Tag Archives: political economy

Economic Improvement?

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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

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…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.

Trust

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I’m going to poke my nose into European affairs, again.

The backdrop is the French budget crisis. The backdrop to that is this. In one of the EU’s responses to their part in the global economic crisis of 2008-2009, the EU passed the Stability and Growth Pact, which authorized the European Commission, the executive body of the European Union (though the Commission has its own president, the body acts like a President-by-Committee) to require EU member nations to submit their national budgets to Commission approval. If the Commission disapproved the budget and the nation in question refused to make Commission-directed corrections, the Commission could levy very serious fines on that nation.

Among the rules of the Pact is that a national deficit cannot exceed 3% of its GDP: cuts to spending and/or increases in taxes could be required by the Commission to bring the nation’s deficit in line. Various smaller nations in the EU already have been subject to budget disapproval and Commission-required corrections or fines. Belgium, for instance, faced a fine of some €800 million in 2011 ($1,131 million dollars in 2011) until it made corrections. Greece and Italy also have been hit with Commission budget mandated corrections, and they have complied.

Enter France. French Prime Minister Manuel Valls has indicated flatly that France will not play by the EU rules to which it is signatory.

I will not permit people to discuss France in this context. France is a big country. We won’t [comply with Commission budget reform requirements].

The French Finance Minister has echoed his boss.

[W]e won’t cut more anywhere, and we also won’t raise taxes.

The Germans, though, despite being economically powerful enough—because it’s still economically sound—to get France to comply, is apparently too timid to do so. Chancellor Angela Merkel has dragged out an old chestnut of hers: “contractual agreements.” These are

written agreements between the European Commission and a Eurozone country that commit that member state to undertake specific savings measures or clearly delineated structural reforms. Under the original plan, the country could then obtain financial aid from a special fund in return. For France, the reward would be a further suspension of the deficit rules.

However. With France saying it’s going to welsh on one contract that it’s signed—that Stability and Growth Pact—how could it be trusted to honor another contract it might sign, a “contractual agreement?”

Manfred Weber, who leads the European People’s Party (think of them as all of Europe’s various Christian Democrats) in European Parliament emphasized the problem.

Europe is at a crossroads. The European Commission’s credibility is at stake with its review of the French and also the Italian budgets. France’s budget has to be rejected. President Hollande needs to make improvements.

There are two questions here. Is the EU’s word worth anything? Can they be trusted to carry out their own mandates? That question won’t be answered until the end of the month, when the Commission will attempt to give its final answer regarding the French budget.

The other question is whether the French word has any value, whether it’s possible to rely on any contract France or a French entity might sign. That question seems clearly answered.

Federal Subsidies and Block Grants

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I’ve written elsewhere about converting Medicaid subsidy transfers to the states to block grants on a declining schedule that eliminates the Medicaid subsidy altogether over a 10 year period.

In an era of excessive Federal government spending, ongoing Federal budget deficits as the normal state of affairs, and the resulting burgeoning Federal debt, it’s time to look at converting all Federal transfers to the states on a declining schedule that eliminates the subsidies altogether over a 10 year period.

It’s time to restore the Federalism to the Federalism concept of our Constitution.

In 2013, the Federal government transferred to the 50 states and an untold number of local governments, just in the form of grants-in-aid, some $450 billion. In 1953, 60 years prior, that number was $0. Between 2008 and 2010, the number rose especially sharply, from $371 (!) billion to a peak of $505 billion.

Total Federal transfer payments were $2.3 trillion in 2013, up from not much more than zero in 1953. Some of that largest recipients of these transfers in 2010 (to mix years of data) were California, getting $63 million; Illinois, getting $19 million; New York, getting $50 million; and Texas, getting $41 million.

This needs to stop.

Federal payments to the states are every bit as addictive for those states as heroin is for a junky; the states will need time to adjust their budgets. Accordingly, I propose taking the 2014 transfer payments to each state as the baseline for that state and beginning in 2015, converting each state’s aggregated collection of transfer payments into a single block grant, with no strings attached—the states need to start learning responsibility and prioritization; the grant should be for the state’s use as it sees fit.

In each year after 2015, the block grant paid to each state should be reduced by 10% of the baseline value so that by the end of 10 years, the transfer payments will be reduced to zero. After that, each state would be required to meet its spending “needs” from its own resources, getting aid from the Federal government—which is to say, for instance, California getting tax money paid by New York citizens, among others—only in an emergency declared and agreed between the state governor and the President.

There would be two outcomes of interest here. The first is that the states would regain their responsibility for their own future, instead of their internal imperatives being dictated by the Federal government through the plethora of strings attached to each of the existing transfers and grants.

The second is that, by eliminating the enormous Federal expenditure, a major step would be taken toward getting Federal spending under control, eliminating the budget deficits that are too routine, and being paying down our outlandish national debt.

A Tidbit

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…of a concept that’s lost on one of the main groups of central planners of the world, those of Russia.

This one comes from an article in Pravda, which plays a role for the Russian government similar to that of The New York Times for the Democratic Party’s administrations. Interestingly, in addition to being missed by the Pravda author, it’s also missed by Tom Friedman, who cited the article in his NYT article.

The context is an alleged oil war being waged by the US and Saudi Arabia against Russia and Iran, an attempt, supposedly, to destroy those two nation’s economies. (I say “alleged” and “supposedly” because of course President Barack Obama wouldn’t do such a thing. Both he prefers engagement with our enemies over contesting with them, and an oil war would be inconsistent with Obama’s promise to Vladimir of greater flexibility in this post-2012 election period. Besides, the Pravda author denies the existence of a war, so that settles it.)

The tidbit from Pravda:

The planned economy of the Soviet Union was not able to cope with falling export revenues [from collapsing oil prices]….

The planned economy was not able to cope.

Planned economies just aren’t flexible enough. More, by introducing like a dam into a river a small body of men into the information stream that is the core of a free market economy, planned economies can’t react with the speed that a freely flowing river of information produces for an unfettered market economy.

This is a fact well known to capitalist economists and empirically demonstrated all over the world, repeatedly, if most dramatically by that Soviet Union collapse.

Unfortunately, this tidbit also is lost on our own central planners, and so we get Obamacare and Dodd-Frank; an explosion of economy-governing rules from EPA, the CFPB, et al; and a burgeoning production of Executive Orders from our Democratic Party President.