Tag Archives: economics

Invading Ukraine is a Trap for Putin?

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That’s the thesis Christopher Hartwell has in his Friday Wall Street Journal op-ed. And he made a good case: Russia failed in a similar situation in Afghanistan; the “brother Slav” argument that Putin makes for Ukrainians coming into the Russian fold isn’t all that; the Ukrainians would mount a strong guerrilla war after losing the invasion war, making the total cost too high for a fragile Russian economy to survive. He concludes with this:

Russia can’t be an empire without Ukraine. But Russia will cease to be a great power if it tries to acquire the rest of Ukraine.

Hartwell, however, ignored a couple of key points, along with made a false comparison.

The false comparison is that of Ukraine and Afghanistan. There was far more enmity, especially fueled by culture and fundamentalist religion, between Afghans and Russians than exists between Ukrainians and Russians, for all the current “brother Slav” split.

Afghan geography lent itself far more effectively to guerrilla resistance than does Ukrainian territory.

The matter of experience: the Red Army, now Russian Ground Forces, gained quite a lot of experience at fighting against a guerrilla foe in Afghanistan, and those forces now are real-time combat experienced at prosecuting a guerrilla war in Ukraine’s Donbas region, the Donetsk and Luhansk Oblasts. They’re conversant with both sides of the guerrilla question. They’re also gaining currency as an occupation force in Crimea.

The key points are these: regardless of how easy or hard it might be for Putin to conquer Ukraine (which conquering will be the easier for Biden-Harris’ refusal to arm Ukraine even with defensive weapons, much less offensive ones), Putin in the end will have Ukraine under his at least more-or-less control, and in the process, he will have completely denied Ukraine to the rest of Europe.

The other key point will be his success at humiliating Biden-Harris, adding to the Biden-Harris administration’s own destructive effects on American credibility. That alone is worth a pretty kopek in Putin’s geopolitical calculation.

Maybe an invasion wouldn’t be such a trap.

A Rain Tax

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It’s back.

Recall the Maryland rain tax that Progressive-Democrats in that State’s legislature actually got passed into law. That…foolishness…contributed to the State’s Progressive-Democrat Governor getting tossed at the next election and replaced by a Republican. The State’s legislature then repealed the tax within the next couple years.

Now we see that the Progressive-Democrat City Manager for Fairfax (that Fairfax), Robert Stalzer, proposed

taxing local residents and businesses for the amount of rainwater that falls on their roofs, driveways, parking lots, and other “impervious surfaces” on their property.

Just the News opened its article on this with this bit from The Beatles:

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold I’ll tax the heat
If you take a walk, I’ll tax your feet

Not to be outdone, or not too badly, anyway, I offer this adaptation from The Lovin’ Spoonful:

You and me and rain on the roof,
Caught up in a taxing shower,
Going broke while it soaks our wallets.
Maybe we’ll be broke in hours,
Waiting out the Guv….

To quote Joe Biden, who railed in a different venue, this is a bonehead idea.

A Comment on Two Crises

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Tax revenues, in the main, rose slightly as a fraction of GDP in wealthier nations despite the existence of the Wuhan Virus situation.

That surprise outcome underlines the novel nature of the economic contraction that accompanied the first surge of Covid-19 infections, and contrasts with the global financial crisis, when revenues fell as a share of economic output, an outcome more typical of recessions.

Novel indeed. According to the Organization for Economic Cooperation and Development,

revenues across its 38 members rose to 33.5% of gross domestic product in 2020 from 33.4% in 2019. In the wake of the global financial crisis, revenues in 2009 fell to 31.8% of GDP from 32.6% of GDP in 2008.

And

In both instances, tax revenues and total economic output fell, but in 2020 the former declined less sharply than the latter.

These…economists…lay off the outcome of the 2020 situation to impacts on jobs.

Employment reductions in 2020 were concentrated at the lower end of the income distribution, as were falls in working hours.  This limited the impact of the Covid-19 crisis on revenues relative to the GFC [global financial crisis], in which job losses and reductions in working hours were more evenly spread.

But this is an outcome, and the economists of the OECD have mischaracterized the cause.

Look at the two examples the OECD cited for its comparison. The “global financial crisis” of 2009 was an economic event that was driven by purely economic factors—in that case, a credit crunch. The economic conditions of 2020 were driven, not by the prevalence of the Wuhan Virus, but by governments’ (over)reaction to the virus, not from the virus.

That political reaction—lockdowns, restrictions on movements, vaccine requirements levied on businesses by governments—differentially impacted economies in the manner indicated. Of course wealthier nations fared better than less wealthy ones. The less wealthy are far more dependent on those low-paying jobs.

SALT Debates

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Recall the SALT—State and Local Taxes—deduction, capped at $10,000 under the Trump income tax reform of a few years ago. Keep in mind the current debate among Progressive-Democrats about whether to raise the cap to $80,000, or higher, or eliminate the cap altogether. Set aside the debate centering on how much lifting the cap would aid essentially exclusively the Evil Rich vs most of those Evil Rich are heavy donors to various Progressive-Democrat politicians.

Consider instead that

some of America’s top earners—including private-equity managers and law firm partners—are already legally circumventing the cap on much of their income.
That is because state governments and the Trump administration blessed a cap workaround for owners of closely held businesses that is proliferating around the country.

That workaround is quite byzantine, too.

Here’s how it works. Normally, so-called pass-through businesses such as partnerships and S corporations don’t pay taxes themselves. Instead, they pass earnings through to their owners, who report income on individual tax returns. That subjects them to state individual income taxes—and the federal limit on deducting more than $10,000, created in the 2017 tax law.
Details vary by state, but the workaround flips that concept. The states impose taxes—often optional—on pass-through entities that are roughly equal to their owners’ state income taxes. Those taxes then get deducted before income flows to the business owners.
The laws then use tax credits or other mechanisms to absolve owners of their individual income-tax liabilities from business income. Thus, they satisfy state income-tax obligations without generating individual state income-tax deductions subject to the federal cap.

The SALT cap was well intended, if set too high at $10k. However, both the SALT and these convoluted workarounds illustrate the foolishness of using our tax code for social engineering and other political purposes instead of simply to raise revenue to cover the few Constitutionally mandated spending purposes.

One low, flat rate tax on income from all sources would simplify things immensely, with no negative impact on revenues for the government. And it would reduce the cost of compliance, with an associated reduction, however small, in end prices to consumers.

Deglobalization, Costs, and Inflation

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There is considerable angst developing in response to the developing move toward economic deglobalization. That angst is centered on the risk of inflation as nations move away from the Ricardian concept of nations focusing their economies on what their own population does best and/or has the best access to necessary resources, and importing from other nations that which the importer might need or want but that those other nations might produce more efficiently and cheaply. The Ricardian concept holds, correctly, that such specialization leads to lower costs overall for all nations and all consumers while yielding the greatest prosperity for all nations and their populations.

The angst is well enough described by Yuka Hayashi in her Sunday Wall Street Journal article.

…tariffs and “Buy American” procurement rules, businesses moving production back to the US where it will be less vulnerable to those policies, and depressed immigration inflows.
“The reorganization and shortening of supply chains…will have a cost that will be passed down to the vendors and ultimately to consumers,” says Dana Peterson, chief economist for Conference Board, an independent research group supported by large US businesses.

And

Studies have shown that globalization has influenced US prices. Kristin Forbes, a Massachusetts Institute of Technology economist, has found that those parts of the consumer-price index influenced by global factors, such as commodity prices, currency fluctuations and global value chains, drove half the changes in the index between 2015 and 2017, up from about 25% in the early 1990s. Economists Robert Johnson of the University of Notre Dame and Diego Comin of Dartmouth found in a 2020 paper that international trade had the effect of reducing US consumer prices by an annual 0.1 to 0.4 percentage point between 1997 and 2018.

And

Deglobalization gained impetus with the global financial crisis of 2008…. It might be adding to current high inflation….

All of that is certainly true, and deglobalization is, not might be, contributing to high inflation, but none of that makes deglobalization, of necessity, an unvarnished bad.

Ricardo’s ideas work only in an idealized world where all the nations are, if not friendly with each other, at least have no enmity among each other. In the real world that does not obtain, and some nations are enemies of others. Within that, some nations might hold resources that their enemy nation(s) might need, and other nations might produce useful, even critical, goods that their enemy nation(s) cannot produce as efficiently or cheaply.

It is against that real world backdrop that a fluid balancing of economic globalization and deglobalization occurs.

Deglobalization certainly can be carried too far, but some deglobalization is necessary from a national security perspective: we need to identify the industries and materials that are critical to our national defense and to our economy and then develop wholly domestic supply chains for them that extend from dirt in the ground to final product at its usage destination. These supply chains don’t need to be—shouldn’t be—our sole source for those resources, intermediate products, or final products, but it’s a Critical Item to have one or two such for each industry and material from which we can expand should an enemy try to cut us off.

That will increase price levels for those items and for related, substitutable, items, but that’s a necessary price to pay for our security—especially compared to the price we’ll pay if we’re cut off completely by an enemy nation, as the PRC already has tried to do with its rare earths production near monopoly.