Category Archives: Economics

Miscellaneous economy stuff

Obama’s Tax Plan

Posted on by
Reply

Wednesday morning, Fox News predicted a wonderful new tax plan from the administration:

…long-awaited corporate tax reform plan on Wednesday, lowering the top income-tax rate for corporations to 28 percent from 35 percent while eliminating deductions.

Corporations with overseas operations would also face a minimum tax on their foreign earnings, new tax benefits would be given to incentivize U.S. manufacturers while taxes on oil and gas companies would reportedly see their taxes go up while losing many large deductions and subsidies.

Now we can see what President Obama actually is proposing.  Although he offers to lower the top corporate rate from 35% to 28%—and that’s the headline—the proposal represents a net tax increase.

Moreover, he wants to make permanent his tax credits and other subsidies for his favored “green” energy products; although in a cynical offering to conservatives, the proposed Obamatax also contains the Santorum manufacturer’s tax subsidy.  Obama never seems to understand that if a product, company, or industry can’t compete on a level playing ground—in an actual free market—that product, company, or industry isn’t ready for market at all.

Along these lines of special treatments according to whether Obama approves or disapproves of an industry, the Obamatax would eliminate oil and gas tax preferences (while maintaining those “green” subsidies).  This, though, will drive up gasoline prices and home (and business) heating costs—and those manufacturers’ energy costs—to the detriment of our struggling economy and of the Americans trying to get by in it.  Despite this, the subsidies should, indeed, be gotten rid of, but the “green” subsidies should be eliminated, too.  With a truly level playing field, the effects will spike and ripple quickly, and costs ultimately will stabilize at lower levels from the overall simplification and the lack of “green” costs being absorbed by the oil and gas—and all other—industries and energy consumers.

The Obamatax applies a tax to business’ overseas profits, a first in American history—and a dramatic increase in the taxes owed by American businesses.  The administration justifies this with claims like:

If foreign earnings of U.S. multinational corporations are not taxed at all, these firms would have even greater incentives to locate operations abroad or use accounting mechanisms to shift profits out of the United States[.]

On the other hand, Intel, just to take one example, earns 85% of its revenue from its overseas computer chip and other manufacturing facilities—facilities that are devastatingly expensive to build or operate here.  Now Intel’s overseas profits will be taxed.  Since Intel makes its money overseas, though, why would it want to remain a US-headquartered corporation under the Obamatax regime?

There’s also the small matter of who gets this tax “cut.”  It isn’t the sole proprietorships, partnerships, Subchapter S, and so on firms whose profits are passed on to the business’ owners, who then pay ordinary income taxes on that passed through income.  Obama’s own IRS data indicate that over half of American business income is earned by these “noncorporate” companies.  But that needn’t concern an administration bent on raising taxes any way it can get away with.

True to form (this form is not unique to the present administration), the Obamatax dictates to businesses what their policies and paradigms must be.  It intends to eliminate “last in first out” accounting, disallow the use of life-insurance policies as a tax shelter, tax carried interest as ordinary income, and eliminate depreciation for corporate aircraft (this last is chump change, but it’s an important bone for the President’s base).  Even more intrusively, though, the Obamatax interferes with debt financing decisions by reducing the deductibility of interest on business’ borrowings.

There’s the underlying mindset, too.  The Obamatax justifies the “minimum tax on foreign earnings” by saying it would

discourage a global race to the bottom in tax rates.

as if low taxes, or having the lowest taxes globally, is somehow bad.  As if it’s really the government’s money, and they’ll magnanimously let our companies have what government deems appropriate.

In touting this tax change (it’s hardly a reform), Secretary Geithner said that the overhaul should be fiscally responsible (the Obama definition of “responsible,” of course) and,

A key test of any reform should be whether the net impact of the changes improves the incentives for investing in the United States.

If he really meant that, why is this the proposal?  Answer: he really does believe it; the proposal’s structure simply displays, again, the administration’s breathtaking lack of understanding of economics.

Obama is masquerading this as a tax cut, but it’s plainly another of his tax increases, and it’s commensurately hard on our already weakened economy.  It’s a good idea to lower the tax rate, and it’s a good idea to eliminate (though reductions are a good start) tax credits, loopholes, subsidies, and the like.  But these must be across the board—no company or industry should be getting special government treatment, good or bad.

And This from the Fourth Branch of the Federal Government

Posted on by
Reply

Victoria McGrane and Jon Hilsenrath write in The Wall Street Journal:

The Federal Reserve has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system….

Hmm….

Since the Dodd-Frank financial overhaul became law in July 2010, the Fed has held 47 separate votes on financial regulations, and scores more are coming. In the process it is reshaping the U.S. financial industry by directing banks on…what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions.

It’s hard to have such arrogance when the public is listening in.

But some would disagree with the secretiveness.  Sheila Bair, ex-Chairwoman of the FDIC, suggests

People have a right to know and hear the discussion and hear the presentations and the reasoning for these rules.  All of the other agencies which are governed by boards or commissions propose and approve these rules in public meetings.  I think it would be in the Fed’s interest to do so as well.

Naturally, the Fed insists that there’s nothing wrong with the secrecy.  Fed Governor Daniel Tarullo says with a straight face that open meetings aren’t always the most effective means to increasing public understanding, and they aren’t a gauge of regulators’ work.

You can have a scripted meeting that does not show any engagement at all….

But this is just a red herring.  Scripting is a hazard of all public meetings, not only the Fed’s.  But more to the real point, this argument elides the fact that there’s no increase in public understanding, either, from secret meetings, nor do such closed-door meetings provide any gauge at all of regulators’ work.

Open meetings could also strain the already busy schedules of top Fed officials. The Fed currently has 250 separate rule-writing projects under way.

There’s a hint there, and it has to do with all those regulations and regulation-writing exercises.

For whom do these guys think they work?

Another Lesson from the European Model

Posted on by
Reply

Here’s the present situation in Greece—it really is this apocalyptic.  Children are street-begging for food, and adults are dumpster-diving for food as soup kitchens close their doors on people because the kitchens have run out.  Professional talent is leaving the country for foreign work, and others are squirreling their money away in foreign bank accounts.  Medecins Sans Frontieres is reporting a return of malaria—and so the exposure of Europe generally to this once-eradicated disease.

University of Athens economist, Panagiotis Petrakis, describes other aspects of the economic failure:

…standard of living down, by as much as 30 per cent; bank deposits that have not been spirited out of the country are dwindling; almost 70,000 businesses folded in 2010 and bankruptcy is stalking more than 53,000 of the remaining 300,000; unemployment, 25 per cent – but youth joblessness is 47 per cent and rising; a quarter of the population living in poverty; homelessness, up 25 per cent, with well-educated youngsters accounting for much of the rise.  Petty crime, doubled.

Greece—and Portugal, Spain, and Italy; although Greece is the farthest down the path—is demonstrating the results of a welfare state running out of other people’s money.  The stimulus money is fully expended, and there are no positive results; only failure: competitiveness has disappeared into an overwhelming national debt, and with the loss of prosperity from that competitive fire, any ability to heal the economy—to repay that debt—is sorely constrained.  Corruption—crony capitalism—is becoming rampant.

Greece, like Detroit, and the US, like Greece, are gravely wounded by the policies of welfarism, however disguised by pretty words of “everyone gets a fair shot.”  Yet our own political elite still want to double down on their failed spending, taxing, borrowing—wealth redistribution—policies by imposing yet higher taxes, increasing spending even more, and expanding our debt explosively beyond its current already unsustainable levels.

Though Europe’s economies are dying, the collective mind of its political elite is still gripped patterns of thought and modes of analysis that were hatched in another era.  And so it is here, where Progressive policies, born in the failed New Deal, continue to hold sway and continue to fail today.

h/t to Belmont Club

Oil and the Economy

Posted on by
Reply

Here are some numbers on the impact of oil in our economy—and so why the government’s oil policy is important to our economic future.  These data have been collected for a Fox News article on a related subject.

Our economy grew at an anemic 1.7% for 2011.  This performance is especially poor in context: that rate did not come at the end of an extended period of prosperity, but at the beginning of a “recovery” from an especially deep recession—a time when growth normally is much stronger, in the 5%-8% range.

Global oil demand is expected to increase by 1.5% (to 89.25 million barrels a day) in 2012, and against this backdrop, the price of North Sea oil (comparable to Middle east oil, but which supply is more stable) is up 11% over last year, to $119 per barrel, while oil produced in Texas is up 19% to $103 per barrel.  This is apart from Iranian shenanigans.

This has driven gasoline prices, nationally, to $3.53 a gallon, up a quarter of a dollar just since the start of 2012, and it could well go $4.25 by April—just in time for the summer driving season, such as it will be.  That’s also up nearly $1.65 per gallon since the 2009 beginning of the present administration.

And the money (sorry) datum: each 25-cent jump in the price of gasoline over the course of a year represents an annual total of $35 billion that’s spent on gasoline and so is not available for use in other parts of the economy. Those $35 billion equate, roughly, to a bit over a third of the cost of the just-passed payroll tax cut.  Thus, in President Obama’s three years, we’ve already had to spend that payroll cut on gasoline.  Indeed, just last year, we spent 8.4% of our household income on gasoline alone—double the per centage of 10 years ago.

Karl Rove, former senior advisor to President Bush the Younger, notes that

One out of every six Americans is unemployed, working part-time, looking for full-time work or so discouraged they’ve dropped out of the workforce altogether.

As the saying goes, work is somewhere else, and you get there in a car.

The government’s oil policy?  President Obama, through his campaign spokesman Robert Gibbs, insists

Our domestic oil production is at an eight-year high, and our use of foreign oil is at a 16-year low.  So we’re making progress.

Others, though, don’t see the increase, or the progress.  John Hofmeister, former CEO of Shell Oil and founder of Citizens for Affordable Energy, points out that national oil production today is 7 million barrels per day—down from 10 million a few short years ago.  Furthermore, Obama has killed the Keystone XL pipeline that, aside from the tens of thousands of jobs the pipeline’s construction would have represented, also would have brought nearly 625,000 barrels per day from Canada into the US.  The current oil policy’s negative impact on oil production only worsen our economy.

Aging Populations

Posted on by
Reply

National population trends depend on a number of factors, including such things as fertility rates, death rates, immigration, and emigration.  At this point, though, I’m only going to look at general population trends for a few countries, without looking into particular influences or causes: today’s age breakouts compared with their projections over the next couple of generations, along with current net immigration rates, for Brazil, the People’s Republic of China, Russia, Germany, France, Great Britain, and the United States.  This list is selected purely for an initial, superficial look in the mirror and at some of our major economic competitors (with the deliberate exclusion of the EU as a whole, since it remains sufficiently fragmented among its constituent nations from a political and economic perspective that some of the individual nations are more important to me than the continent).  The UN’s report World Population Ageing: 1950-2050 is my source for the population data; I massaged data from the CIA’s The World Factbook 2011 snapshot for the immigration numbers.

In Brazil, nearly 63.5% of the population was in the age band 15-59, while those 60 and older comprised under 8%.  By 2025 (one generation after those 2000 figures), these are expected to have shifted to 62.5% and a shade over 15%, while in just one more generation, by 2050, the numbers are expected to have shifted to 56.5% and a bit over 23.5%, respectively.  The support ratio, the number of people in the actual labor force (15-64 years old, nominally available to contribute to the support of the elderly) per person 65 or older, reflects this shift and emphasizes the problems confronting an aging population: the support ratio is expected to shift, over those same two generations, from 12.9 to 1, to 6.6 to 1, to 3.5 to 1—or the number of workers supporting that older population is expected to fall by nearly 75%.  The fertility rate (loosely, the number of children per woman during her child-bearing years) is expected to remain just at the replacement rate of 2.1.  Brazil has a net emigration rate close to zero; movement into/out of the country plays almost no role in Brazil’s population and its future economic impacts.

Here are numbers for the People’s Republic of China:

2000 2025 2050
15-59 (% of total population) 65 53.8 29.9
60+ (% of total population) 10 62 19.5
support ratio (work force to 65+) 10.0 5,2 2.7
fertility rate 1.8 1.9 1.9

The size of the work force available to support that aging population is expected to fall, in relative terms, by two-thirds.  China has a net emigration rate roughly 450,000 persons per year.  This, coupled with that below replacement fertility rate will continue to present the nation with an economic problem in efforts to support that relatively expanding aging population.  Moreover, this shortfall can only be exacerbated by the one-child policy and its associated gender bias in the coming generations.

In Russia, the numbers stack up like this:

2000 2025 2050
15-59 (% of total population) 63.5 60.8 49.3
60+ (% of total population) 18.5 26 37.2
support ratio (work force to 65+) 5.6 3.6 2.1
fertility rate 1.1 1.4 1.8

There are a couple of points here.  Russia starts this period with a low number of workers per old person.  Indeed, they haven’t had a support ratio above 7.7 since 1975.  Also, the fertility rate is at disastrous levels—this is a population implosion in progress.   The trend is in the right direction, but in our two generations it still doesn’t reach the replacement level—and that ratio is from a rapidly shrinking population base.  The situation is very dicey for Russia.  Russia gains, due to immigration, roughly 40,000 persons per year; however, despite this, the country experienced an annual population decline of 650,000 in 2011, and this will continue until the combination of immigration and fertility rate can reverse the trend.

The German numbers are these:

2000 2025 2050
15-59 (% of total population) 61.2 54.6 49.5
60+ (% of total population) 23.2 33.2 38.1
support ratio (work force to 65+) 4.1 2.6 1.8
fertility rate 1.3 1.4 1.6

The situation looks as bad for Germany as it does for Russia; however, there is a critical difference: the German economy is a much more productive economy, owing to its relatively free market operation.  Germany also accepts a large number of guest workers (although not all become immigrants); these are not reflected in the above population figures.  Separate from the guest worker program, Germany experienced a slight net immigration, yet it still lost, as of that 2011 snapshot, roughly 170,000 persons.

The French numbers are these:

2000 2025 2050
15-59 (% of total population) 60.7 54.8 51.3
60+ (% of total population) 20.5 28.7 32.7
support ratio (work force to 65+) 4.1 2.8 2.1
fertility rate 1.8 1.9 1.9

The projected French support ratio is in better shape than the German one, and this seems related to the somewhat more stable age break out between the two population bands.  The fertility rate doesn’t reach the replacement rate, but France, like Germany, accepts a large number of guest workers.  So far, the relatively free market tenets of the French economy makes it, like Germany’s, more productive than most; this mitigates (but does not eliminate) the economic results of the unfavorable population trends.  France had a net immigration of some 100,000 persons in 2011, and its population grew by 325,000 that year.  The net influx of immigration clearly is helping stabilize/grow the French population.

The numbers for Great Britain are these:

2000 2025 2050
15-59 (% of total population) 60.4 55.4 51.1
60+ (% of total population) 20.6 29.4 34.0
support ratio (work force to 65+) 4.1 2.9 2.1
fertility rate 1.6 1.7 1.9

The British fertility rate is too low, but its trend is the most favorable of the three EU countries presented.  Like France and Germany, the British also accept a large number of guest workers.  The British economy, especially after Thatcher’s earlier reforms and Cameron’s present efforts, is  a relatively free market one, and so highly productive.  This, as with Germany and France, helps mitigate the economic impact of its unfavorable population trends.  Great Britain had a net immigration of some 163,000 persons in 2011, and its population grew by nearly 350,000.  As with France, immigration is helping the stabilize/grow the British population.  In both countries, net immigration may be going a long way toward slowing, and mitigating the effects of, the projected decrease in support ratio over the next two generations.

The numbers for the United States look like this:

2000 2025 2050
15-59 (% of total population) 62.1 56.6 54.6
60+ (% of total population) 16.1 24.8 26.9
support ratio (work force to 65+) 5.4 3.4 2.9
fertility rate 1.9 2.0 2.1

The Baby Boomer generation is much of the spike in the first generation after the 2000 data; after that, the rates begin to stabilize (although we’d need to see more generations of data before stabilization can seriously be claimed), and the fertility rate reaches near replacement by 2050.  The US’ economy is the freest of the nations surveyed; this relatively higher productivity goes a long way toward mitigating the economic effects to the population age band trend.  The US experienced a net immigration of 1.3 million and a population growth of over 3 million in 2011.  This immigration rate also will be critical in overcoming the support ratio decrease over the next couple of generations, even though that ratio may begin to stabilize after that.

Even in a centrally managed economy, new workers are needed to produce the economic output required to support those too old to work—the work force must be replenished at least as fast through births and immigration as it is depleted through aging and death.  It’s important to note at this point that guest workers may not be a long-term answer.  All three of the EU countries above are starting to have—or think they’re starting to have—problems with their guest worker populations.  Moreover, the long-term work force and support ratio solutions—the overall population and economic output trends—depend on a net influx of permanent members of the population: birth rates and immigration rates.

With our more productive and flexible (relatively) free market economy, we still need immigration just to maintain our work force, much less support our own aging population, even with our projected replacement rate fertility level.  This puts a premium on getting control over our borders while making it easy for people to enter our country legally, and to stay legally once have arrived.