Category Archives: markets

A Tax for a Health Fiscal Cliff

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It joins Democratic Presidential Candidate Barack Obama’s enormous tax hike he has taking place at the start of the new year, and it also creates a health cliff for the nearby future as it actively stifles medical innovation in the US.  “It” is the 2.3% tax that will be charged to American medical device manufacturers—on top line revenue—sales—not on profit.  Former Governor and US Senator from Indiana, Evan Bayh (D, IN), offered some thoughts on this problem in a recent Wall Street Journal op-ed.

As a result of this problem,

For a typical company, a 2.3% tax on revenues equals a 15% tax on profits.  When combined with a 35% corporate tax and state corporate taxes, the tax rate for the medical-device industry will exceed 50% in most jurisdictions.

[This inflicts an] added cost of $30 billion—according to the Congressional Budget Office—to the industry.  This tax comes straight out of a company’s bottom line.  Because many devices are sold to hospitals, physicians and other providers through multiyear contracts, the prices are already locked in, so the tax cannot be passed on to the buyer.

Think about the effects this will have on medical innovation.  Governor Bayh did:

America is a global leader in medical-device production and sales.  Last year the US device industry earned $5.4 billion more in exports than we spent on imports of such devices.

Even more important to the average American is the industry’s role in saving and sustaining life.  Medical devices have contributed to remarkable advances in numerous areas: artificial hips and knees, and devices used in the treatment of cancer, and for angioplasty, vascular surgery and in-vitro fertilization, to name a few.  Many of these devices have not only improved the quality of life for patients, but also produced health-care cost savings—for instance, each time an angioplastic balloon made open-heart surgery unnecessary.

and

Especially hard hit could be the hundreds of small companies developing medical software applications. These apps promise to revolutionize the practice of medicine—for instance, by delivering blood-sugar test results for diabetics.

But now

Thirty billion dollars must be taken out of operations or R&D.  Who knows what lifesaving devices that might have been developed will fall victim to this tax?

What about jobs?

Many US device companies, in response, have already announced layoffs, canceled plans for domestic expansion and slashed research-and-development budgets.  This month, Welch Allyn—a maker of stethoscopes and blood-pressure cuffs—announced that it will lay off 10% of its global workforce over the next three years, but all of the jobs being cut are in the US[]

and

In my state of Indiana alone, Cook Medical has canceled plans to build one new US facility annually in each of the next several years, and Zimmer plans to lay off 450 workers, while Hill-Rom expects to lay off 200.  Stryker, based in Michigan, anticipates having to lay off 1,000 workers[]

and

[P]roduction is moving overseas, good jobs are going to Europe and Asia, and cutting-edge medical devices will now be produced elsewhere for import into the US.

Of course Obama and his Progressive Congressmen knew this when they wrote the tax; it’s part of why the entire bill was written behind closed doors in the back of Harry Reid’s office suite, and why Nancy Pelosi was so anxious to get the bill passed before “we can find out what is in it.”  So much for Obama’s concern for the little guy.  So much for Obama’s concern for the health of Americans.  So much for Obama’s concern for America’s innovation leadership.

Update: added the actual name of the man in the first paragraph.

A Social Security System Proposal

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Social Security, as we know it, is going to go broke in a few short years.  Demographics guarantee this.  When Social Security was instituted, it was a supplemental income program for our retired, who were expected to continue to rely on their own resources and those of their families for their retirement years.  Moreover, at that time, there were roughly 7 workers paying into the system for every retiree and a retiree lifespan in retirement was about 6 years.

Today, Social Security is expected to be an income replacement program.  Moreover, the number of workers paying into the system is around 3 for each retiree, and that number is falling.  Then, each retiree is expected to live for 17+ years in retirement.

But one thing has remained constant.  Each worker paying into the system is paying for someone else’s current retirement—the money paid in is not set aside to accumulate for the payer’s benefit.

I propose to change this in the following way.  It will eliminate Social Security as we know it, but it also will preserve and strengthen the promise of social security: a reasonably comfortable retirement for the retiree.  Privatize, entirely, Social Security.

Eliminate the payroll tax for both employer and employee (think about the immediate stimulative effect from reduction in the cost of labor of 6.2%).  However, require the employee to set aside 6.2% of his income from all sources, not just from wage income (just to keep it simple, and consistent with a tax proposal nearby).  Why 6.2%?  That’s the current employee payroll tax for Social Security, absent any temporary reduction.  Eliminate, also, the present upper limit on income (wages) subject to the Social Security payroll tax.  However, instead of this money immediately being paid out to someone else’s present retirement, it will be put into an account owned and managed by the employee, and the money will accumulate for his own future retirement.

Let’s look at the effect of this on a hypothetical man’s retirement.  Let’s say the man earned $100,000 per year in his last years of working.

Under the current system, that man retiring at 66 will receive $25,800 per year until 2033, when the Social Security Trust Fund will be exhausted and payroll taxes will only be able to support payouts at 75% of their nominal rate—our man, after having been retired just 20 or so years (never mind the 17+ years of an actuarial retirement), will see his payout cut to $19,400 per year (note that for this, I’m ignoring inflation and cost of living increases).

Now suppose our man has been socking away 6.2% for his, let us say, 40 years of working life, and he’s still making $100,000 in his last years.  Again, we’ll ignore inflation, and we’ll take a naïve position of his having started out making $20,000 per year and received constant annual pay raises to reach his present $100,000 annual income.  With his 6.2% set-aside each year naively left to grow with the market (the S&P500 historical growth rate has been 9.77% since 1926—a period including the Great Depression, the Carter Recession, and the Panic of 2008), our man will accumulate enough by the time of his retirement to withdraw over $55,000 per year over the course of a nominal 18-year retirement, or more than $29,000 per year, if he expects to have a 34-year retirement (i.e., live to 100).  And he won’t have a reduction to 75% of that because the government ran out of money.  Of course, this table napkin analysis ignores inflation, also, and it ignores leaving the remainder of the man’s accumulated retirement fund still invested—now perhaps in bonds.

Notice one other critical factor here: with privatized retirement savings in place of Social Security, each man will be working for his own future instead of working for someone else’s present.  With his own money at stake, the man will do a far more careful job of managing for his future retirement than the government already has done—with OPM.

There is, of course, the risk that the man may invest foolishly, or he may invest wisely but have a run of bad luck in the market—downturns do occur.  What happens to him in this brave new world?

First, look at what happens in the present situation, where the impending failure of the Social Security System is an empirical fact.  In this scenario, where the government’s management of our retirement accounts has failed, the disaster affects all of us—every retired individual; every soon-to-be-retired individual; and each of the rest of us, who must find a way to support these unfortunates.

If the man fails, though, whether through his folly or his bad luck, the effects of his failure is limited to him and his family; it is not a national disaster.  And these individuals will be few enough in number that help—a hand back up, generally, or support if his failure comes too late for him to recover—can come from his family, his local community, church and/or charity, and, yes, as a last resort, state government.

The Federal Bank of US Taxpayer

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In a new Bernanke hair-brained scheme, the Federal Reserve Bank said last week that it is going to quantitatively “ease” by buying mortgage-backed securities from the private economy, to the tune of $40 billion worth per month.  Nearly half a trillion dollars each year.  And it’s open-ended, meaning the Fed has no plan—no idea, really—of when it might stop.

Bernanke says this is necessary.

If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

Bernanke then said, in all seriousness,

[This move will] assure the public that the Fed will remain accommodative long enough to ensure recovery.

We don’t have a single number that captures that, but we anticipate that we’ll have to do more and we’ll do enough to make sure the economy gets on the right track[.]

In other words, he doesn’t have a clue what his decision criterion should be, but he’s going to decide, anyway.  And more so, as time goes on and his nonexistent milestone isn’t met.

And

These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month [including its existing long-bond buying “plan”] through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative[.]

There are a number of questions, though.

Why are we taxpayers being put on the hook for these private economy instruments?  If these securities are failing in our economy, why should the public have to pick up the tab?  If they aren’t failing, whence the need to take them off the banks’ hands?  What ever happened to free markets, responsibility, and accepting consequences, as well as reaping rewards?

And these questions:

The Fed has been artificially suppressing interest rates for the last three-plus years.  That suppression already has lowered my own mortgage rate from 6+% to nearly 3.5%.  What does Bernanke expect to gain from suppressing mortgage rates directly?  The inflation rate this year is 1.7% month on month, and 2% year on year through August.  The August interest rate on a one-year Treasury Note is 0.16%: he’s already suppressed interest rates to the point that we’re paying the government for the pleasure of lending it our money.  What does Bernanke expect to gain?

These artificially suppressed rates have a number of negative effects.  By distorting the market for debt instruments, the Fed is making it difficult, if not impossible, for investors accurately to assess value of the debt of borrowers—and so is making it unnecessarily difficult, and risky, to lend.  How does the Fed plan on redressing this failure?

By artificially suppressing interest rates, the Fed is actively and extensively damaging those who’re committed to, or dependent on, fixed income instruments, like bonds, for their income.  Folks like retirees.  How does the Fed plan on redressing this failure?

Savings accounts have become utterly useless—the interest rates here have been good approximations of zero for the last four years.  Savings accounts used to be an effective means through which financial institutions could accumulate funds for lending to borrowers—like home-buyers and businesses looking to expand their operations. How does the Fed plan on redressing this failure?

Our economy will recover, eventually.  And interest rates will rise.  Catastrophically, if all the money the Fed is pumping into our economy with…ideas…like this one drives inflation skyward.

On top of this, though, the Fed is creating another time bomb, one which it has no hope of controlling.  When interest rates rise, and the cost of borrowing goes up, for lending institutions as well as for borrowers, as the former search for funds to loan to the latter, those lenders still will be sitting on all those mortgage loans let at artificially low rates.  Those low rates in a healthy economy (let’s skip over the high inflation, high interest rate economy) will be far below then-market rates, and so those existing mortgages, mortgages with which the lender still will be stuck, will not be generating enough income for the lenders to continue to loan.  For up to 30 years in the mortgage market.  Can you say, “S&L bankruptcy?”

And, by the way, as Federal Reserve Bank of Richmond President Jeffrey Lacker said Saturday,

Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve[.]

Or for any part of the government.

How’s That Working Out For You?

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Here are some more data on our economic condition:

  • US wholesale prices in August had the largest one-month gain in more than three years
  • The producer-price index, which measures how much manufacturers and wholesalers pay for finished goods, increased a seasonally adjusted 1.7% in August from July
  • Prices for intermediate goods—which are semifinished goods, like lumber or flour, that require further processing—grew 1.1% in August from July
  • Prices of raw materials increased 5.8% in August, suggesting prices for finished goods will rise further in the future
  • [I]nitial jobless claims were up 15,000 to a seasonally adjusted 382,000 in the week ended Sep 8.  Economists surveyed by Dow Jones Newswires had expected “only” 370,000 new applications

And these data [emphasis mine]:

The income of the typical US family has fallen to levels last seen in 1995.  Census Bureau said annual household income fell in 2011 for the fourth straight year to an inflation-adjusted $50,054.  …it will be a generation before Americans regain the peak income levels reached at the close of the ’90s

Here’s a graph of what that looks like:

Notice that: Not only is income much lower than the Evil Bush years, it’s still falling.

The monthlies are snapshots, and should be taken with a grain of salt, certainly.  But they also bear watching, especially in light of those falling incomes under the Obama administration, and the inflation trap his Fed chief, Ben Bernanke, is building in with all that dollar injection.

And the guy who sometimes sits in the President’s chair actually said this, as though he believed it,

[W]e have made progress digging our way out of the worst economic crisis since the Great Depression[.]

The Obama Economy on the World Stage

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The World Economic Forum puts out annual reports reflecting the quality and freedom of the world’s national economies; their 2012 report is here, and Fox News has a brief summary here.

Here are some of those…highlights…reflective of the performance of the Obama administration’s economic policies.

  • Since 2008, the United States has slid from No 1 in the world in “global competitiveness” to No 7 this year.  Out-ranking us are Switzerland, Singapore, Finland, Sweden, the Netherlands and Germany.
  • We’ve slid from 41st to 54th in “public trust in politicians.”
  • We’ve fallen from 50th to 76th on government regulation.
  • On government debt, though, we’ve not fallen so far; we already were near the bottom: from 97th to 140th.

James Gwartney, Economics Professor at Florida State University has the right of it:

The slide in the global competitiveness report is almost certainly due to … policy-related factors[.]

Yet Democratic Presidential Candidate Barack Obama objects to serious reform.  He and his surrogates spent all of last week castigating those evil Republicans for their proposals that would address this slide, all while proposing nothing of his own.  Other than another cynically nebulous “promise” to cut our deficit [sic] by $4 trillion over the next four years.