Tag Archives: economics

Driving out the Successful

Posted on by
Reply

In the race to see who can tax the rich the most, Rhode Island is contesting for the lead, courtesy of the State’s Progressive-Democratic governor, Dan McKee, and his legislature. The legislature has just passed and McKee just signed a bill that, among other items on Progressives’ wish list, raises the top income tax rate from 5.99% to 8.99%.

All races have winners and losers, and the losers in this race to tax are the citizens of those States whose governments keep raising taxes. It’s not just the Evil Rich who are losers in this race, though. The losers include all those whose portfolios—including 401(k)s and IRAs—benefit from the investments those rich folks make. The losers include the citizens of those high and higher tax-competing States who work, or would like to work, but the jobs aren’t expanding as much or aren’t being created at all because the Rich are constrained in how much they can grow their businesses or innovate from inside them. The losers include the small mom-and-pop businesses who fall into the Evil Rich category via the income pass-through nature of their businesses.

McKee’s tax on the rich in particular, will, as the editors at The Wall Street Journal noted, very heavily impact pass-through small businesses. What can those folks do? A glance at a map suggests a response, at least for the State over which McKee reigns. Rhode Island is 45 miles long, north to south, and its east-west width varies from 20 miles in the north to 35 miles in the south, with some detours to get to bridges across various fingers of Narragansett Bay and Mt Hope Bay. Those business owners easily could relocate to next door Massachusetts or Connecticut and still ably serve their existing customers. Those two States have high taxes, also, but not as destructively so as what McKee is inflicting.

For this Texan, for most of us in the Midwest and Pennsylvania, that’s an easy daily commute.

I Wonder

Posted on by
Reply

The ECB raised its baseline interest rate earlier this week, doing so, it said, in response to the jump in energy prices, which has driven inflation above 3% in the eurozone. Inflation in the rest of the economy—and it’s the same in the US and in the rest of the OECD-esque economies—remains largely muted and under control except to the extent energy costs percolate through them, impacting personal and commercial transportation and shipping, food production, manufacturing, and so on. It’s energy inflation that’s at the core of inflation in today’s overall economy, not a broad excess demand or supply deficiency.

So, I wonder.

When a central bank raises its baseline interest rate, it’s using, if not a cudgel, at least a two-handed sword to address a problem. That’s appropriate, when the problem is broad. But if the problem is narrow, a dagger would seem more appropriate (to continue the metaphor, or perhaps a scalpel, to soften the imagery a little).

Today’s inflationary problem seems narrow, for all its broad effect. It’s energy that’s causing the overall inflation. If raising interest rates is the way to combat inflation, what if a central bank were to raise interest rates only on basic energy production—oil, natural gas, and coal at their input stage, and solar and wind facilities at their component manufacture stage—while leaving its otherwise baseline interest rate unchanged for the rest of the economy?

Clearly that would take some restructuring of its baseline interest control, separating out energy from the rest of an economy. That might demand legislative support. But there’s no reason a farmer should have to pay a higher interest to borrow to get his seed for next year, when it’s core energy that is impacting the cost of his money and not a shortage of seed or a flood of farmers into the market for that seed. It’s the same for folks borrowing to buy a house or car and for those building houses and factories. It’s underlying energy, not a shortage of labor or a spike in buyers, that’s inflating the cost of their money.

On the other hand, raising interest rates on basic energy production would reduce the amount of energy produced. That would lead to reductions in the supply of all the things to which energy is central in their production. The demand for energy is pretty inelastic in a modern economy—it’s going to be produced, within broad limits, regardless of price, and that price increase still is going to percolate through an economy.

So I wonder (still I wonder). It seems to me that targeting the inputs to energy production—crude oil, natural gas coming out of the well, coal leaving the mine, metals arriving at the solar panel or windmill factory while leaving rates on the rest of an economy alone would reduce inflation growth in the rest of the economy while limiting supply deficiencies more than does raising interest rates all across an economy.

The Cost of Ethanol-laced Gasoline

Posted on by
Reply

A number of corn State Senators, Chuck Grassley (R, IA), Joni Ernst (R, IA), Deb Fischer (R, NE), Pete Ricketts (R, NE) and Roger Marshall (R, KS), have written about the financial benefits of ethanol in our gasoline.

Expanding E15 availability lowers gas prices by 20 to 40 cents per gallon on average.

Compared to what, though? See below.

And

E15 is a net positive. We know E15 will lower prices at the pump….

Again, compared to what?

I won’t go into the production costs of cars whose fuel-related seals must be designed to handle the corrosive nature of ethanol, nor will I address the maintenance costs of cars burning ethanol-laced fuels, even with those corrosion-resistant (but only resistant) seals, nor why the percentage of ethanol in gasoline tops out at 15% before ethanol’s corrosive nature overwhelms even these toughened up seals.

I won’t mention, either, the increase in the cost of food, including meat, from the diversion of corn away from the grocery store or the production of animal feed toward the production of ethanol. I’m only going to mention the immediate fiscal costs to the consumer of ethanol-laced gasoline, taking corn-based ethanol, corn being the primary source today for ethanol production, as my illustration.

It costs $1.74 in 2001 currencyto produce a gallon of ethanol from corn, and it costs 95 cents to produce a gallon of gasoline.

A gallon of E15 gasoline consists of 85% gasoline, and 15% ethanol. According to my 3rd grade arithmetic, the costs embodied in that gallon are 85% of $0.95 plus 15% of $1.74, or a skosh under $0.81 plus a skosh over $0.26. That’s $1.07 per gallon of the hybrid fuel. Using my 3rd grade arithmetic again, that’s $0.12 per gallon more than for unadulterated, and much easier on the car, gasoline.

That’s not cheaper fuel for our cars; it’s much more expensive. Those Senators bragged that

Expanding E15 availability lowers gas prices by 20 to 40 cents per gallon on average. That could mean around $400 per year in savings for a US household—precious dollars that could be spent on other needs.

The irony in that isn’t lost on me, even if it seems lost on those Senators. Instead of those 30 cents per gallon (to take the middle of their range) in ethanol-laced gasoline, not having to spend that baseline of 12 cents extra per gallon at all, all year long, would save roughly $160 per US household—precious dollars that could be spent on other needs, like food, including meat, made cheaper by no longer diverting corn to making alcohol. (OK, a little mention.)

Tradeoffs

Posted on by
Reply

We, as a nation, have three questions that we must answer in order to proceed optimally into the future, according to Matthew Slaughter, of Dartmouth‘s Tuck School of Business, and David Wessel, of Brookings‘ Hutchins Center on Fiscal & Monetary Policy. They’re largely correct, but they miss one Critical Item without which our path into a prosperous and growing future would be severely constrained, if not blocked altogether.

In their question regarding “walls or bridges,” the two argue against walls—tariffs—and for trade globalization as the path to prosperity via competition and its heavily encouraged innovation rates that such free trade creates.

[R]esearch has long shown that globally engaged companies tend to create the good jobs at good wages for which so many Americans are yearning. In 2023, the US parent companies of US-based multinational companies paid their 29.9 million workers in America an average total compensation of $97,078—about 20% above the average in the rest of the private sector.

They didn’t address, though, the downside of their largely unfettered free trade regime. That downside was amply illustrated by the recent Wuhan Virus situation, during which our dependence on the People’s Republic of China’s medicines—and not just for Virus medical supplies, but also for over the counter pain killers and anti-inflammatories, even a variety of flu medicines—was exposed, along with the world’s dependence on the PRC even for simple things like face masks.

The downside was graphically demonstrated much more recently by the PRC’s control over rare earths, from ore through processed rare earths to finished products, and its use of that control to throttle their export and thereby threaten our economy and that of Japan’s.

The Critical Item is this tradeoff. Carry out free trade globalization; it is valuable, but do it within this framework. There are a few items that are critical to our national security and to our economy (there is a lot of overlap between them): those rare earths, the raw materials for medicines. For these, we need to have our own supply paths, wholly contained within our borders, that stretch from dirt in the ground through final product deliverable to the domestic end user. These nationally-contained supply lines need not be the only sources for these materials; it’d be sufficient for them to be in place, actively used, and able to be rapidly expanded during periods when overseas sources become constrained.

That tradeoff will be expensive, but that cost is simply—and necessarily—a cost of maintaining our national security, our ability to defend ourselves, whether militarily or economically. The cost of being unable to will be far greater, and not only fiscally.

Yet Another Reason

Posted on by
Reply

The European Union is moving toward passing legislation that would allow it to curb imports of heavily subsidized foreign products. The legislation doesn’t single out any particular nation; although, the Peoples’s Republic of China is infamous for such subsidies.

Those subsidies allow PRC businesses to sell their products at less than their cost of production in order to sell at lower prices than European businesses can due to their own, unsubsidized, costs of production. That allows the PRC to put those businesses out of business and to seize nearly all of the market share. In the aggregate, this cascades into steadily increasing PRC influence over European economies.

Naturally, the PRC wants to continue this domination, so it’s threatening countermeasures if Europe continues with the impudence of defending itself.

Chinese authorities could initiate anti-discrimination and supply-chain security investigations into the EU’s “overcapacity instrument,” a social media account run by China’s state broadcaster said Friday, citing unnamed sources.
If the EU advances the tool, China will take immediate action and deploy comprehensive countermeasures, it added.

Of course, that retaliation wouldn’t matter if Europe’s nations were doing no business with the PRC or with businesses domiciled there.

The PRC keeps providing reasons for discontinuing business with or within it. It’s time for the EU and for Europe’s nations individually to act on at least some of those reasons, for their own economic survival.