Texas.  Texas has many faults, but the routine of government interference with its citizens’ wallets and businesses isn’t among them.

California has become a state that people are increasingly trying to escape, and Texas a state people are increasingly migrating to.

…

A study by the Manhattan Institute found that Californians have been leaving for states with better job prospects, lower taxes and better business climates.

In other words, states that are pursuing the kind of low-tax, limited government, free market policies [President Barack] Obama typically rejects.

The public may have voted to give Obama a second term.  But many people in California are voting with their feet, leaving the state that’s already put in place policies Obama has promised to keep pushing for four more years.

Obamanomics, as California demonstrates—its economy actually shrank sharply in the last four years—are an utter failure.  RTWT.

The Obama Ransom

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The Wall Street Journal described the broad reach of President Barack Obama’s tax increases, which are set to occur in six weeks unless Republicans pay the ransom on the 98% of Americans which he’s demanding.  Here’s the effect on lower income Americans.

A married couple making between $20,000 and $30,000 a year would go from receiving, on average, a $15 tax credit to owing $1,408, according to research by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.

The situation of an individual from the higher end of that range makes manifest that impact.

Traci Petty, 42, [is] a single mother…studying for a master’s in business administration in Danville, VA, while earning about $30,000 a year working part-time at a nonprofit.

Ms Petty would be hit by the shrinking of the child credit to $500 from $1,000, the higher payroll taxes and the elimination of the Bush-era 10% tax bracket.  Altogether, she would face at least a $1,500 cut in the $4,000 or so tax refund she gets each year.  She counts on the refund to pay bills.

But then, we’ve seen no evidence Obama even cares about these folks; his rhetoric focuses on “helping” the middle class and abusing those Americans at the upper end of the economic scale whom he hates so much.