Economic Improvement?

Our GDP grew at 3.5% last quarter compared to the prior year’s 3rd quarter, against economists’ expectations of a 3.0% growth rate. That’s good, right?

Why did it grow?

Part of the growth came from trade: imports fell sharply. Net trade is a definitional component of our GDP, and net trade consists of Exports less Imports. A reduction in imports, then, by definition elevates GDP.

This particular reduction, though, reflects a reduction in buying goods and services from overseas, which is entirely consistent with another trend: Americans aren’t buying stuff at any high rate, still.

In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.

[Note that the larger subject of the cite’s linked-to Elizabeth MacDonald article concerns our economy’s bailout impeded recovery.]

A larger part of the fall-off in imports, though, is the drop in oil imports. This also reflects a couple of factors: oil imports (imports generally) are measured in dollar prices, and the price of oil is down quite a bit from increased supply. The reason oil imports are down is due partly because we’re bringing smaller volumes of the stuff, but also because we’re spending less on what we do bring in. These two factors—reduced buying generally and the reduced price of oil—greatly reduce the impact of reduced imports generally on our economy. Imports are down because personal consumption is down and because it costs less to buy what we do import. These aren’t reflective of a sound economy.

The other side of that increased supply, though, is increased domestic production of oil (and of natural gas). Lower prices that result from that, both globally and domestically, are good for our economy, but the impact on the global price of oil—those import costs—really has little to do with hard goods being imported, or not.

There’s another factor in that apparently sound quarterly GDP growth rate: government spending in the form of defense spending. Government spending is another definitional component of our GDP, so whenever government spending increases, so does our GDP, regardless of any impact on our actual economy—the private sector, where Americans live and operate. I won’t go into how government spending crowds out private spending; that’s well covered in earlier articles of mine and in articles written by far sharper individuals than me.

It’s the particular government spending, defense spending, that’s of interest in this latest GDP growth number. Defense spending grew at its fastest rate in five years. There are sound reasons for that growth, but defense spending is highly volatile, as heavily influenced as it is by, not just big ticket items, but by huge ticket items, also. These huge ticket items include Navy and Air Force spending for (enormously expensive) ships and aircraft. Next quarter’s spending, next year’s spending, could easily be wildly different from the just concluded quarter’s.

Other factors in last quarter’s GDP growth rate are less encouraging—and they reflect conditions in our actual economy.

Growth in business investment—R&D, capital improvement, plant construction, and so on—slowed and fell well short of expectations. Business investment is a reflection of business owners’ expectation of future economic conditions; they’re unwilling to spend money today if the demand for their goods won’t be there tomorrow. Lack of such investment also means an anticipation of business income being unavailable for pay raises for existing jobs or for hiring for new jobs.

Also, consumer spending decelerated to a 1.8% rate. That’s us not spending (and not buying foreign goods).

That GDP number turns out not to be all it’s been cracked up to be.

European Taxes

…and, by extension, the goal of this administration’s Europe-wannabe tax schema.

Matthew Karnitschnig and Robin van Daalen, in The Wall Street Journal, interviewed the newly retired Marius Kohl, who was for 22 years the Attendant—head—of Luxembourg’s Sociétés 6, or Companies 6, the Luxembourg government agency that, among other things, determines the annual tax owed by each of roughly 50,000 Luxembourg-registered holding companies.

It’s a wide-ranging interview and well worth the read, but I want to focus on one small bit of it.

One outcome of Kohl’s stewardship is that Luxembourg became a corporate tax haven: companies registered there generally paid little in the way of taxes. This especially stands out against the EU average headline corporate rate above 21%, rates running as high as France’s 33%, and Luxembourg’s own 29%.

Naturally, the EU is dismayed with this, and with Kohl’s departure, it’s pushing Luxembourg to “fix that.” Luxembourg is being unfair, say the EU’s functionaries, and it should raise its corporate tax to be more in line with the rest of the EU.

Notice that. The EU declines to compete with Luxembourg (or with Ireland, whose official rate of 12.5% is being raised with the Irish government surrender to EU pressure) for business and associated employment. Instead, Luxembourg must make itself less competitive, must lower itself to the EU’s plain.

Because, it really isn’t people’s money, its government money that government kindly lets people use some of. Because, people are just piggy banks for the men of government, we’re not really in this for our own benefit.

This is where the US is headed, for all that President Barack Obama is talking about lowering our own corporate rate from 35% to 28%.   Obama, after all, is holding out for more taxes raised elsewhere in return.

Jobs Numbers

The headline numbers are in, and they seem favorable enough: unemployment has dropped to 5.9%, and 248,000 new jobs were created in September.

However.

Counting the 142,000 new jobs created in August, new jobs were created at a monthly average of 195,000 jobs per month over the total interval. Using, instead, Labor’s revised August number of 180,000 new jobs (I’d be curious to learn how President Barack Obama’s Labor Department could make such a large estimation error—a 20% error), that still works out to a pretty anemic 214,000 new jobs per month over the period.

The labor force participation rate, at 62.7%, remains at historic lows. If this rate were at 2007’s level of 66.2% (a rough average for the year), the unemployment would be nearly 11%.

Even taking the 5.9% unemployment rate as legitimate, we’re still years behind schedule—not just behind the rate extant at this point in a normal recovery, but behind Obama’s promised unemployment rate which he used to sell his Stimulus package, as this graph illustrates.ObamaPromisedEmploymentRate

In particular, we’re still not at the 5% Obama promised we’d reach by last year. Oh, and that peak unemployment of 8% worked out to over 10%, which was worse than the No-Stimulus situation which he projected.

Additionally, median income remains down sharply from pre-Panic levels—7.9% sharply.

Additionally, new jobs created since the Panic officially ended in 2009 has only just, this past summer, matched the number of jobs extant in 2007, some three or more years later than prior recoveries. And that…milestone…ignores the fact that there are, today, 16 million more Americans in the civilian noninstitutional population (able-bodied Americans, capable of working) than there were just prior to the Panic.

What’s different between this recovery and the recoveries from prior recessions? Only Obama’s policies, actively aided and abetted by his pet, Senate Majority Leader Harry Reid (D, NV) and the latter’s Senate cohorts. All the prior recoveries proceeded much faster, and those paces occurred under both Republican and Democrat administrations.

Some Thoughts on Immigration

Started 24 years ago, the EB-5 program allots 10,000 visas annually to foreigners who invest at least $500,000 in US development projects, from dairy farms and ski resorts to hotels and bridges. In return, the investor and family members become eligible for green cards, or permanent residency, typically within two years.

There are similar quotas, if not monetary requirements, on the other visas we issue.

But why? Immigrants are good for the United States: they bring with them ideas, problem solving techniques, entrepreneurship, a demonstrated view of the importance of family, and so on.

Beyond that, they are spring-loaded to take to heart the modern Conservative/18th Century Liberal view of their personal responsibility and liberty, and the proper role of limited government in their lives (in too many cases, they’re coming here explicitly to escape an intrusive, controlling government)—they already possess much of that view.

Why are modern Conservatives afraid? In any contest of ideas, the Conservative message will resonate with the majority. Immigrants are not at all “natural Democrats.” Far from it: they’re natural Conservatives.

Democrats and Inversions

Inversions in this context, to oversimplify, are when American companies buy foreign companies and then relocate their headquarters to that foreign country in order to take advantage of that country’s lower tax rates. That this is part of an American company’s management fiduciary duty to the owners to minimize costs and maximize profits is unimportant to the denizens of the present administration and to too many “Republicans” as well.

President Barack Obama’s Treasury Secretary, Jack Lew, had some thoughts about the evils of inversions.

These transactions erode the US tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans[.]

Of course, Lew and Obama carefully ignore the fact that half of us Americans already pay little or no taxes, “unfairly placing a larger burden on all other taxpayers.”

They also ignore the fact that it isn’t their money in the first place; the money belongs to the companies’ owners.

They also ignore the fact that our “tax base” already is excessively progressive and that it has the highest business rates in the world.

Lew went on:

These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether.

A better way to reduce the economic benefits of inversions would be to do the patriotic thing: lower, drastically, the tax rates on American businesses. Taxes, after all, are at the foundation of our Revolutionary War—not only the stereotypical taxation without representation, but also the point of that demand of representation: so we could keep tax rates from getting out of hand.

If our business tax rates were lowered sufficiently—Ireland, for instance, taxes businesses at 12.5%, compared to our 35% rate—a couple of things would occur. The first would be a cessation of inversions, and if our business taxes were lowered significantly below 12.5% (I’ve been advocating all along for an elimination of taxes on our businesses), foreign businesses would be attracted to the US, bringing with them the jobs they have.

The other thing that would occur involves the $2 trillion that American companies with foreign branches, affiliates, and so on are holding overseas in order to avoid our usurious tax rates. With those tax rates vastly reduced, that money would come home. $2 trillion is a lot of jobs and capital investment (which is more jobs in the nearby future) waiting to happen.

But tax rate reductions are anathema, if not inconceivable, to Democrats.  And to too many “Republicans.”