Category Archives: markets

The Deficit Has A Silver Lining?

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Dr Alan Blinder, Princeton University Professor of Economics and Public Affairs, had some thoughts on this.  His piece is fundamentally optimistic, but a few of his remarks jumped out at me.

Congress and the president have managed to agree on several measures that reduce the projected 10-year deficit considerably.

Reduced the 10-year deficit.  He writes of this as if it’s a good thing.  He writes of this as though that continued 10-year deficit, representing as it does an enormous expansion of an already ruinous debt, is a good thing.

Meanwhile, Republicans are talking far less menacingly about either shutting the government down or precipitating a debt crisis.

For which cynical straw man he declines to provide a single quote from a Republican—or Conservative—wherein such a one ever talked about shutting down the government or precipitating a debt crisis in recent history, other than in the context of Progressives manufacturing such things so they can decry them.

That law [the Budget Control Act of 2011] created land mines like the fiscal cliff, but it also cut spending by over $1.9 trillion once you include the associated interest savings, as you should.  (Here and elsewhere, I use the 10-year budget window 2014-2023 and recent estimates from the widely respected Center on Budget and Policy Priorities.)  That was all spending cuts, no tax increases.

Here Blinder is simply being disingenuous.  There were no spending cuts in that Act.  A reduction in the rate of spending increase is still a spending increase.  A Professor of Economics, even one at Princeton, knows that.

Then came the New Year’s Day agreement that averted the cliff. The headline number then was about $600 billion in tax increases.  But if you add in the spending cuts and the associated decrease in debt service, it came to another $850 billion or so.

See above.  And he’s exaggerating the magnitude of the spending increase reduction.

But imagine that our legislators agree instead on a smarter package of spending cuts and revenue raisers that amounts to the same amount of money [as the present sequester cuts].  After all, it’s only about 0.6% of GDP.  Then we’ll have achieved the $4 trillion target.  The Center on Budget and Policy Priorities estimates that doing so would be enough to stabilize the debt-to-GDP ratio at about 73%, which is a sensible goal for now.

There are a couple of things here.  “Cuts and revenue raisers” that achieve the same degree of…something.  Serious cuts in Federal spending would get the government out of the way of the economy, and its recovery—its enthusiastic performance—would raise plenty of revenue for the government, more so than it’s collecting now.  But Blinder and his fellow Progressives, with these demands for more taxes as the only possible revenue raisers are simply demonstrating their contempt for a free market and the wisdom of the individual Americans participating in it, preferring instead an economy centrally directed by Know Better Progressives.

The other thing is that stable debt-to-GDP at 73% nonsense.  This is an amazing thing even for a Princeton Professor to say.  There’s nothing at all stable about such a debt level.

Some of this “cost control” [in his claimed slowing rise in the cost of health care] is due to the weak economy: Hard times lead people to postpone or cancel some medical care.  But health-care inflation began to fall years before the recession began, which suggests that deeper forces are at work.  If we can somehow slow health-care costs to the rate of GDP growth, our long-run budget problem is basically solved.

On the effectiveness of President Barack Obama’s poor economy in holding down cost increases, well NSS.  “If we can somehow slow health-care costs…,” well the answer here is obvious—let a free market work its will in a competitive environment.  But, such an answer truly is not obvious to one who disdains the free market and that wisdom.

…fixation on reducing the budget deficit, to the exclusion of all other national goals, seems strangely anachronistic.  The nation has other priorities, too—such as faster growth and more jobs.

This also is an amazing thing.  The nation does have as critical economic and security imperatives faster growth and more jobs.  But these are not possible to achieve until the budget deficit is eliminated and the debt it drives reduced.

A Foreign Tax on American Investors in America

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The European Commission earlier this month proposed a new financial-transaction tax for 11 participating states, including Germany, France, Italy, Spain, Belgium, Austria, Slovenia, Portugal, Greece, Slovakia, and Estonia.  These produce roughly two-thirds of the EU’s economy.

It’s an enormous tax, too, in a market where spreads are on the order of pennies, even fractions of pennies: 0.1% for trades in bonds and shares, and 0.01% for derivatives transactions, and it would apply to both buyers and sellers

as long as either of them is based in one of the participating states, or if the financial instrument being traded was issued in any of these countries.

As damaging as this tax is, they’re not done.  The tax is intended to suppress trading:

[The European Commission’s] own impact assessment estimates that the number and volume of trades in shares and bonds could drop by around 15%, while derivatives transactions may drop by as much as 75%.

Never mind that this activity—especially its volume—contributes to the liquidity of the instruments and so contributes to holding down their price to buyers.  Which facilitates more general investing in companies—their source of funds for R&D, plant expansion, even hiring.

But wait, there’s more: they’re claiming the right to tax folks outside their jurisdiction—we Americans, investing here in the US, for example, as a result of those domiciliary and passing-through aspects.

This tax will hurt us: Paul Jiganti, Managing Director of Market Structure and Routing Strategy at TD Ameritrade Holding Corp, estimates that

a typical [American] customer who pays $9.99 to buy 1,000 shares priced around $35 apiece could see that charge rise sevenfold, to around $70 on the trade.

Which will have the EU’s desired outcome.  Jiganti was caught by surprise by all of this:

To be honest, I thought that cooler heads would prevail.  I thought the US government would take care of it before it really became an issue.

For all of Treasury’s sharp words about the tax, though, don’t expect any real action.  President Barack Obama, Treasury’s boss, has never met a tax he didn’t like.  He’s not going to oppose this one in any meaningful way.

Progressives Need to Quit Complaining and Start Cooperating with the Republicans

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Sally Kohn, a Fox News contributor, offered a response to President Barack Obama’s Tuesday State of the Union address.  Herewith, I offer my response to her and to Obama.

Tonight, the president of the United States of America and the leader of the party that won the Presidential election in 2012 while losing the Congressional and State House elections set forward a plan not only for the next four years but the next four decades of American decline.

It is a plan that purports to build our economy from the middle class out and not just from the top-down, while ignoring the poor and their fading opportunities for upward mobility.

It is a plan that purports to believe American workers can get the skills they need for the 21st century and American companies can compete in the global marketplace.

It is a plan that creates a false choice between helping our students and seniors and creating jobs for everyone else in between on the one hand and cuts to spending on the other.

It is a plan that ignores the lessons of American history and the traditions of our founding values of limited government and personal opportunity and choice and personal responsibility.  And it is a plan that has already failed multiple times in this President’s administration and in those of prior Presidents’—and a plan that the American do not support!

Nine in 10 Americans—and eight in 10 Republicans and independents—agree that we need to create a road to citizenship for the hardworking, aspiring Americans who are so vital to our economy and our communities.  Over 85% of voters believe we need to strengthen the manufacturing industry in America.  A majority of voters support improving our roads and schools and creating jobs primarily through private enterprise and that where taxes are necessary for public infrastructure improvement, these should be minimal and temporary.  A wide majority of gun owners—and NRA members!—support common sense violence prevention measures like keeping weapons out of the hands of felons and those convicted of domestic violence actions.  A growing majority of scientists note that human activity as a driving cause of climate change is not supported by the evidence.  More and more Americans are recognizing that singling out particular companies—even whole industries—as “winners” outside the results of free market competition is wasteful of taxpayers’ money.   And most Americans recognize that inequality in America is a major problem and that our government’s distortion of  our economy unfairly favors that government’s chosen.

Americans understand the tight linkages between our enormous deficits and exploding debt on the one hand and jobs and our economy’s health on the other.  They also recognize that the latter cannot be repaired until the former is fixed.

A strong majority of Americans recognize the straw man Obama put forward that equates reforming Medicaid, Medicare, and Social Security so that they are made stronger and preserved for our children and grandchildren with cuts to these programs.  And they recognize the false choice that Obama made between reforming and strengthening our social safety net or cutting defense.

In other words, every single idea and initiative that President Obama outlined in his State of the Union Address is not only additional spending that our nation cannot afford and additional taxes that our citizens cannot afford—especially after the $600 billion tax increase passed with the fiscal cliff deal just concluded—but also directly contradicts the values and priorities of the majority of American voters: it’s the government as the solution rather than the strength and collective wisdom of Americans acting on their own priorities.  Those trying to argue otherwise are obviously intoxicated by the recycled air of their own ideological bubble.

 

In crafting his Republican response, Senator Marco Rubio (R, FL) noted that he and his fellow conservatives are the defenders of working people and immigrants.  And while Rubio repeatedly suggested Republicans agree with President Obama’s assessment of the problems we face as a nation, he repeatedly made clear Progressives remain opposed to any reasonable solutions.

The Democratic Party should be less worried about demagoguery and more worried about their substance.  No party that offers “jobs” bills built on failed—repeatedly!—Keynesian spend, borrow and tax…stimulus…, sends up legislation that purports to address violence direct against women but that only increases spending without addressing causes of violence, and offers an immigration act that is nothing more than amnesty for illegal behavior can claim to represent mainstream America, let alone a governing majority.

For crying out loud, Progressives in the chamber—including Obama and his Attorney General Eric Holder—couldn’t even manage to support protecting voting right protection with simple things like voter ID requirements or and helping kids go to pre-school in effective programs.  Instead of continuing to oppose everything conservatives stand for, Progressives should explain to the American people why the only thing Democrats seem to consistently stand for—higher taxes, more spending, increased borrowing, and coddled favored entities—didn’t ward off our financial crisis or create jobs with  those increases and coddlings in place.

Of course the irony in all this is had Republicans eked out a presidential victory with even a fraction of the margin President Obama enjoyed, they would be reforming and strengthening our social safety net along with repealing and replacing Obamacare and enjoying a broad and mainstream mandate to do so with strong public opinion favoring that action.  Instead, the Progressives’ present course consists of doing nothing, allowing these programs to fail, and allowing Obamacare to increase the cost of health insurance—for those who still can afford any coverage at all.

So the fact that President Obama continues to advance the plan for the nation that he does is evidence of either a deep and unyielding disdain for free markets and the power of the collective action of individual Americans without government involvement or a fundamental failure to grasp reality.  Or maybe both.

In every sense imaginable, America is stagnating, if not in decline.  Our economy is not recovering and we are in retreat from world.  Our demographics are evolving; our politics must keep up.

President Obama articulated a plan that is rich in spending and taxes, which any sensible Republican true to his principles and to the mandates of his constituency over the last two elections must be highly inclined to prevent.  The American people chose their path and elected—and reelected—a Republican House, with losses in the Senate smaller than is normal for a Presidential reelection.  Democrats would be wise to stop with the blanket criticisms and start finding a way to work with Republicans on real economic plans and social safety net reform.

Odd, isn’t it, how completely the Progressive plaint applies to openly, proudly “my way, or else” Progressives?

Farm Subsidies

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The US spent $277 billion last year on farm subsidies of all stripes; the amount includes $37 billion for conservation payments, most of which goes to large agribusiness.

The EU is learning about the costs of farm subsidies; it’s time we did, too.  The article at the link has a lot of environmental items in it; I’ll generally deal with the fiscal items.

The European Union plans to spend about €60 billion, or about 40% of the entire EU budget, on agriculture this year alone.  It’s a lot of money for an economic sector that generates less than 2% of the bloc’s gross domestic product and employs less than 6% of its workforce.

Individual (small) farmers can get €10,000 ($13,500), or more, from the EU’s spending.  However,

[t]he main beneficiaries of this policy, according to the authors of the journal Der Kritischer Agrarbericht (Critical Agricultural Report), are “large-scale, streamlined farming operations, which receive annual payments of up to €120,000 ($162,000) per employee.”

(That’s a helluva salary, were the money actually going to the employees.)

And

In Germany, 1.9% of businesses collect about 30% of payments, and they are not always farms.  Ice hockey clubs, aristocratic families and companies like candy maker Haribo and sugar producers Südzucker and Nordzucker also benefit from EU agricultural subsidies.  In 2009, defense contractor Rheinmetall also received a hefty sum of cash—for planting trees in a former tank training area.

Sound familiar?

While the EU is trying to tie continuance of these subsidies to environmental questions (a forced set-aside of 7% of farmland, for instance, since the claim is that plowing that land releases massive amounts of CO2), this won’t solve the underlying problems.

Farm subsidies of such magnitude (indeed, of any size, as is the case with all subsidies) drive up the cost of food for the consumer.  Taxpayers pay those subsidies, those wealth transfers, and so taxpayers are paying twice for those artificially inflated prices—once with the subsidy, and again when they buy the food being subsidized.  Further, those inflated prices drive the demand for food stamps.

Artificially Low Interest Rates

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When the financial markets aren’t allowed to influence interest rates in accordance with market forces, there are wide-ranging consequences.  Here‘s one.

Ford Motor Co expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.

The nation’s second-largest auto maker is one of a who’s who of US companies pouring cash into pension plans now being battered by record low interest rates.  Verizon Communications Inc contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies’ sensitivity to this issue—Boeing Co now reports “core earnings” to separate out pension expenses.

Leaving aside the wisdom of defined benefit plans like pensions vs defined contribution plans like 401(k)s, and even assuming that interest rate assumptions underlying pension contributions in normal times are reasonable, this is money that would be better spent on capital plant, product development (both existing and new), hiring more workers, and so on.

Sort of like Ford did last year, but cannot use for this year’s priorities.