Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
When European Union commissioner Juncker meets with Trump in the White House today, the $5 billion fine that he just leveled against Google (which Trump tweeted about last week) will be on the agenda. The EU claims jurisdiction over the entire world in that the fines are determined as a percentage of worldwide revenue. Furthermore these companies are being fined for benefiting the consumer and for causing economic growth.
The top 4 payers of fines under this statute were American companies:
"Make no mistake, this statute is being used to punish American companies for being big and American. It is designed to shackle American companies so that European producers can steal their market share."
To read the entire posting on the American Thinker website:
The Laws of Diminishing Returns and Increasing Cost Apply to Government Expenditures
Congress appears to be unwilling to eliminate any program which has been in existence for years if any citizen’s group supports it. Congress appears to be unwilling to eliminate instances of wasteful spending even when they are reported in the media and are well-known. Even worse is the overspending on ongoing programs because of Congress’s failure to control legitimate spending.
The most grievous policy mistake is to neglect two of the most important economic laws, the Law of Diminishing Returns, and its related Law of Increasing Cost. Over-spending on existing programs is probably the rule rather than the exception. The former says that given the fact that all factors are limited, e.g. capital and labor, increasing the employment of one factor relative to another to produce a particular product will result in less than proportional increase in output. Increasing costs means that, given the fact that total resources are in limited supply, to produce more of one product requires giving up more and more of another or other products.
The reasons we don’t see these effects is that the economy is too complex and too dynamic. There are so many sectors and industries, some of which are affected without calling our attention to them. And over time, there will be invention of new products, improved methods of production, technological change, innovations, and other changes. But we are better able to discern their effects as government grows and its subsidies increase. The need for subsidies is evidence of diminishing returns and of increasing costs. If we were able to calculate benefits and costs of new government expenditure programs, we would observe that most of them are due to the diminishing returns and increasing cost of existing programs.
These require increasing diversion of funds from the private sector. For example, increased defense spending is at the expense of increased costs of goods in the private sector. When government spends more money on global warming projects, it is at the expense of increased costs of other goods people buy. Since electricity produced by wind and solar power is more costly than electricity produced from fossil fuels, the increased cost effect reduces private purchasing power twice, as private sector costs increase and second by the law of diminishing returns as government expenditures on climate change increase.
Failure to pay attention to diminishing returns means that government expenditures on many if not most programs exceeds the amount that cost-benefit would justify and many expenditure programs should not have been initiated at all. Government would get increasing returns by reducing expenditures and the private sector would enjoy increasing returns and reduced costs as government expenditures are reduced.
Admittedly, this makes a case for reducing the size of government. There can be little doubt that federal government spending is excessive on a wide range of programs in nearly every department and agency. ...
Did Trump Cause the Improved GDP Growth -- Ray and I were published in the American Thinker this morning
Here's the link:
Did Trump Cause the Improved GDP Growth?
By Howard Richman and Raymond Richman
Real GDP rose by 3.0% during the second quarter of 2017, the fastest quarterly rate in over two years, according to data released on Wednesday by the Commerce Department. Did President Trump cause the accelerating economic growth?
The answer is yes. The rapid growth was led by a surge in business fixed investment (purchases by businesses of new tools and structures). If not for that surge, Real GDP would have only grown by 2.2%. The following table shows the contributions of the different types of spending upon economic growth during the second quarter:
What Income Tax Reforms Are Needed?
Suggested Reforms of the Personal Income Tax
After passage of the 16th Amendment in 1913 authorizing enactment of income taxes, Congress enacted the personal income tax. Income had always been considered a good measure of ability to pay. The income tax was conceived as not merely a revenue source but could be used for social engineering. The first bit of social engineering was the taxation of income at progressive rates as a way of reducing income inequality. Another reason given was that very high annual personal incomes are basically undeserved resulting from what economists term economic rents.
But how progressive should the income tax be? That was a question not easy to answer. During WWI, the top marginal rate reached 92%. But that rate could not continue because of its anticipated adverse effect on investment. Reason suggested a better rule based on benefit and cost, namely, that in normal times, the top tax rate should not be higher than the rate that at which the negative effects on the economy equaled the perceived benefits of reduced inequality. No one knows how to determine that rate.
Reform proposals include a reduction of the number of tax brackets from currently seven to three. This does not simplify the calculation of the tax at all. Regardless of the number of brackets, once taxable income is calculated the calculation of the tax liability is simple involving at the most calculation of the sum of two numbers. Reducing the number of brackets interferes with the progressivity of the tax. Over wide ranges of income the tax rate becomes constant with those at lower levels of the income brackets paying the same rate as those at the highest level of the range.
In any case, progressive taxation has been in existence since the first days of income taxation. Congress, soon after the 16th Amendment was adopted in 1913, learned that they could conceal in the income tax code and regulations all kinds of subsidies that benefitted selected constituents. That made it unnecessary to show in the budget how much those benefits, called tax expenditures by economists, cost taxpayers. What followed is that Congress passed bill after bill adding thousands of pages to the personal income tax law which encompassed about 500 pages in 1930 and now covers 2652 pages. Some estimate that the internal revenue code and its regulations cover 74,000 pages!
As the Tax Foundation points out, Over the decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to buy electric and hybrid vehicles, turn corn into gasoline, purchase health insurance, buy a home, replace that home's windows, adopt children, put them in daycare, purchase school supplies, go to college, invest in historic buildings, spend more on research, and the list goes on....
Pres. Trump Makes His Worst Deal Ever, the Pivot Toward China and Away From Russia
Chinese President Xi Jinping taught Pres. Donald Trump a lesson in how to make a deal last week. The deal will do little to reduce the huge trade surplus China enjoys with the USA. China promises what amounts to a trifling increase in imports of coal from the USA at the expense of N. Korea. Germany and Japan the second and third of our trade partners having a huge trade surplus with the USA, can get the same “deal” by promising to export fewer cars to the USA. They can make them in U.S. plants with the dollars they acquired by decades of huge chronic trade surpluses. Japan has already engaged once in this ploy. S. Korea, another trade surplus country can make the same deal. The deal will not reduce our enormous trade deficits. China succeeded in getting Trump to tone down the anti-China rhetoric of his election campaign. What did the USA get in return?
China promises to curb North Korea's nuclear program. The deal ensures China that it will be able to maintain a huge trade surplus with the USA. The deal will make Trump’s promise to Make America Great Again impossible because eliminating our trade deficits is essential to restoring economic growth and manufacturing employment. And During the campaign, Donald Trump promised to reduce our foreign involvements.
And there are other important considerations. Non-Communist Russia has always been a U.S. ally. Even as a Communist nation, she was our ally in World War II. Now we choose to ensure that the only country challenging U.S. economic power, Communist China, is enabled to continue its growth at the expense of the American worker, except for a few coal-miners! China’s economy became second in the world as a result of our misguided trade policies and multi-nationals, like Goldman Sachs, Apple, Hewlett-Packard, Caterpillar, and others, sharing their capitalist technologies with it. U.S. universities trained the creators of the atomic bombs in China and Russia. Russia as an ally did more to win World War II than any other country. So why are we turning on Russia and pivoting toward China, a huge mistake that guarantees the decline of American power and weakens us against former enemies Germany and Japan. ...
Against the High Tech Luddites
Several of the United States' high technology billionaires have apparently recently fallen prey to the foolish arguments of neo-luddites. For instance, Bill Gates has recently proposed a tax on robotic automation. Economists have rightly rejected these claims. Indeed, if we want to have rising incomes the best thing is for robots to take more jobs. That's how we become more productive. And ultimately how living standards can rise. It is this kind of ingenuity which has kept Malthus' grim prognostications at bay in much of the world for the last two centuries.
At the present moment, indeed, the US is facing a crisis of low productivity growth. The robots are not being invested in rapidly enough. The graph below shows the BLS estimate of non-farm productivity growth over time. The last several years have been ones of low productivity growth. The five year average rate of productivity increase is among the lowest in the time series....
Socialism Causes Slow Growth and Is Prone to Violence
During the recent presidential election, candidates for the Democratic Party nomination included a self-styled “democratic socialist”, Sen. Bernie Sanders. The adjective democratic is used by him to distinguish himself from totalitarian socialists like Adolf Hitler and Joseph Stalin, both noted for the number of their citizens they killed. Violence was a trademark of the Nazis, the National Socialist party of Germany, but our mixed-economy, defined as partially socialist, is not without violence from socialists. Sanders’ followers used violence to prevent a Trump rally in Chicago during the recent Republican primary for President and they organized protests at most of his rallies. Even post-election the violence continues. The violence at our Universities aimed to prevent conservatives from speaking is a manifestation of socialist intolerance for anti-socialist ideas.
Socialists seem unable to accept the reality of Trump’s election and anti-Trump protests continue. The reader may argue that many protestors are Democrats who do not consider themselves to be socialists. But to be a Democrat you have to believe in government intervention in the economy, in the mixed economy, an economy with increasing socialist tendencies.
Socialist are utopian and a world free of competition has always been attractive to young people. I believed in a cooperative commonwealth as a young man. But when I observed the co-op movement in England that created the first supermarket but failed to expand and that co-ops in the U.S. refused to branch out, I realized that co-ops and socialist governments lacked the incentives necessary to grow and develop, lacked the dynamism of a free market economy....
The Corporate IncomeTax Is the Worst Tax Ever Invented
The corporate income tax is the worst tax ever invented. Economists who have studied and written about its incidence, that is who actually pays the tax, agree that it varies from industry to industry. Monopolists pass the tax on to consumers so that although they appear to be paying the tax they do not bear the burden of the tax. It even varies among monopolists depending upon how much competition they have from competing products. It even varies among firms in highly competitive industries like supermarkets. Some have some monopoly power depending on their location and the number of supermarkets in their vicinity. The corporate income tax violates every principle of taxation. Not only does much of it fall on consumers, but the tax penalizes workers who depend on pensions and IRAs, etc. for their retirement. The income from the wages invested in their retirement schemes is taxed at the maximum rate of corporate tax, currently 35% so their pensions and retirement income is much less than it would be if the tax were 15 or 20% as would be if it is were taxed under the personal income tax. The rich shareholders pay no personal income tax on their corporate income except dividends, and they escape the highest rates by buying back shares rather than pay dividends, a practice that is increasing.
So why don’t we tax corporation as partnerships are taxed. Partners pay personal income taxes on their shares of the partnership’s income. The reason given historically is that corporations have the privilege of limited liability for their shareholders. If the corporation fails, shareholders have no additional liability to what they have already invested in the corporation. But even this argument no longer holds. In most States, perhaps all, partnerships and proprietor ships may elect to be treated as limited liability companies. Increasingly one see the letters LL.C. indicating that only the assets of the company are liable for its debts.
So what is the excuse for a separate corporate income tax with all its inequities and bad economic practices that the corporate income tax encourages. No excuse at all As for the abuses, we’ve written about them in articles on this blog in the past.
An essential companion reform is changing the rules for depreciation under the corporate and the personal income tax as well. ...
Trump's First Priority Should Be to Balance Trade
The real drag on the American economy since the 1970s has been the foreign trade deficits and the multilateral trade agreements which caused the loss of millions of American manufacturing jobs, the movement of thousands of American companies overseas, and converted the U.S. from the world’s leading creditor to the world’s leading debtor. Balancing U.S. trade with the rest of the world is the only economic policy capable of restoring the U.S. economy and making the U.S. really great again. All the other Trump initiatives will do some good but cannot arrest the decline of the American economy and the stagnation and reduction in the American standard of living. These facts are concealed by the booming stock market which is based on unrealistic expectations. Without balancing trade, the decline in American power and economic well-being will end in a political Armageddon. ...
It's Morning in America 2.0 -- Peter Navarro in SF Chronicle
Peter Navarro, Trump's chief economic advisor, had a commentary about Trump's election victory (It's Morning in America 2.0) in which he made the case that the Trump administration will lead to an economic resurgence. He states that the Trump program will create a stimulus to the economy in four ways:
Regarding Trump's trade policy he wrote:
Trump is Correct: GDP Growth Lowest since 1929-1939 - my blog entry in American Thinker this morning
Here's a selection:
During Sunday’s presidential debate, Republican candidate Donald J. Trump claimed that the U.S. GDP growth rate is the lowest since 1929....
The usually accurate Breitbart fact-checkers held that this claim was “hyperbole” and “mostly false.” However, the average growth rate in real GDP during the period from 1929-1939 was 1.3% per year. The average growth rate from 2005-2015 was 1.4% per year. Every decade in between has had higher growth than 1.4%, as shown in the graph below:
The Case for Free and Balanced Trade
In the 2016 presidential campaign, trade has become a major economic and voting issue. For decades both political parties have supported expansion of free trade through trade agreements. So have most academic economists. But a few have urged a policy of balanced trade with the rest of the world. Free trade and balanced trade are not necessary mutually exclusive.
When trade is balanced, all trading partners benefit. Countries can increase that benefit by reducing their barriers to imports, as long as trade remains balanced. Then they will exchange goods that are cheaper to produce in one country for goods that the other country can produce more cheaply. This is called the law of comparative advantage. Both countries benefit. David Ricardo pointed this out in the early 1800s.
But what happens when trade is not balanced? Is free trade still a good thing? Unfortunately, U.S. policy makers in Washington have thought so and so have most economists. They are wrong. The U.S. economy has been suffering annual trade deficits for decades that resulted in economic stagnation, slower than normal economic growth, and the loss of millions of manufacturing jobs. The Table below shows how the trade deficits for selected years during the period covered by the foregoing graph caused a reduction in Gross National Product and led to slow growth. The slow U.S. economic growth rate of the last 17 years is unprecedented. From 1999 through 2015, the average U.S. growth rate was just 2.1% per year, as compared with over 3% for almost every ten year period during the previous 5 decades.
The following table shows how negative net exports reduced Gross National Product during selected years from 1960 to 2015 ...
The Case Against Free Trade
There is a very good case for international trade between two countries. Both countries can increase their welfare by exchanging goods that are cheaper to produce for goods that the other country can produce more cheaply. Both countries benefit. Historically, economists called this the law of comparative advantage. But for a country to benefit from international trade, its trade must be in balance with the rest of the world unless the imbalance is temporary; for example when the imbalance permits the import of capital goods that will enable it to produce goods that will enable it to balance its trade in the future.
Few goods are directly exchanged for other goods. Goods are usually exchanged for money. In international trade, goods are paid for in any currency the seller with accept. Historically, this meant exchange of goods for gold or other precious metal. For many decades, most currencies were on the gold standard, meaning their currencies could be exchanged for gold. From 1880 to World War I, most countries were on the gold standard and it was a period marked by economic growth in most countries. A so-called gold-exchange standard succeeded it in which the U.S. was on the gold standard and other countries could convert their currencies into U.S. dollars or gold. But it broke down when the U.S. abandoned the gold standard in 1971. Since then, most imports have been paid for in U.S. dollars, internationally accepted as a reserve currency. The U.S. dollar continues to be the preferred currency for paying for imports. But the U.S. dollar today has competition. Many international transactions are settled in other currencies, the Euro, or the currency of one of parties, the Chinese Yuan, for example, since China is a leading exporter and importer.
Most of the problems of international trade are related to the fact that a number of big countries have trade surpluses year-after-year, becoming international creditor nations. This has been described as a beggar-one’s-neighbor policy because it grows its own economy at the expense of lack of growth or slow growth in the economies of its trading partners. The U.S. has incurred annual trade deficits which became huge after conclusion of the GATT agreements and the creation of the World Trade Organization in 1995. The stagnation of the U.S. economy during the past two decades and the loss of millions of American manufacturing jobs can be attributed to the trade deficits. Today, China, Germany, and Japan are the leading creditor nations. And South Korea is becoming one.
Of course, countries do not need to balance their trade with every country but with the rest of the world. But this is not and has not been the U.S. recent experience. For two decades the U.S. has experienced rising trade deficits with the rest of the world. In 1980 the trade deficit was $13 billion or about 0.45 percent of GDP, less than one-half of one percent. As a result of the successive GATT trade agreements, the trade deficits grew enormously reaching $376 billion in the year 2000, diminishing GDP by 3.66 percent and contributing to the 2000-01 recession. The U.S. trade deficit grew to a record level reaching $723 billion in 2008 diminishing GDP by a record 4.91 percent and helping to precipitate the Great Recession of 2008-09. As a result of the Great Recession, international trade decreased and the trade deficit fell, recovering to $530 billion in 2015, reducing GDP in that year by 2.95 percent. ...
Trump Gets It Right: Trade Was a Loser For All Except the Most Wealthy Americans
Robert B. Zoellick, wrote an opinion piece entitled “Trump Gets It Wrong: Trade Is a Winner for Americans” (WSJ, 8/8/2016). Mr.Zoellick is a lawyer with a J.D. degree from Harvard. From 2001to 2005, he was the United States Trade Representative under President GW Bush. Prior to that, from 1993 through 1997, he served under Pres. Bill Clinton as an Executive Vice President at Fannie Mae for two years. He served as the lead State Department official in the negotiations of the North American Free Trade Agreement and the Uruguay Round which created the World Trade Organization. He helped launch the Asia Pacific Economic Cooperation group. From 1985 to 1988, under Pres. Reagan, he served in the Department of the Treasury in various positions, including Counselor to the Secretary, Executive Secretary and Deputy Assistant Secretary for Financial Institutions Policy. He served as the Chairman of International Advisors at The Goldman Sachs Group, Inc., from June 2006 to 2007 He actively supported Romney in 2012. He was rewarded by Pres. G. W. Bush with a five year stint as the head of the World Bank at about $800,000 per year. He is clearly a guy who knows how to ingratiate himself with politicians of both parties.
He writes that “55% of registered voters think free trade is good for America because it opens up markets for U.S. goods”. Citing other polls, the writes that “Republicans would be prudent not to assume voters will join Mr. Trump’s retreat on trade.” Unfortunately, he may be right on that; we shall see. He declares that American manufacturers have benefitted from the free trade deals through lower costs and so have American consumers through lower prices, averaging savings according to one study of about $10,000 per household. U.S. multinationals make about “57 % of U.S. capital investment, and are the source of 83% of private R&D.” “Americans are not losers. But some Americans lose out because economic forces and misfortunes can overwhelm them. Whoever becomes the next President should help people adjust to change, not pretend that change can be prevented.” ...
Time for Balanced Trade Not Free Trade
Most economists oppose protective tariffs by the U.S. but few of them criticize the mercantilist practices of others who impose artificial import duties and other barriers to trade. Few economists oppose the imposition of protective tariffs by developing nations, designed to promote “infant” industries -- and they all proclaim that is what they are doing. Most economists favor expanding international trade in order to gain the efficiencies of specialization among nations. The basic economic criterion to determine what to specialize in is the economic theory of comparative advantage. A country should specialize in the things its resources enable it to produce relatively more efficiently.
While that still holds true for industries based on the accessibility of natural resources, traditional theory was given a death blow recently by the publication of a seminal book by Ralph Gomory and William Baumol, Global Trade and Conflicting National Interests (MIT Press, 2001). In their book they point out that trade today is dominated by manufactured goods, very different from the largely agricultural trade which was the basis for traditional economic theory of comparative advantage. Any country, they showed, could invest in the production of a manufactured good and gain economies of scale that would enable it to produce the good at a lower cost than rivals. No one visualized that leading American corporations would move their factories overseas secure in the knowledge that free trade meant that they could export those goods to the U.S. free of duty....
Why US Multinationals Oppose Trump and Favor Clinton
Apple’s CEO, Tim Cook, announced that Apple would not contribute to the costs of the Republican convention in Cleveland this year as it has done in past conventions. Apple is a corporation incorporated in the.US but almost all of its products are produced in China. It is a Chinese company much more than it is an American company. And so are many other “U.S.” multinationals, including a number of high-tech companies like Hewlett-Packard. Hundreds of major American corporations have shipped millions of jobs overseas, according to an analysis of Trade Adjustment Assistance (TAA) filings made to the U.S. Department of Labor's Employment and Training Administration on behalf of the displaced workers. According to a report on CNN, over 900 US corporations are producing products abroad, a "who’s who" of American manufacturing firms.
Given that the presumptive Republican candidate for President, Donald Trump has announced his intention to balance trade with China and re-negotiate all USA trade treaties to assure that trade becomes more balanced, Trump has incurred the opposition of companies that produce all or some of their products abroad and their spokesman, the US Chamber of Commerce. The latter in its propaganda lauds the advantages of U.S. exports and does not mention the disadvantages of U.S. imports which exceed the former by several hundred of billions per year causing the loss of millions of American manufacturing jobs. US multinationals account for a substantial share of manufactured goods exports to the US, so it is not at all surprising that these companies should prefer a tweedledee candidate to Hillary’s tweedledum candidacy, lest a tariff be imposed on their exports to the U.S..
U.S. policies contributed to the growth of China as the number two manufacturing power. Pres. Richard Nixon normalized relations with China in 1972. On 24 January 1980 Congress passed a trade agreement conferring Most Favored Nation (MFN) status on China. Despite this move, China’s MFN trade status (which was not granted permanently) created new legal and political impediments to Sino-American trade relations which were not removed until 2001, when China joined the WTO, whose rules prohibit members from imposing trade restrictions on other members except when they are experiencing chronic trade deficits.
Growth in the U.S. goods trade deficit with China between 2001 and 2013 eliminated or displaced 3.2 million U.S. jobs, according to a study by EPI Director of Trade and Manufacturing Policy Research Robert E. Scott. Trade with China has caused job loss in all 50 states and the District of Columbia, including all but one congressional district. About two-thirds of jobs lost, or 2.4 million, were in manufacturing. The U.S. Bureau of the Census reported that American companies abroad and US subsidiaries of foreign corporations trade accounted for about 50.9 percent ($1,178.7 billion) of total consumption imports ($2,314.0 billion) in 2014. Republican and Democratic presidents Pres. Bill Clinton and George Bush did not concern themselves with the trade deficits’ disastrous consequences for American manufacturing workers and the US. Economy tanked as a result, no doubt contributing to the popularity of Trump’s candidacy....
Inequalities of Wealth and Income Are Poorly Measured and Grossly Overstated
One hears a lot about the inequalities of wealth and income and how immoral and obscene they are. But wealth and income are rewards for what individuals contribute to the economy. The contributions of individuals to the society are grossly unequal. So the rewards should be expected to be unequal. But although they are unequal, they are not nearly as unequal as people believe. In the first place, the inequality of wealth is measured improperly by excluding many forms of wealth such as the value of accumulated social security, annuities, insurance, and pensions. These are largely owned by the middle and working classes. So those who measure wealth inequality are overstating the proportion of wealth owned by the most wealthy. Second, inequality of wealth varies substantially with business fluctuations and interest rates. Inequality of wealth is as great currently as it has ever been but that’s the fault of the Federal Reserve Policy of low interest rates as we shall show below. Third, government taxes wealth at death in the form of estate, gift, and inheritance taxes and this induces the wealthy, in the U.S. at least, to give much of their wealth away, to universities, hospitals, non-profits, and charities during their lifetimes. As for income inequality, it is usually measured before income tax. After tax income is much more equal and a lot income is not counted at all, things like free school, librairies, food stamps, Medicaid, and much else. And those who talk about inequality of wealth and income seldom talk about the relative equality of consumption, or the fact that Americans enjoy the highest standard of living in the world.
Consumption is what individuals take out of the economy. While the rich consume more that the poor and lower middle class, measures of inequality of consumption fail to include not only welfare benefits such as welfare payments, Medicaid, public housing, and food stamps but social security payments, public parks, free schools, public libraries, and much else. Wealth and income are measures of the value that households contributed to the economy whereas consumption measures what households take out of the economy. Inequality of consumption is therefore the only inequality that should be of concern and in the U.S. inequality of consumption is not a problem. The problem that poor are rightly concerned about is their inability to find and hold a job. ...
Global Trade down 9% since 2014
Robert Romano, writing on Net Right Daily, Americans for Limited Government's website, reports that global trade is down about 9% since 2014. He begins:
Most economists think that global trade collapses during global economic recessions due to the fact that countries often raise their tariff rates during those recessions. But the causation is different. First trade becomes imbalanced. Then the trade deficit countries get into financial problems and can no longer buy as many imports from the trade surplus countries. Then trade collapses and world growth stagnates. Finally, trade deficit countries impose balancing-trade tariffs upon the products of the trade surplus countries which allows them to get out of the recession. So the economic recession itself causes both the decline in world trade and the rising tariffs.
We are not the first economists to understand that imbalanced trade leads to global economic slowdowns. We attributed that understanding to John Maynard Keynes in our journal article about our Scaled Tariff when we wrote:...
The Law of Diminishing Returns; How we Escaped Its Consequences
Most of us do not understand the economic Law of Diminishing Returns. Parson Malthus, who gave economics its reputation as the dismal science, postulated that given the fact that the earth’s surface is limited, as population grows the product that each additional worker adds to land’s output of productive land would eventually begin to diminish and that if growth of population were left unchecked, earnings in agriculture per person would diminish to below the level needed to sustain the population. What Malthus and all the classical economists, including Karl Marx, failed to realize was that land was not the only resource employing labor. Most of our labor is employed in producing non-agricultural products and services, combining labor not with land alone but will growing amounts of physical capital. Since the time when Malthus wrote, the end of the 18th century, the U.S. and Europe have experienced rising wage rates as capital per worker increased. But there is some evidence that we have begun to experience diminishing returns again, the result of forgetting that for wages to rise wage-increasing capital investment must grow relative to labor input.
Not many decades ago, after World War II, Japan began to experience rapid economic growth so rapid in fact that a colleague of mine at the University of Pittsburgh predicted it would catch up to the U.S., just as many have been predicting that China’s rapid growth would make it the number one economic power exceeding the U.S. But even economic growth is subject to the law of diminishing returns.ot surprising to economists familiar with the law of diminishing marginal productivity, China’s rate of growth slowed down just as Japan’s had before it. The returns to capital are high when there are lots of new investment opportunities. But new investment opportunities often grow slower that savings, the source of investment capital. Marx thought that savings would always rise faster than investment opportunities. Marx was the real economic pessimist. Marxism is the real dismal science.
Knowledgeable readers may have already guessed that the law of diminishing marginal productivity is merely an application of the economic Law of Supply and Demand. The supply of land being relatively fixed combining it with an ever-increasing supply of labor reduces the amount of product eventually that each additional unit of labor produces, hence the law of diminishing returns. But Malthus did not anticipate the extensive growth of non-agricultural industries over the next two centuries. The production of new products increases the demand for labor causing wages to rise. He never expected the incredible rise in productivity in the industrial and commercial sectors. ...
Trade Agreements Have Been an Economic Disaster for the USA
When the U.S. began negotiating the General Agreement on Tariffs and Trade (GATT) in 1947, it was the world’s leading creditor. By the time the ninth round of negotiations was concluded in 1994, it had become the world’s leading debtor nation, millions of well-paid manufacturing workers lost their jobs, and the U.S. suffered two recessions in less than ten years, in 2000-01 and 2008-09. No wonder the malaise that led to what is clearly a popular revolt in the 2016 primaries. If there is a single statistic that shows the cause of the malaise—and surely it has many causes all associated with government intervention in the economy!—it is the growth of our international trade deficit in the following table.
The table shows that U.S. Gross National Product, GDP, the total output of goods and services, which equals C+I+G+(X-M), ie., total private consumption expenditures, C, plus gross private domestic investment expenditures, I, plus government consumption and investment expenditures, G, plus exports minus imports (X-M). It shows the GDP for selected years 1960 to 2015. It shows that the U.S. had a trade surplus of $4 billion in 1960, which made a contribution to GDP of 0.74 percent, less than one percent but at least positive. As a result of GATT trade agreements from 1947 to 1994 and subsequent agreements with China, Korea, and Mexico, the U.S. experienced growing trade deficits which exploded after 1994.
In 1980 the trade deficit was $13 billion or about 0.45 percent of GDP, less than one-half of one percent. As a result of the successive GATT trade agreements, it grew enormously reaching $376 billion in the year 2000, diminishing GDP by 3.7 percent and contributing to the 2000-01 recession. The U.S. trade deficit grew to a record level reaching $723 billion in 2008 diminishing GDP by a record 4.9 percent and helping to precipitate the Great Recession of 2008-09. As a result of the Great Recession, the trade deficit fell, recovering to $530 billion in 2015, reducing GDP by about 3 percent. In other words, had our trade been in balance in 2015, our GDP would have been $18.5 trillion instead of $17.9 trillion. ...
A Summary of Modern Economic History
After Spain discovered the New World and started to ship lots of gold back from it, it became the most powerful country in the world. It could pay for new weapons with gold. It could pay for new ships with gold. It could outfit military expeditions with gold. So the other countries of Europe decided that they wanted to get Spain's gold and in the 16th and 17th centuries they invented mercantilism, the strategy of maximizing exports and minimizing imports in order to obtain Spanish gold....
Officially, the unemployment rate is 5.1 percent of the labor force, defined as those working or, if unemployed, actively seeking employment. Millions of Americans have given up looking for jobs, millions more are on welfare, and millions are working part-time involuntarily. The real unemployment rate is closer to 20% and the country’s malaise shows it. The BLS has just reported that the average wage actually fell in 2014. And the U.S. Bureau of the Census reported Wednesday that for the past three years the median household income stagnated following two years of declines. A dismal picture indeed.
The bankruptcy of both the Democratic and Republican Parties cannot be remedied by a single presidential candidate of either party, although the Trump candidacy for the Republican nomination offers a glimmer of Officially, the unemployment rate is 5.1 percent of the labor force, defined as those working or, if hope. The entrenched oligarchies that control both major parties are incapable of pursuing rational economic programs in the national interest as evidenced by the huge international trade deficits that converted the U.S. since 1970 from the world’s leading creditor nation to the world’s leading debtor nation. The same oligarchies seek the votes of every voting group in the country and thus are incapable of pursuing the national interest. Although the Republicans pretend to be against a big central government, when in power they failed to eliminate a single agency of government (except one—the Export-Import Bank, which they eliminated on ideological grounds. Not only did the Ex-Im Bank not cost the government a red cent but it was the only government agency that created export jobs!), supported every Democratic proposal to send government jobs overseas like the General Agreement on Tariffs and Trade, the World Trade Organization, and the TransPacific Trade Agreement, all of which caused or will cause U.S .international trade deficits and will continue to cause the movement of American factories overseas and the loss of millions of good-paying U.S. manufacturing jobs. It has nurtured the anti-global-warming movement which has caused the federal and state governments to waste hundreds of billions of dollars subsidizing crony capitalists with no, literally no, effect on climate change. Following is a program to change all that:
First, we should end our huge chronic trade deficits which have decimated our manufacturing sector and caused the loss of millions of good American manufacturing jobs....
Worldwide trade peaked in 2007
Up until 2007, global trade was expanding. The trade surplus countries were lending money to the trade deficit countries so that the trade deficit countries could buy their products. But imbalanced trade cannot grow forever. Eventually the trade deficit countries become bad credit risks, so the system falls apart. Most economists haven't yet figured this out even though we explained it in our 2008 book and again in our 2014 book. They think that all you need to do in order to enhance worldwide trade is to lower trade barriers. They don't understand the importance of balanced trade.
They are just starting to notice now that world trade has been in decline since 2007, but they can't explain why. In the September 14 Wall Street Journal, William Maudlin began (Worries Rise Over Global Trade Slump):...
"Free trade" Is Not supported By Economic Treory. Balanced Trade Is.
General Motors is planning to import cars from China, Ford is planning to import cars from Mexico. What’s the beef? Mercedes, Volkswagens, and BMWs are being imported from Germany, Toyota and Nissan are being imported from Japan, Hyundai, Samsung, and Kia are being imported from Korea, Fiat, Maserati, and Lamborghini from Italy, Renault and Citroen from France. Why shouldn’t GM and Ford import autos they make abroad?
The problem is not with importing foreign cars. It is the fact that we have huge trade deficits with China, Germany, and Japan, trade deficits with Korea and Mexico. China, Germany and Japan sell to us but do not buy enough from us, resulting in huge trade deficits for the U.S.. Apple produces its major products in China and has closed its factories in the U.S. So has Hewlett-Packard and dozens of other American companies. Nothing wrong with that so long as the countries in which they produce their products buy as much from us as we import from them. The five countries mentioned above do not.
The problem can be easily dealt with without violating the rules of international trade. ...
Fed Official Says Fed's Quantitative Easing Policy Failed to Achieve Any of Its Recovery Objectives
Jeff Cox of CNBCcom reports that the Federal Reserve is putting some of its post-crisis actions under a magnifying glass and not liking everything it sees. Stephen D. Williamson, vice president of the St. Louis Fed, finds fault with three key policy tenets. Cox writes:
”Specifically, he believes the zero interest rates in place since 2008 that were designed to spark good inflation actually have resulted in just the opposite. And he believes the "forward guidance" the Fed has used to communicate its intentions has instead been a muddle of broken vows that has served only to confuse investors. Finally, he asserts that quantitative easing, or the monthly debt purchases that swelled the central bank's balance sheet past the $4.5 trillion mark, have at best a tenuous link to actual economic improvements.”
“Williamson is quick to acknowledge that then-Chairman Ben Bernanke's Fed, through liquidity programs like the Term Auction Facility that injected cash into banks, "helped to assure that the Fed's Great Depression errors were not repeated."
"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation," Williamson wrote.
We all know that wages have not benefitted at all under the Fed’s policies and that the economy’s growth has been less that 2% per year and the growth in GNP for the 2nd quarter of 2015 is projected to be 1½ percent of less. We appear to be on the verge of another recession. ...
Globalization Has Been a Disaster for U.S. Manufacturing and U.S. Workers
It is time to end the globalization foolishness begun by Pres. Woodrow Wilson and executed by Pres. Franklin Roosevelt. The former created the League of Nations and the latter, the United Nations, a much more serous subversive entity. Globalization has reduced the United States from its status as the world’s leading creditor to the world’s leading debtor, reduced its status as the world’s leading manufacturer to second place to China, cost the US millions of manufacturing jobs, caused the loss of millions of American jobs, and caused real wages of American workers to stagnate. The latest trade statistics show that the trade deficit in July was $43.8 billion but the details are even worse for American workers. The trade deficit on goods was $63 billion, an annual equivalent of about 6 million manufacturing jobs. The burden borne by US workers who lost their jobs can be conservatively estimated at $300 billion.
We’ve created huge international bureaucracies that are expensive to the American taxpayer and what they do that is worth doing can be done by agencies of the US government at much lower cost. Here is how much some of them cost us:
In 2012, the US contributed $7.5 billion direct to international organizations. This does not include the Department of State’s own Agency for International Development. The principal beneficiary was the UN which received $637 million in support of the UN itself plus an additional $75 million to UN’s Capital Master Plan or 22% of the cost of administering the UN, plus contributions to dozens of UN entities. This does not include the dozens of UN programs, some of which are listed below. Where possible, the list includes the principal contributions of the US to all international agencies and in some cases the proportion of the budget of the organization financed by the US contribution. Where no percentage appears, one can assume that all or nearly all of the cost is borne by the U.S. ...
Gloabalization Has Been a Disaster for the U.S., Especially American Manufacturing Workers
It is time to end the globalization foolishness begun by an academic, Pres. Woodrow Wilson and executed by an effete politician, Pres. Franklin Roosevelt. The former created the League of Nations and the latter, the United Nations, a much more serous subversive entity. Globalization has reduced the United States from its status as the world’s leading creditor to the world’s leading debtor, reduced its status as the world’s leading manufacturer to second place to China, cost the US millions of manufacturing jobs, caused the loss of millions of American jobs, and caused real wages of American workers to stagnate. The latest trade statistics show that the trade deficit in July was $43.8 billion but the details are even worse for American workers. The trade deficit on goods was $63 billion, an annual equivalent of about 6 million manufacturing jobs. The burden borne by US workers who lost their jobs can be conservatively estimated at $300 billion.
We’ve created huge international bureaucracies that are expensive to the American taxpayer and what they do that is worth doing can be done by agencies of the US government at much lower cost. Here is how much some of them cost us.
UN programs, some of which are listed below. Where possible, the list includes some the principal contributions of the US to all international agencies and in some cases the proportion of the budget of the organization financed by the US contribution. ...
Economics Does Not Favor Free Trade; It Favors Balanced Trade.
Economists have been virtually unanimous in their belief that the policy of free trade benefits all trading partners since Adam Smith endorsed the policy of free trade in his famous work, the Wealth of Nations. At that time, countries were pursuing a policy of building up gold reserves by exporting more they import, a policy called mercantilism. A policy of free trade was a revolutionary idea at that time in opposition to the mercantilist practices of that time. But today, a policy of free trade is a suicidal policy for a country. The only policy that economic theory justifies today is a policy of balanced trade with the rest of the world which can be shown to be beneficial to all trading partners. About the only case in which free trade in an appropriate policy in the long-run is when both trading partners employ a common currency, there is free movement of capital and labor, and there are no trade barriers. These conditions hold among the States of the USA in their trade with one another.
Under current economic conditions free trade is a suicidal policy as the recent history of the U.S. demonstrates. The U.S.A. has experienced chronic international trade deficits for decades, which have converted the U.S. from the world’s leading creditor nation to the world’s leading debtor nation, decimated its manufacturing sector, and caused the loss of millions of U.S. jobs in manufacturing. Prof. J. M. Keynes was a realist when he wrote that when a trading partner uses mercantilist practices to keep trade unbalanced in its favor, called a beggar-ones- neighbor policy, he would recommend that Britain take counter-measures. We suggest a counter measure that any nation could use under World Trade Organization rules, the Scaled Tariff, a single-country-variable-tariff, whose rate rises as the trade deficit increase and disappears as trade becomes balanced. ...
The Trade Agreements Negotiated by the U.S. Have Been a Disaster for U.S. Workers. and the U.S. Economy
In seeking a Trans-Pacific free trade agreement, the U.S. is continuing a policy of seeking international trade agreements in spite of the fact that all of the agreements it negotiated since 1966 have converted the U.S. from the world's leading creditor nation to the world to the world’s leading debtor nation. In 1947, the U.S. began negotiations seeking an international General Agreement on Tariffs and Trade (GATT). There were eight rounds of negotiation from 1947 to 1994. They had little effect on the U.S. trade balance until the Kennedy round, 1964-1966. The trade deficits exploded after the Uruguay round. 1986-1993, in which 123 nations participated and which created the World Trade Organization (WTO) which began operations in 1995. The creation of the WTO marked the beginning of the end of the USA as the world’s leading industrial power. The North American free Trade Agreement (NAFTA) with Mexico and Canada in 1993, the granting of permanent most-favored-nation trade status to China in 1980, the free trade agreement with Korea, all produced large trade deficits and cost millions of American jobs. These agreements led to a major exodus of U.S. manufacturing firms overseas.
The US ran a trade surplus in 1981 of $3.1 billion. By 1983, the US experienced a trade deficit of $35.1 billion. By the end of the Uruguay round, 1983-1994, and the creation of the WTO in 1995, the U.S. trade deficit had grown to $105.3 billion. The trade deficit peaked in 2006 at over $800 billion and in 2014 it amounted to $467.6 billion. ...
U.S. Trade Agreements Have Been an Economic Disaster for American Workers
In 1947, the U.S. began negotiations to seek an international General Agreement on Tariffs and Trade (GATT). There were eight rounds of negotiation from 1947 to 1994. The Tokyo round which began in 1973 and lasted for more than six years was attended by 102 nations. The last round began in Uruguay in September, 1986 and 123 nations participated and ended with the creation of the World Trade Organization (WTO) in 1995. GATT marked the beginning of the end of the USA as the world’s leading industrial power.
GATT was followed by the granting of “most favored nation” status to China in 2000. In a 2012 article by Justin R. Pierce, a Federal Reserve Board researcher, and Yale economist Peter K. Schott, found a link between the sharp drop in U.S. manufacturing employment after 2001 and the elimination of trade policy uncertainty resulting from the U.S. granting of permanent normal trade relations to China.
When one examines the history of the US trade balance, it appears that until the end of the Tokyo round which lasted from 1973 to 1979, the US ran small trade surpluses with the rest of the world. The US trade surplus in 1981 was $3.1 billion. In 1983, the US experienced a trade deficit of $35.1 billion. By the end of the Uruguay round, 1983-1994, and the creation of the WTO in 1995,.the U.S. trade deficit had grown to $105.3 billion.
Globalization and Free trade Agreements Set the U.S. on the Road .to Decline
George Washington in his farewell address urged the US to avoid foreign entanglements. How right he was. US foreign entanglements began with a vengeance under Pres. Franklin D Roosevelt beginning with the Bretton Woods agreements (1944) which created the World Bank and the International Monetary Fund.These agreements were negotiated by Harry Dexter White on behalf of the US. (White was later exposed as a Communist spy.)
Benn Steil (senior fellow and director of international economics at the Council on Foreign Relations and founding editor of International Finance) in his book The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Council on Foreign Relations, Princeton University Press, 2013), he discusses the creation at Bretton Woods of the World Bank and the IMF. He writes:
What Is the Appropriate Tax Treatment of Capital Gains?
Capital gains are currently subject to tax when the capital asset is sold or otherwise realized. Most economists believe that accrued capital gains, that is, unrealized gains, are income but they are confusing capital and income. When one owns an asset whose price has increased in value since it was acquired, he has an accrued but unrealized capital gain. He may realize the gain by selling the asset. To tax accrued but unrealized gains as income while taxing the increased yield which the capital gain capitalizes would be double taxation. It would be taxing the annual yield and its capital value. The value of a capital asset, as every economist should know but often does not, is the capitalized or discounted value of the expected stream of income it is expected to yield its owner. He pays taxes on the yields, the stream of income, as they are earned. To tax accrued gains and the yields as they accrue would be double taxation of the yields because capital value is the value of expected yields. Only realized capital gains can be considered income. Only when a capital asset is sold is the capital gain considered realized and subject to tax.
Holding on to a capital asset which has appreciated in value leaves the owner subject to taxes on its annual yield. Selling a capital asset which has appreciated in value relieves the owner from paying taxes on its future yields, which will have to be paid by the buyer. No capital value is created by the sale nor has any been destroyed. The case for taxing capital gains as income rests on the fact that in selling the capital asset, the seller is realizing the change in capital value caused by the increase in expected yields during the period of his ownership. He is, in effect, realizing the income that the change in value represents. There is no reason why the capital gain should not be considered income to him. ...
What are the prospects of the US economy short-term and long-term?
According to the Council of Economic Advisors, the US economy is growing steadily. It recently reported that "we have now seen twelve straight months of private-sector job gains above 200,000 -- the first time that has happened since 1977” and that the “GDP report for the fourth quarter of 2014 is consistent with a wide range of indicators showing further labor market strengthening.” 252,000 jobs were added in December, 2014, 257,000 in January, 2015, and 295.000 in February, 2015. The unemployment rate fell to 5.5% in February, 2015. The stock markets have risen to new highs although they are highly volatile. Real estate values have been rising. So how good is the good news? Not so good, really.
The recovery as the ordinary man in the street knows has been sluggish and the data corroborates that. As I pointed out in a recent posting to this blog, the measures taken by the Treasury and the Federal Reserve Board have made the rich richer and poor poorer. Consider the following table which shows the changes in employment and unemployment between 2008 and 2015:
As the table shows, the number employed has grown by less than one percent in the seven years of recession and recovery. The number unemployed increased 23 percent, millions are employed part-time for economic reasons beyond their control and millions more have stopped looking for jobs and are not counted in the labor force. ...
The Short-run and the Long-run in Economics and Politics
“In the long-run we are all dead” said the late great economist John Maynard Keynes who revolutionized economic thinking. He recommended fiscal stimulation to increase aggregate demand which would increase production and employment. He was responding to the dominant view of free market economists that the free market would create full employment if wages were flexible. Because wage levels are very slow to respond to changes in the demand for labor, government intervention is required to increase aggregate demand in the short-run. Keynes’s ideas have dominated economic thinking since the 1930s. Accordingly, Pres. Obama’s administration pursued Keynesian fiscal and monetary policies which included an $800 billion stimulus program beginning in 2009 and authorized a $200 billion rescue of two private mortgage insurance companies, Fannie Mae and Freddie Mac. The preceding administration of Pres. George W. Bush began fiscal policy stimulus with a lump sum rebate of $300 per person plus dependents to all income taxpaying households. This was an application of Keynesian economics. He also enacted TARP which authorized the Treasury to buy the troubled assets of banks, investment companies, and insurance companies. This accorded with all schools of economics.
The federal debt in 2009 was $11.9 trillion and 83% of GDP while five years later it reached $18 trillion, exceeding the total production of goods and services in 2014. As for monetary policy, the Federal Reserve adopted a policy of monetary expansion and low-interest rates, buying government bonds and other assets with newly printed money. The most often used aggregate of the money stock, M2, increased from $1.6 trillion in 2009 to $10.9 trillion in 2014. The combination of a huge federal debt and money supply threatens serious budgetary and another financial crisis inflation in the not too distant future. We may have solved a short-term problem but in the process inaugurated serious long-term problems. ...
Let's End Means-Tested Benefits -- we were published in American Thinker yesterday
Here's a selection
To read the whole thing, go to:
The Democrats and their loving media are bent on making the distribution of wealth and income the principal issue in the 2016 campaign. President Obama in his so-called state-of-the-union message (1/20/15) proposed to raise taxes on the very wealthy, saying “let’s close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth.” One trouble with that statement is that it suggests the rich don’t pay their fair share of taxes. In 2008, the top one percent of personal income taxpayers according to the IRS paid 38.02 % of the federal personal income tax paid, the top 10% which includes all the really rich paid 69.94%, the top 25% paid 86.34%, the top 50% paid 97.3%, and the bottom 50% paid only 2.7%.
We are all for closing loopholes but it is hard to identify a loophole? Are charitable deductions loopholes? Some believe they are. Besides the president was telling an untruth when he implied that loopholes created wealth inequality. The inequality of wealth is largely due to inventions and innovations. Steve Jobs and Bill Gates, to name only two of the thousands who became millionaires and billionaires, did so by creating the products produced by Apple and Microsoft.
The anti-poverty charity Oxfam reported ahead of the World Economic Forum in Davos that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014 (while Obama was President incidentally) while the least well-off 80% own just 5.5%. At the most recent meeting of the American Economic Association, economists took issue with some foolish writings about inequality written by French economist Thomas Piketty .
An Oxfam spokesman said it would use its high-profile role at the Davos gathering to demand urgent action to narrow the gap between rich and poor. How? They do not say. One would think that it would be more important to reduce the number of poor than narrow inequality. That is what American inventors and innovators have done historically. ...
Chinese stock market tumbling...
It's midnight here in Pennsylvania, but it's Monday morning in China and the stock market is already down 6.3% today. Go to the following website to see where it stands right now:
This from Bloomberg News today:
So how does this play out?...
The Russian economy will come roaring back
Business Week published an assessment of where Russia has been and where it is going. Its analysis of the present was pretty good, but its pessimism about Russia's future was nonsense. Russia will probably come roaring back, as countries almost always do after a currency collapse.
The ruble started falling as a result of European and American sanctions and Russian counter-sanctions. These sanctions got the Russian currency falling in exchange rate. Here´s a first hand account from a commentary on the subject by Daniel Gurevich, one of my students, who was then living in Russia:...
Mike Lee gets it -- Watch his "Animal Farm" speech about the Cromnibus bill
After castigating Congress for passing the Cromnibus, he shows he understands just what is happening in our economy today. His theme is the loss of opportunity when Washington is siding with the special interests against the American people.
He says that the loss of opportunity is not globalization only -- perhaps he understands what we have been arguing, that growing trade doesn't help when it involves huge trade deficits....
How the Minimum Wage Contributed to the Ferguson Riots
The legal federal minimum wage prevents employers from hiring anyone, with few exceptions, who would work for less. Michael Brown, the young black teenager killed in Ferguson, was one of the millions of black teenagers and other unskilled blacks who are unemployed as a result of the minimum wage of $7.25 per hour which costs prospective employers $16,150 per year including social security tax and Medicare insurance plus some thousands more for Obamacare. As a result, most black teenagers are unable to get the first foot on the ladder to a living wage and the ability to raise a family. And many older unskilled workers, including single mothers, who are without a job find themselves alienated and part of a vast underclass with attendant unsocial and criminal behavior.
That the minimum wage reduces the demand for unskilled workers cannot be denied. The vast majority of economists acknowledge that the legal minimum wage prevents the employment of many unskilled workers but they are afraid to publicly denounce the minimum wage which enjoys so much support from powerful political groups, like the labor unions. Unions do not want competition from non-union employers.
We even hear calls for a “living wage” as though every worker is the sole support of a family. The average household consists of 2.54 persons down from 3.33 in 1960. That statistic includes seniors and families whose children are grown-up. Twenty-eight percent of women age 35 to 44 have three kids or more. During the 1950s, women had four children on the average. That date is significant because the minimum wage began to have its effect about then. Still, the typical family with a teenager in it has one or two parents. If either parent works, a teenager earning $5 and hour adds $10,000 to the family income. His employment could be the difference between the family’s living in poverty or not....
Government Interference in the Economy Has Been an Unmitigated Disaster
Few Americans know the economic harm that government mismanagement of the economy has caused. The Community Investment Act—still in force—was the principal cause of the housing bubble that led to the Great Recession, whose effects we are still experiencing. And government intervention in the economy continues to cause untold economic misery. For example, the minimum wage law has denied employment to millions of unskilled workers with dreadful consequences to them and to our society. The Corporate Income Tax was enacted to appease anti-business sentiment. Its proponents unknowingly created a tax that violates all the criteria of a good tax. Americans widely support free trade notwithstanding the fact that some of our trading partners entertain policies that steal American jobs and whole industries. Americans are unaware that the federal government (and some state governments) have given away billions in subsidies and tax credits and conducted a war on fossil fuels in the name of preventing global warming. It has become a world-wide disaster. Scientists are in disagreement as to how much of the global warming is caused by the burning of fossil fuels. Scientists are unanimous in acknowledging that the billions spent to date have had no effect whatsoever on climate change. Moreover, the dynamic oil and natural gas industry has been the major contributor to employment growth during the past six years and is reducing our chronic trade deficits which have cost Americans millions of jobs. Americans are willing to provide low-rental housing for the poor but are unaware that while rentals are low, the cost per unit was astronomical. And Americans should know that many other government policies have slowed America’s rate of economic growth, among them excessive and costly unnecessary government regulations which have raised costs to the consumer and produced little of no benefit. Let us look at a few of these policies....
Who Is a Racist? A Conversation with Prof. Jack Anderson
I had a conversation with my friend Jack Anderson, a retired physics professor at the University of Pittsburgh. I am a retired Professor of Public and International Affairs at Pitt, an economist.. I described the wonderful book I was reading by Jason Riley, a black editorial page staff member of the Wall Street Journal, entitled Please Stop Helping Us, in which he writes, as I have done, about the racial impact of the federal and state minimum wage laws, I described the minimum wage laws as supporting the monopolistic practices of labor unions to restrict competition from employers who pay lower wages and that the first minimum wage was passed by Congress and signed by FDR at the request of the labor unions. I said it was a racist law. Jack asked, “Did the unions intentionally want to prevent the employment of blacks? If not, how can you describe them and the law as racist?.” By the effects, I replied. Until 1950, the unemployment rate of blacks was actually less than that of white workers. With each successive increase in the minimum wage, the rate of unemployment of blacks increased relative to whites. That is why I describe it as a racist law. Following are recent government figures:
Government Is Responsible for the Sluggish Economy; What to Do About It
To grow the U.S. economy is an imperative given the sluggish state of the economy which will soon end our world leadership. The U.S. has been for decades the world’s leading debtor nation. It has 21 percent of the labor force unemployed, underemployed, or not looking for a job since they were laid off. The wealthy have become wealthier thanks to the tax treatment of corporate income and the poor have become more numerous and dependent on government hand-outs. The blame for this malaise are a host of government policies that impede entrepreneurship and risk-taking and interferes with the efficient functioning of a free-enterprise economy.
It is time that we reduced the negative role of government in the economy. 1) We need to reform the tax system by eliminating the corporate income tax and taxing corporate earnings as the personal income of the shareholders. 2) We need to eliminate wasteful subsidies, including tax expenditures. 3) Our health care system is unnecessarily expensive and has undesirable economic effects. 4) Our trade deficits slow economic growth. We need to balance our international trade. The government’s failure to intervene to correct our chronic international trade deficits has cost millions of jobs. 5) The minimum wage should be abolished because it has created an army of unemploy, unskilled labor the value of whose services is less than the legal minimum wage. 6) Wasteful and unnecessary regulation of American business, Following are our reasons for making them.
First, tax corporate earnings as the personal income of shareholders under the more progressive personal income tax. ...
The purchase of Tim Hortons, a Canadian restaurant chain, by Burger King, an American restaurant chain, is making news as a so-called inversion, a term used to describe a company’s moving its headquarters abroad to avoid paying U.S. taxes on its foreign income. The Canadian effective corporate income tax rate on manufacturing and processing corporations is 15 percent currently but the provinces levy an additional 10 to 16 percent rate. The top U.S. rate is 35 percent and the states levy corporate income taxes ranging up to 9.9 percent in Pennsylvania and 8.84 percent in California. Burger King does not stand to save anything by moving to Canada but it will avoid an increased tax liability to the U.S. when it buys Tim Hortons by moving its headquarters. At present, the U.S. gets no revenues from Tim Hortons
President Obama and the Secretary of Treasury Lew have called inversions unpatriotic. You be the judge. Inversions cost no revenues. Compare that with out-sourcing abroad which not only affects revenue but c auses massive unemployment here at home and increases our trade deficit. Why the fuss about inversions and none about out-sourcing. And nearly all the leading American corporations do it, including Apple, GM, and other administration favorites. But out-sourcing is another story.
All that Burger King, and Pfizer and others appear to want is to avoid paying an increase in the taxes on the combined company than the two pay at present. The administration wants to increase those taxes, a desire to tax American businesses on their incomes regardless of where it is earned. Hypocritically, Congress and successive administrations have granted an exception for individuals (who vote!) who do not have to pay personal income tax on what they earn abroad as long as they are out of the country for eleven months per year. Thanks to the eleven months provision practically none of the employees of cruise ships patronized by Amearicans mostly are Americans! ...
The End of the Chinese NEP
Gordon Chang has an intriguing analysis of China's building attacks on multinationals up today on the Trade Reform website. The entire analysis is worth reading. Chang writes:
The frontal attack on foreign business brings to mind the xenophobia of Mao’s era, and that may be no coincidence. Chinese President Xi Jinping has been conducting a series of Maoist-inspired campaigns since he became China’s leader in November 2012. The use of Cultural Revolution-style methods against multinationals suggests that Xi’s Maoist rhetoric is already affecting Chinese governance.
Xi is now taking the country backward in another important respect. China prospered when it opened up its economy after the bloodshed and chaos of the Maoist years. Xi talks positive change but has, on important matters, sponsored regressive economic moves. Whether or not Xi has abandoned Deng Xiaoping’s transformational policies, he is on balance moving China’s economy backwards.
My interpretation is that this reflects the continuation of important strands of China's communist policy -- that China's New Economic Plan coming to an end. In the 1920s the Soviet Union opened (briefly) to western firms in order to acquire technology and capability. William F. Jasper (2006) writes that Lenin stated the strategy behind this opening as follows:
The Capitalists of the world and their governments, in pursuit of conquest of the Soviet market, will close their eyes to the indicated higher reality and thus will turn into deaf mute blind men. They will extend credits, which will strengthen for us the Communist Party in their countries, and giving us the materials and technology we lack, they will restore our military industry, indispensable for our future victorious attacks on our suppliers. In other words, they will labor for the preparation of their own suicide.
In Trading Away Our Future (2008, p 78-81), my coauthors and I suggested that China's opening to foreign firms might have similar characteristics...
What the U.S. Needs to Do to Grow the Economy
Economics professor George Schultz, former Secretary of theTreasury, State, Labor, and Director of Management and Budget, in the Wall Street Journal (8/ 9/14), in an opinion piece entitled “How to get America Moving Again”, made the following recommendations: 1) reform the personal income tax system of deductions and lower the marginal rates as proposed in the 1986 Tax Act which passed the Senate 97-3, 2) lower the corporate income tax rates to be competitive with the rest of the world, 3) simplify and reform the multitude of business regulations and design them to work better, 4) establish rule-based rules for federal reserve policy for stable monetary growth, 5) get control of government spending, especially entitlement spending, and 6) replace Obamacare by neighborhood health clinics, health savings accounts, and protection against catastrophic illnesses. George Schultz not only speaks for himself but his views may be taken as the predominant view of the economics profession. As such, they are very disappointing. They would do very little to stimulate the economy and reduce unemployment.
Since these same suggestions are repeated so often, let’s consider them, why they are inadequate, and what would speed the recovery and growth. Before doing so, we should note that the belief that the economy is slowly recovering is widely touted by government spokesmen and the media. It seemed to be borne out by the 2nd quarter Gross Domestic Product increase to 4.0 percent which followed a 2.9 percent decline in the first quarter. A continuing recovery is also indicated by the reduction in recent weeks of the number of claims for unemployment insurance. The trouble with the second quarter’s increase in GDP is that private inventories of goods increased, usually undesirable and unplanned, added 1.66 percentage points to the second-quarter rate of growth. So the 4.0% growth rate was more like 2.34 percent. Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013. An undesired increase in inventories is a drag on the economy.
The recent reduction of the weekly claims for unemployment insurance from over 300,000 per week to less than 300,000 per week, while positive, has to be balanced by the sharp increase in part-time jobs and an increase in the number of persons no longer looking for jobs. As Mortimer Zuckerman, editor of the US News and World Report, pointed out in the Wall Street Journal, 7/13/14, we have 374,000 fewer jobs than we had in November, 2007 and most of the jobs created since then have been part-time. ...
The Outlook for the U.S. Economy is Continued Slow Recovery
That the economy may be recovering appears to have been borne out by the widely touted increase in second quarter Gross Domestic Product of 4.0 percent after a 2.9 percent decline in the first quarter and the reduction in the number of claims for unemployment insurance. The trouble with the second quarter’s increase is that private inventories of goods increased, the change in real private inventories added 1.66 percentage points to the second-quarter change. So the 4.0 growth rate includes a presumably undesired growth in inventories and perhaps the figure that should have been touted was 2.34 percent. Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013. An undesired increase in inventories is a drag on the economy. The trouble with the reduction of claims for unemployment insurance while positive has to be balanced by the sharp increase in part-time jobs and the increase in the number of persons no longer looking for jobs.
The growth that is occurring cannot be attributed to the government’s monetary and fiscal policies. On the monetary side, the stimulating effect has been primarily in raising asset prices. Corporate shareholders and real estate owners have benefitted. The unemployment rate alleged to be 6.2 percent is more than triple that if you count the millions of workers who lost their jobs and are no longer looking for jobs and if you count the millions of workers who are working part-time but want full-time jobs.
So what do the economic data tell us? That the performance of the economy is nothing to be proud of. So what should we do about it? ...
Republican Tax Policies Lack Economic and Political Sense
What do Republicans stand for when it comes to taxes? The Republican platform of 2012 recites:
"Taxes, by their very nature, reduce a citizen’s freedom. Their proper role in a free society should be to fund services that are essential and authorized by the Constitution, such as national security, and the care of those who cannot care for themselves. We reject the use of taxation to redistribute income, fund unnecessary or ineffective programs, or foster the crony capitalism that corrupts both politicians and corporations. Our goal is a tax system that is simple, transparent, flatter, and fair. In contrast, the current IRS code is like a patchwork quilt, stitched together over time from mismatched pieces, and is beyond the comprehension of the average citizen. A reformed code should promote simplicity and coherence, savings and innovation, increase American competitiveness, and recognize the burdens on families with children. To that end, we propose to: Extend the 2001 and 2003 tax relief packages-commonly known as the Bush tax cuts-pending reform of the tax code, to keep tax rates from rising on income, interest, dividends, and capital gains; Reform the tax code by reducing marginal tax rates by 20 percent across-the-board in a revenue-neutral manner; Eliminate the taxes on interest, dividends, and capital gains altogether for lower and middle-income taxpayers; End the Death Tax; and Repeal the Alternative Minimum Tax."
The Republican objection to all taxes is reprehensible. Taxes do not “reduce a citizen’s freedom”. They are a necessary price for having a government of laws and providing security of persons and property. Taxes are bad not because they reduce freedom but when they distribute badly the burden of authorized expenditures of governments or because they have bad economic or social effects, usually the unintended consequences of legislative incompetence and ignorance. And some taxes, e.g., the taxes on motor fuels can be justified as a charge to finance the building and maintenance of highways and streets. The same can be said for court fees and similar charges. ...
Hold Mexico Responsible for the Invasion of Illegal Immigrants from Central America
We saw a few months ago how Mexico stopped an American Marine who had arrived at a Mexican entry point as a result of a driver’s mistake and kept him in jail for alleged illegal transportation of personal weapons he had in his vehicle. We have now witnessed Mexico allowing thousands of children and teenagers to enter Mexico illegally from Central America without visas or even documents of personal identification. In addition, Mexico provided them with transportation and sustenance from their point of entry in Mexico to the U.S. border, a distance of several hundred miles, by bus and by train. This required the cooperation and approval of the Mexican government and in our opinion is a hostile act, making it complicit in a conspiracy to violate U.S. immigration laws. Mexico must be held responsible for this invasion. We should demand that they indemnify the U.S. for all the expenses of repatriating those illegal immigrants and all the expenses of sustaining them while they are in U.S. custody.
For reasons we cannot fathom, none of the media have mentioned Mexico’s responsibility for the present influx of illegal immigrants and the millions of illegal immigrants of the past recent decades. It may be a deliberate effort by Mexico to effectively retake parts of Texas, New Mexico, Arizona, and Southern California taken from it as a result of the U.S.-Mexican Wars. The U.S. has reacted passively to the influx of illegal immigrante, apparently fearful of offending Mexico. But it is time we insisted that Mexico behave as a friendly neighbor. These are unfriendly acts. ...
The Minimum Wage Should Not Apply to Teenagers or the Unskilled
Economists are divided on how much unemployment the minimum wage causes but there is little doubt that a legal minimum wage decreases the demand for unskilled workers. What wage potential employers are willing to pay depends on what the employer believes that hiring an additional worker would be worth to him. No employer will hire a worker unless he believes the worker will contribute as much value as the worker costs. Who is hurt the most by a minimum wage? Teenagers having no work experience and unskilled 20 or over without work experience. And as the data shows, black teenagers and the black unskilled are affected the most, an unintended consequence.
There seems to be little chance for abolishing the current federal minimum wage of $7.25. There is increasing pressure to increase it as already has been done in some states. Twenty-two states have minimum wages above the federal minimum. According to the US Bureau of Labor Statistics only 1.5 million workers are actually employed at the federal minimum. So how do we end this tax on teen-agers and the unskilled? For the former, it is easy. Eliminate or reduce the legal minimum wage insofar as it applies to teen-agers and the unskilled looking for work.
The data clearly justify this policy change. Compare the unemployment rates of teenagers and the rest of those in the civilian labor force. The unemployment rate during the first quarter of 2014 was 6.5 percent for those 20 years of age and older but 20.9 percent for those aged 16 to 19. White teenagers had an unemployment rate of 20.9 percent, black teenagers 34,5 percent, Latin teenagers 24.4 percent and Asian 15.4 percent. Black male teenagers has the scandalous astronomical level of 42 percent. ...
Minimum Wage Is a Barrier to Employment of Teenagers, Blacks, and Hispanics
Before 1938, all minimum wage laws were declared unconstitutional by the U.S. Supreme Court. Pres. Franklin Roosevelt signed the Fair Labor Standards Act in that year which, inter alia, established a minimum wage of $13 per week. The Roosevelt packed Supreme Court upheld its constitutionality under the Constitution’s commerce clause. Arguably the ruling enabled the federal government to legislate without constitutional restriction on its power, except for the first ten amendments of the Constitution. The federal government established a minimum was of $7.25 in 2007 when we were just entering he Great Recession, which no doubt helped deepen the recession and slow the recovery. There is little doubt that the minimum wage causes unemployment; a poll showed that 70% of economists believe that the law affects mostly unskilled labor, those without previous work experience. The principal group are teenagers and the statistics bear that out, with particular effect on blacks and Hispanics as the following table shows:
Source: US Bureau of Labor Statistics ...
The Current Minimum Wage May Cost Teenagers and Blacks More than $29 Billion!
Economists are divided on how much unemployment the minimum wage causes. About 70% or more of economists believe that a minimum wage decreases the demand for workers, especially unskilled workers. The demand for any worker depends on what the employer believes that hiring him would be worth to him. No employer will hire a worker unless he believes the worker will contribute as much value as the worker costs. Who is hurt the most? Teenagers and the unskilled who are unable to find jobs and those who patronize fast food restaurants, the less expensive hotels, and businesses catering to customers of the low and moderate income classes who are forced to pay higher prices for their necessities.
The unemployment statistics speak for themselves. Compare the unemployment rates of teenagers and the rest of those in the civilian labor force. The unemployment rate during the first quarter of 2014 was 6.5 percent for those 20 years of age and older but 20.9 percent for those aged 16 to 19. White teenagers had an unemployment rate of 20.9 percent, black teenagers 34.5 percent, Latin teenagers 24.4 percent and Asian 15.4 percent. The minimum wage laws affect blacks more than any group. Even in the population over 20 years of age, the black rate of unemployment was 11.5 percent compared to whites 5.7 percent. It could be argued that the minimum wage laws affect blacks more than any other group. ...
What Produces Inequality of Income and Wealth? What Should Be Done About It?
From an economist’s viewpoint, the present distribution of income after tax is greater than it needs to be in a market economy. Some inequality is necessary as an inducement to work hard, to excel, to save, to invest, and to innovate, the essentials of a productive and growing economy. But the present inequality in the U.S. is excessive and greater than it needs to be even at the present rates of the personal income tax. But that is not because the personal income tax is not progressive enough. The rates are progressive but a lot of income escapes taxation or is taxed at special low rates. More important, much of the taxes paid by corporations is really paid by customers of the corporation. Shareholders bear little of the burden of the corporate income tax and since ownership of corporations is highly concentrated in the hands of the rich, the rich get richer faster. Moreover, the personal income tax allows property to be depreciated over and over again and taxes dividends and capital gains, highly concentrated in the hands of the rich, at lower rates than ordinary income. There are some reforms of the personal income tax that would increase the progressive incidence of the tax without raising rates. Of course, there is another tax that reduces inequality of wealth between generations, the federal estate tax.
What produces inequality? A French economist, Thomas Piketty, a sort of new Marxist, has just written a book that is little more than a tract. Some have even questioned his data. The book argues that capital accumulation, because the return on capital grows at a higher rate than the economy grows, inevita bly leads to greater and greater inequality of wealth. Marx actually argued that capital accumulation would tend to diminish the rate of return on capital as capital accumulated relative to other inputs. That follows from the universal acknowledgment of the law of diminishing returns. Were it not for innovation, new products and methods of production, the marginal return on capital would diminish as capital accumulated, to zero. (Has that been happening and is that the reason for so little new private investment and our slow recovery? That’s a good question.) Regardless, our French economist seems to believe that progressive taxation is ineffective. He ignnores the everchanging membership among millionaires and billionaires and seems never to have heard of estate taxation.
Our view is that the excessive accumulation of wealth is due to the fact that shareholders of corporations bear little of the burden of the corporate income tax and, therefore that corporations should be treated like partnerships. Corporate earnings would be taxed as personal income and subject to the progressive rates of the personal income tax. The estate tax should be made more progressive and would reduce the inequality as wealth passes from one generation to another. ...
The Failure of Obama's, Prof.. Summers', and Prof. Bernanke's Keynesian Policies
The report that the GDP rose at an annual rate of only one-tenth of one percent (0.1%!) during the first quarter of 2014 was a shock to all economists notwithstanding that it was triggered in part by the horrible winter of 2013-14. Although the low growth rate may have been the result of an unusual combination of factors and is unlikely to be repeated, the slow rate of recovery during the first five years of the Obama administration is surprising given the enormous debt-financed expenditures of the federal government and the billions of dollars injected into the economy by the Fed’s quantitative easing policy. Keynesian economists were in charge, including Profs. Summers, Bernanke, Romer and many others. It is not too early to declare Keynesianism dead. Keynes himself would long ago have agreed with that conclusion given the swift recovery from the post World War II recession which was led by a booming private sector.
Given that a recovery from the great recession ought to have been given the highest priority, the federal government wasted enormous resources in the 2009 $830 billion American Recovery and Reconstruction Act. Almost all of the expenditures were transfer payments, and had as little effect as the Bush and Obama direct rebates to taxpayers did in 2008 and early 2009. As the administration reported, “the stimulus was fairly well divided among different types of relief. The biggest portion was public investment -- those included the "shovel-ready" infrastructure projects and longer-term investments in green energy, broadband and the like. More than a quarter of the stimulus went to tax cuts, one-fifth went to helping states plug their own huge fiscal holes, and 15 percent went to bolster the safety net.” As the President himself later reported, there were very few “shovel-ready” projects. And transfer payments create no new jobs. ...
Why Economists Failed to Promote Recovery from the Great Recession 2008-2014
Pres. Obama had some stellar economists serving as his advisers but they ended up giving him and his staffers bad advice as to how to promote an economic recovery from the 2008-14 recession. (Most economists consider a recession to be taking place while economic growth is negative. We do not consider it ended until full-employment is regained.) Consider who they were. Prof. Lawrence Summer of Harvard was head of the National Economic Council, Prof. Ben Bernanke of Princeton was head of the Federal Reserve and had been Chairman of the Council of Economic Advisors in 2005-6, Prof. Christina Romer of Obama’s first Council of Economic Advisors (2009-10) was a professor of economics at Univerity of California at Berkeley. She was succeeded at the CEA by Prof. Austan Goolsbee (2010-11), of Chicago’s Booth School who received his Ph.D. in Economics at MIT. He was succeeded by another Princeton Professor, labor economist, Alan Krueger (2011-13). During the George W. Bush administration when the recession began, Prof. Edward Lazear, who had been a professor of Human Resources Management at Stanford University and chairman of the CEA from 2006-2009 and succeeded Ben Bernanke as chairman of the CEA. About Bush’s anti-cyclical policies, nothing good can be stated. Bernanke deserves double mention because he helped inflate the housing bubble and did nothing to prevent it during his tenure at the CEA nor during his tenure at the Fed beginning in 2007.
Bernanke’s predecessor at the Fed, Alan Greenspan who served as the chairman of the Federal Reserve Board from 1987 to 2006 must be deemed to have been the economist most responsible for the housing bubble. Greenspan’s great mistake was in continuing the inconsistent role of the Fed under the Community Investment Act of 1977. The Act was intended to ensure that black and poor neighborhoods were not discriminated against by the banks and put the Federal Reserve System in charge of administering the program. The Fed lowered the standards for making housing loans so much that it ended up contributing to the housing bubble that burst in 2006 ushering in the Great Recession from which we have not yet recovered. The huge number of subprime loans that defaulted is a convincing demonstration of the Fed's failure to perform its duty to prevent the banks from making sub-standard loans.
This tells us that economists at the top of the profession did little to prevent the recession and little to promote a recovery. They were rewarded handsomely in honors and funds in academia and by government and international agencies. The millions still unemployed after six years, employed part-time, or forced to drop out of the labor force were betrayed by what masquerades as a science. ...
A Mixed Socialist-Capitalist Economic System Does Not Work, Either
One does not have to point to the fall of the Union of Soviet Socialist Republics or to the failure of Labor Party policies in the U.K. to justify the conclusion that governments are incapable of efficiently producing goods and services although there are some few exceptions, principally in areas that economists call “natural monopolies” for example. The problem that popularly elected governments have is that democratic politics interferes with the essential efficiency force, competition.
The history of the U.S. with financial institutions is especially egregious as have been its efforts to provide public housing, subsidize higher education, and promote alternative green energy sources. Indeed, Wagner’s law of increasing government explains why there is no limit to government inefficiency. Governments do not compete with themselves.
Government enterprises have had some success in the production of electric power when it is a natural monopoly especially in the distribution of energy but its subsidies to energy-producing enterprises has been a failure regardless of what criteria you want to apply. We prefer economic efficiency. That requires the measurement of social costs and benefits. Unfortunately, the measurement of social benefits and costs is a political calculation and subject to the same difficulties as we have with running government enterprises....
Democrats Condemn Blacks to Live in Urban Ghettos
During the Depression of the 1930s, Democrats created temporary government jobs in the Works Progress Administration (WPA) and Public Works Administration (PWA) but did little to encourage private sector jobs. In the current administration, Pres. Obama did even less. He spent nearly all of his first administration from 2009-2013, on enacting Obamacare, a health plan that actually discouraged hiring in the private sector. His economic stimulus plan of 2009 consisted almost entirely of pork, transfers to the states, and financing unproductive environmental programs. Pres. Franklin Roosevelt likewise spent most of his first two terms on a giant public program, the Social Security System, not a job-creating program, unproductive anti-competitive price-increasing policies, the NRA, and in 1937, he signed the Wagner-Steagall Act which provided for subsidies to local public housing.
This was followed by the creation of the Public Housing Administration, the U.S. Housing Authority, and the House and Home Financing Agency which Lyndon Johnson combined the into a new Department of Housing and Urban Development. We find no federal authority for such an agency. In any case, the record is filled with failures, high costs, new urban slums, and the bankruptcy of many cities, most recently the city of Detroit.
We know the record of the demolitions of huge public housing complexes in Chicago and a number of other cities, including the immense Pruitt-Igoe public housing development in St. Louis, and as recently as two years ago, the demolition of two high-rise public housing buildings in Pittsburgh. Despite this continuous record of the failure of public housing, the Department continues to exist.
End the Corporate Income Tax; Integrate the Corporate and Personal Income Taxes
This paper is an attempt to decide the best way to tax the owners of corporations. First is to tax the corporation on the basis of its earned income and capital gains, which is the present treatment. Dividends that shareholders receive are included in their personal income subject to the personal income tax. Second is to tax corporate income as partnership income is taxed, namely shareholders would include their share of the earnings of the corporation in their personal income subject to the personal income tax, which is the way we tax income from partnerships and other limited liability companies. Third is to tax corporations not on their earnings but on the market value of the outstanding shares of each corporation at the end of the year. Each has its advantages and disadvantages but of the three alternatives, the present Corporate Income Tax is the worst.
The Corporate Income Tax, as it exists at present, violates most of the principles of taxation developed by economists over the past two centuries. Those principles are:
1. Equal treatment of equals. Persons of equal taxable capacity should bear the same burden of the tax. Taxing corporate income at the same rate, e.g., 25%, taxes the low income shareholder at the same high rate as the most wealthy.
2. Progressivity. The burden of a tax should fall with greater weight on persons with greater taxable capacity than on those with lesser taxable capacity. They should never be lest than proportional to income.
3. Economic effects. The negative economix effects should be minimized. ...
How to Reform and Change the Corporate Income Tax
This paper is an attempt to decide the best way to tax the owners of corporations. First is to tax the corporation on the basis of its earned income and capital gains, which is the present treatment. Dividends that shareholders receive are included in their personal income subject to the personal income tax. Second is to tax corporate income as partnership income is taxed, namely shareholders would include their share of the earnings of the corporation in their personal income subject to the personal income tax, which is the way we tax income from partnerships and other limited liability companies. Third is to tax corporations not on their earnings but on the market value of the outstanding shares of each corporation at the end of the year. Each has its advantages and disadvantages but of the three alternatives, the present Corporate Income Tax is the worst.
The Corporate Income Tax, as it exists at present, violates most of the principles of taxation developed by economists over the past two centuries. Those principles are:
1. Equal treatment of equals. Persons of equal taxable capacity should bear the same burden of the tax. Taxing corporate income at the same rate, e.g., 25%, taxes the low income shareholder at the same high rate as the most wealthy.
2. Progressivity. The burden of a tax should fall with greater weight on persons with greater taxable capacity than on those with lesser taxable capacity. They should never be lest than proportional to income.
3. Economic effects. The negative economix effects should be minimized. ...
Hospital layoffs continuing
Health care has been a booming field. With baby-boomers aging, the demand for health care has been increasing. Young people who wanted to find a sure-fire job have been going into nursing and other medical disciplines knowing that the market for healthcare workers was growing. But that market suddenly changed in December due to the onset of Obamacare.
In order to hold down the costs of Obamacare, government administrators are placing price ceilings on government healthcare payments. Also, some healthcare consumers, facing higher costs for insurance, are cutting back on their elective procedures.
As a result of these two factors, hospitals are being forced to cut back on the services that they offer and are laying off workers. The result will be fewer hospitals and clinics and fewer services offered by the remaining hospitals and clinics. As healthcare supply decreases, customers will increasingly encounter long waiting times and other forms of healthcare rationing.
The last two monthly employment reports from the Bureau of Labor Statistics confirm that the new trend began shortly before I first spotted it in the December 20th American Thinker (Jobless Claims Up). After going up month after month, hospital jobs started declining in December from 4,797,500 in November to 4,792,800 in December to 4,788,300 in January (on a seasonally-adjusted basis).
An article in a Nevada newspaper explains why these layoffs are occurring (Problematic hospital funding leads to layoffs, reconsiderations):...
How to Reduce Inequality of Income and Wealth
The inequality of income has been raised as a political issue but neither the Democrats nor the Republicans have proposed anything resembling a reasonable policy to reduce it. The Dems would raise the rates of the personal income tax and increase entitlements while the Republicans argue that lower taxes would create more equality by helping achieving full employment. Both are partly right. But both overlook the fact that much of the income of the very wealthy is not really taxed at all. You would not suspect that the principal reason there are so many millionaires and billionaires is, believe it or not, the Corporate Income Tax.
And the solution is simple, treat corporate income as we treat partnership income. Partners report their share of partnership profits as personal income. There is no separate partnership income tax as there is for corporations. Corporate shareholders should report their share of corporate profits as personal income. Small corporations, so-called S corporations are now permitted to elect to have their earnings treated as the personal income of their shareholders. What we propose is that shareholders of all corporations treat their shares of corporate income as personal income for tax purposes. ...
The economic case against Obamacare -- Ray was published in Saturday's Pittsburgh Tribune-Review
To read the rest, go to:
Stop the Growth of Government Which Leads to Socialism Which Leads to Fascism
It is no accident that Hitler and Mussolini were socialists before they organized their National Socialist (NAZI) and Fascist parties. It is the inherent tendency of socialists to become authoritarian. It is no accident that Stalin, when the Kulaks refused to give up their crops, confiscated their farms, murdered millions of them, and exiled all the remaining to Siberia. They believe that the end justifies the means. It does but it does not justify illegal means like murder, threats of financial and bodily harm, and blackmail. Pres. Obama has now been shown to be persecuting his perceived enemies as evidenced by the IRS discrimination against conservative groups, the blatant lies that under Obamacare individuals and businesses could keep the health care policies if they wanted to, the selective prosecution of banks -- J. P. Morgan but not Goldman Sachs an Obama favorite, and now threatening Bank of America. He has also been charged with urging insurance companies not to criticize Obamacare under the implied threat that they would suffer consequences.
The federal and state government impose huge taxes on cigarettes because they have been shown to be health threatening as if the danger associated with smoking were not enough. The hypocrisy is self-evident; the government could ban cigarette smoking as it has with marijuana and cocaine but it would lose all the money it extracts from taxes on cigarettes. ...
Why Holder Didn't Prosecute Jon Corzine
And while we are on the subject of Holder's selective prosecutions, this from the Huffington Post:
And this from Real Clear Politics:...
Why Holder Didn't Loot Goldman Sachs
It is hard to prove that Attorney General Holder's shakedown of JPMorgan for $13 billion was politically motivated. The timing suggests political motivation, in that JPMorgan CEO Jamie Dimon had spoken out against Obama's "anti-business" economic policies during the 2012 election campaign. But timing doesn't prove causation.
The circumstances suggest political motivation, in that the charges mostly stem from shady practices at two failed financial institutions that JPMorgan bought to prevent a chain reaction of defaults, at the request of the Bush administration. But Holder's punishment of public-spirited take-overs, also, doesn't prove political motivation.
The size of the settlement, the largest ever extracted by the government from an American business, and the diversion of $4 billion into a political slush fund suggest political motivation. But, again, they do not prove it.
The strong evidence of political motivation comes from Holder's selective prosecutions. According to an August 10, 2012, press release by Michigan Democratic Senator Carl Levin, JPMorgan's fellow major bank Goldman Sachs was caught red-handed by his investigative committee in mortgage fraud. Here's a selection:...
The JPMorgan Shakedown Slush Fund
In my last blog post, I reported Attorney General Holder's shakedown of JPMorgan Chase for $13 billion. I supposed that Holder was punishing CEO Jamie Dimon for criticizing the Obama administration's "anti-business" economic policies during the 2012 election campaign.
I missed a possible second political purpose. According to University of Maryland business economist Peter Morici:
Like me, Morici described the settlement as a "shakedown":...
Holder shakes down JPMorgan
On the heels of IRS targeting of Tea Party groups, we have another example of the "Chicago Way" in action. The New York Post reported on Sunday:
The shakedown was completed personally by Attorney General Eric Holder. According to newsmax.com:
Some financial analysts argue that the shakedown was unjustified. The supposed crimes by JP Morgan resulted from portfolios of failed banks that JP Morgan had taken over at administration request. JP Morgan and Wells Fargo were the two well-managed major banks that didn't need government help during the fall 2008 financial meltdown.
The attack on JP Morgan could be payback for things that Dimon, a former Obama favorite, said during the 2012 election season. According to newsmax.com:...
Make the Shutdown of Undesirable Federal Departments and Agencies Permanent
A Continuing Resolution is an abomination. The House of Representatives under the Constitution of the US was established by the first article of the Constitution. The Constitution provides that “All Bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.”
The Senate under Harry Reid has been acting unconstitutionally as it pretends to have equal authority on spending and revenue matters with the House of Representatives. If that were so, why does the Constitution give exclusive power to initiate revenue measures to the House, the federal body closest to the people?
Senators in the original Constitution were “chosen by the Legislature” of each state. The Senate was intended to act on behalf of the States to prevent the federal government's encroachment on its powers and legislation harmful to the States. While the 17th Amendment provided for the popular election of Senators there was no change in the powers of the Senate. The States’ legislatures in passing this amendment abandoned the ability to prevent the encroachment of the Federal Government on the powers of the States. Witness the establishment of the Federal Departments of Housing and Urban Development and Education; formerly the exclusive concern of state governments.
The House passed a budget each year for the past five years but the Democratic Senate refused to consider them – which was unconstitutional behavior. The House has been sending bill after bill on the budget and the Senate has been tabling them without consideration. The Senate has been in effect vetoing the budget bills of the House of Representatives.
Trade deficits and stagnation
Dean Baker rightly takes Krugman to task for not focusing on trade deficits as one source of US stagnation. http://www.cepr.net/index.php/blogs/beat-the-press/krugman-on-bubbles-and-secular-stagnation
Eliminate the Minimum Wage; Substitute a Revised Earned Income Tax Credit
Most economists believe that the minimum wage increases unemployment among unskilled and young workers. Unions and their economists are strong backers, even though none of their members earns less than the minimum wage. Their reasons are Machiavellian; they don’t want competition from persons earning less than their members earn.
As the following table shows, unemployment rates among workers between the ages of 16 to 19, black and white, have three times the unemployment rates of whites and blacks in the labor force. The rate of unemployment of black teenagers is a staggering 38.4 percent. The Obama administration’s monetary and fiscal policies have created enormous benefits for shareholders as the booming stock markets show. They have benefited blacks, particularly black teenagers very little or not at all. The rich have benefited and so have businesses catering to the rich, but the poor have gotten poorer. Only today, as we write this, the US Bureau of the Census confirmed that there are more Americans with incomes at the poverty level than before the recession.
The minimum wage is part of the problem. It has prevented the employment of teenagers and the unskilled particularly....
How the Corporate Income Tax Creates Billionaires and Punishes the Middle Class
The U.S. corporate income tax violates nearly every criterion of a good tax. It is expensive to administer and to comply with. It violates the principle that persons with equal incomes and circumstances should bear an equal burden. It causes corporations to engage in uneconomic practices, including relying too heavily on debt financing and too little on equity financing. It encourages corporations to buy-back their shares instead of paying dividends. It encourages the corporation’s principal shareholders to retain earnings and pay little or no dividends that would be subject to high personal income tax rates. Corporate earnings are taxed twice, once by the tax on corporate earnings and again by the personal income tax when paid out in dividends. Because the rates of tax differ widely among countries, the high rates of the U.S. tax puts American corporations at a competitive disadvantage in foreign trade. And, importantly, the corporate income tax is not as progressive as it is believed to be and may not be progressive at all. In fact, it worsens the distribution of income; probably the principal reason we have so many billionaires.
In effect, the corporate income tax enables the controlling shareholders to reinvest their corporate income free of personal income tax. And it may even be free of corporate income tax! Economists widely believe that the tax is passed forward to consumers or backward to employees; they reason that corporate investors must at the margin earn the same return as unincorporated businesses or they would not invest in corporations which are subject to a corporation income tax.
Prof. Arnold Harberger, an eminent economist, argues that corporations that sell their products domestically are able to pass the tax forward to consumers or backward to their employees but corporations that export much of what they produce cannot pass the tax forward to consumers because of international competition. But corporations with earnings abroad have an advantage in that they pay no tax until their foreign earnings are repatriated so they can reinvest their earnings abroad without paying any personal income tax.
Corporate shares are widely believed to be owned preponderantly by the wealthy. This may be true but pension funds, whose beneficiaries are workers, and mutual funds that are widely held by the middle class, own a substantial portion of corporate wealth. Many of the beneficiaries are in brackets below the basic rate of the corporate income tax. Their earning are thus taxed at the high rate of corporate tax and taxed again when they receive the pensions and dividends. ...
Real Tax Reform; Tax Corporations As Partnerships
The U.S. corporate income tax violates nearly every criterion of a good tax. It is expensive to administer and to comply with. It is not as progressive as it is believed to be. Indeed, by retaining earnings and avoiding paying dividends, wealthy shareholders avoid the high tax rates of the personal income tax. It violates the principle that persons with equal incomes and circumstances shoulde bear an equal tax burden. It causes corporations to engage in a number of uneconomic practices. Earnings are taxed twice once as corporate earnings and again under the personal income tax when, as, and if they are paid out in dividends. The personal income tax on dividends amounts to taxing the same income twice. Workers who pay into pension funds are not only taxed twice but the corporate tax date for most workers is higher than their personal income tax rate and they are taxed again when the pension is received and personal income tax has to be paid. It encourages corporations to engage in debt financing rather than to raise equity capital. It encourages corporations to buy back their stock instead of paying dividends, as a means of converting dividend income into capital gains. It encourages moving factories overseas, encourages imports and discourages exports costing millions of jobs. It discourages the payment of dividends and favors corporate practices such a stock buy-backs which convert ordinary income into lower-taxed capital gains.
It is believed to be progressive because corporate ownership is distributed unequally. But the incidence of the tax is in doubt. Prof. Harberger, an eminent economist, argues that corporations that export much of what they produce cannot pass the tax forward to consumers because of international competition. But corporations that sell their products domestically may be able to pass the tax forward to consumers or backward to their employees. ...
The Growth of State-Dominated Capitalism in the USA
The Federal Government over the past eight decades has grown from 2.1 percent of Gross Domestic Product (GDP) to 10.7 percent while State-Local governments did not grow at all. As the following table shows, federal expenditures during the 1930s more than tripled, from 2.1 percent of GDP to 7.1 percent of GDP while State-Local programs declined from 8.9 percent to 7.8 percent.
The new economic system in the U.S., introduced by the “New Deal” in the 1930s, can be described as state-dominated capitalism and is to be distinguished from the system of economically passive government and free private enterprise that existed before 1890. Our thesis is that state-dominated capitalism in the USA can be said to have grown significantly under the administration of Franklin Roosevelt with the policies of the “New Deal” and through the President’s successful attempt to force the Supreme Court to legitimize the expansion of the powers of the central government....
Blacks Do Poorly Under Obama's Stimulus Policies
It is generally believed that blacks have fared well under Obama but the truth is that Obama’s policies have made blacks worse off. A black scholar, Dr. Reginald Clark, points out that every racial group, except the blacks, has benefitted, however moderately, since 2009. He writes that “since 2009 Blacks are the only group that has taken a definitive step BACKWARDS since then.” This continues to be true as the following table shows:
Census Release, May 13, 2013
Unemployment Rates Apr. 2012 Apr. 2013
Total 16 and over 8.1 7.5
Teenagers 24.9 24.1
White 7.4 6.7
Black 13.1 13.2
Asian 5.2 5.1 .
Hispanic 10.3 9.0
Pres. Obama succeeded in getting the Congress to increase the progressivity of the federal personal income tax by raising the top marginal rate from 35 to 39.6 percent and increasing the rate on dividends and capital gains from 15 percent to 20 percent for taxable incomes over $400,000 for single filers.
The Congressional Budget Office (CBO) published an analysis of the progressivity of the personal income tax and of all federal taxes. Its summary includes the following paragraph:
"In 2007, the bottom quintile’s average rate for the individual income tax was -6.8 percent, which means that refundable earned income and child tax credits exceeded the income tax owed by that group. On average, households in the second quintile also received more in credits than they paid in individual income taxes. The average income tax rate was 3.3 percent for the middle quintile and 6.2 percent for the fourth quintile. For the highest quintile, the rate was 14.4 percent. The top 1 percent, on average, paid 19.0 percent of their income in individual income taxes."
So the personal income tax average rates range from -6.8 percent in the lowest quintile to 19.0 percent for the highest one percent. Raising the marginal rates in the top brackets will increase the progressivity of the tax system very little, but will have the wrong economic incentives. And taking government expenditures into account is already very progressive. ...
II. Abolish the IRS As We Know It and Strengthen the Federal System
The scandalous misuse of the power of the IRS bureaucracy requires more than legislation requiring political neutrality in its administration. The personal and corporate income tax codes have increased in size and complexity enormously. The size of the bureaucracy and the costs of administering the personal and corporate income taxes are beyond belief. The costs to taxpayers to comply with the law runs into hundreds of billions of dollars. The current income tax laws, both personal and corporate have to be repealed and replaced.
Prof. Arthur Laffer and his colleagues at The Laffer Center calculated the economic burden caused by the tax code’s complexity in April, 2011. They estimated the total cost of administering the personal and corporate income tax, which yielded about $1.4 billion in 2008, to be $431.1 billion, or 30 percent of total income tax revenue. They break the cost down as follows:
Thirty percent for administration and compliance costs is outrageous; even ten percent for just cash outlays is excessive. The cost of ad ministering sales taxes is on the order of two percent which is one of the reasons given by many economists for recommending substituting the Fair Tax for the personal income tax. ...
A Better Way to Tax -- Ray was published in Saturday's Tribune Review
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Abolish the IRS As We Know It and Restore the Power of the States
The recent scandal involving the IRS illustrates the out-of-control growth of the federal bureaucracy. Instead of limited powers of the federal government and reservation of all powers to the states not specifically granted to the federal government, spelled out in the first ten amendments to the U.S. Constitution, the reverse is now true. The states are not only dependent fiscally on the federal government but it is they who have limited powers. In this paper, we propose to limit the powers of the IRS and reassert the predominance of the States.
The IRS would, under our proposal, administer only an income tax on wages and salaries. Since most wages and salaries are taxed at the source, corporations and other employers will pay over to the IRS nearly all of the wage taxes collected. Recipients will have only a simple return to file, dealing mostly with allowances for dependents. Most will have to file no return at all. The billions now spent by the IRS in administering a tax code of many thousands of pages will be reduced 95 percent.
Taxes on interest, capital gains and corporate income would be replaced by a form of tax on wealth, a tax on the capitalized value of all business enterprises. Given the total value of business enterprises, a very small rate of perhaps 3 percent, together with the tax on wages and salaries, would yield more than the current yield of the personal and corporate income taxes. ...
The Gods of the Copybook Headings are in Cyprus - We're published in today's American Thinker
Here's is a selection:
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The Gods of the Copybook Headings are in Cyprus Now, and Coming Here Soon
The above you-tube video shows Glenn Beck reading Rudyard Kipling's 1919 poem, The Gods of the Copybook Headings. In that poem, Kipling compares the truths of the real world ("the Gods of the Copybook Headings") with the promises of social progressives ("the Gods of the Market Place"), and he concludes that nations which follow the false promises of the social progressives eventually rediscover reality, often when it is too late.
In his April 2 column (Today, Cyprus, Tomorrow…) Pat Buchanan sees the Gods of the Copybook Headings at work in Cyprus today. He argues that those investors who loaned their money to Cypriot banks were ignoring reality, writing:
No Recovery From the Great Recession Is in Sight
As I reported last week, initial claims for unemployment compensation during the week ending March 16, 2013 broke below 300,000 for the first time since 2007. And I asked if it marked the beginning of a recovery from the Great Recession. It turns out that the answer is negative. The number of initial claims rose in the following week ending March 23, 2013. The seasonally adjusted number of initial claims rose by 16,500 to 357,000 and the seasonally unadjusted (the actual!) number rose 14,706 to 315,659. Of course, the preceding week’s numbers could have been a fluke and so could the latest week’s numbers.
What is hampering the recovery? Just this week in an op-ed in the Wall Street Journal, Mortimer Zuckerman, editor and publisher of the US News and World Report, labeled the claims of recovery to be a fantasy, pointing out as we have done, that the true unemployment figure is 14.9 percent, not 7.7 as reported officially.
The claims of recovery appear to be substantiated by the rise in the prices of stocks as indicated by the Dow-Jones and other stock markets indices. But the quantitative easing by the Federal Reserve Board has provided financial institutions with increased money for lending, much, if not most of it, has simply increased the prices of assets such as stocks and real estate. The FED’s financing of the trillion dollar deficits has enabled increased government spending which is a stimulus to the economy as long as it lasts but is at the expense of diminished private expenditures.
The stimulative effects of increased government spending on consumption and investment are largely offset by the fact that it stimulates imports and does nothing to increase exports. In fact, it is government policy to stifle the production of fossil fuels which we still import. The trade deficit rose to $44.4 billion in January, 2013 from $38.1 billion in December, 2012. Fortunately, the private sector has been increasing the output of oil and natural gas in spite of environmental extremists’ powerful influence on government policy. In fact, the fossil fuel boom is the strongest stimulus to the recovery we have and helps to offset the depressing effects of the government’s “green” policies. ...
Pres. Obama Policies Are Leading to the Loss of More American Jobs
Mortimer Zuckerman, editor in chief of U.S. News & World Report, in an op-ed piece in the Wall St. Journal (2-16-13) entitled “By Any Measure, the Jobs Disaster Continues”, confirms what we have been writing in this space for months namely that the press has been misreporting the unemployment data because they employ the seasonally adjusted numbers reported by the Bureau of Labor Statistics instead of the actual numbers. He writes:
“January was supposed to have seen 157,000 jobs created…But the supposed hiring was based on seasonally adjusted numbers … The real, unadjusted figures for January show that nearly 2.8 million jobs disappeared, which happened to be worse than the 2.63 million lost in January 2012.”
He also points out that the statistics do not include the number of “discouraged workers who have dropped out of the labor force.” Were they included, “the formally announced unemployment rate would be around 9.8%, not the headline 7.9%.” And, “After four years America remains in a jobs depression as great as the Great Depression.” ...
More Than a Million Workers Lost Their Jobs Since Obama's Re-Election. Recession Is in Prospect
Over one and a quarter million workers have lost their jobs since Pres. Barack Hussein Obama won re-election. In the five weeks before the election, the average number of initial claims filed for unemployment insurance amounted to 347,918 per week but the average in the 13 weeks since the election amounted to 447,908. This contradicts the administration’s and the media’s reporting that the economy is growing, but is consisted with the decline in Gross Domestic Product in the fourth quarters of 2012. At the same time, Obama’s rich friends benefited from a stock market boom as a result of his easy money policies and from government subsidies. The Fed’s increase in the money supply created few if any jobs but created an asset boom, fueled by expectations of run-away inflation.
The fact is that increased government expenditures financed by public debt creates few new productive jobs and few are lasting. As soon as government expenditures are reduced, the temporary jobs created are lost. Many of the jobs created by government deficit spending are unproductive, for example, the government subsidized jobs in wind and solar energy. Even though more than half the cost is borne by government subsidies, the favored companies are subsidized even further by tax credits and by orders to the electric utilities to buy their output even though it is more costly. In addition, the utilities must have back-up facilities for those periods in which little or no electricity is generated because of the lack of wind or sunlight. The rising cost of electricity is a burden on the economy.
Insanity has been defined as doing the same thing over and over again and expecting a different result. The President wants to increase federal government spending which he has been doing and financing by deficits for four years and which has done little or nothing to create improved economic conditions. Unemployment, including involuntary part-time employment and the number who are no longer seeking work or who have dropped out of the labor force, is higher than when he took office. Republicans on the Senate Budget Committee reported that the federal government spent more than a trillion dollars (the amount of the federal deficit last year) on welfare programs and that more than forty-seven million, a new high, were enrolled to receive food stamps. ...
Treat Corporations as Partnerships for Personal Income Taxation
Many taxpayers believe that the Corporate Income Tax falls mainly on the wealthy. In fact, the wealthy do own a large proportion of corporate wealth. But workers pension funds own a significant share of corporate wealth. An organization noted for its opposition to wealth and income inequality produced the following estimates:
Distribution of US Stock Market wealth, 2007
Population % of Stocket Market Wealth
Top one percent 38.2
90 -99th percentile 43.0
80-90th percentile 9.9
60-80th percentile 6.4
0-60th percentile 2.5
What is surprising about the above distribution of stock market wealth is not that stock market wealth is highly concentrated but that the bottom eighty percent owns as much as 8.9 percent of total stock market wealth. This means that they were taxed at up to 35% on their corporate earnings, most of it probably in their IRAs, 401s, or other pension accounts. The burden of the corporate tax on the wealthiest ten percent is taxed at the top corporate rate of 35 percent which was also the top rate of personal income tax. In effect, the bottom eighty percent are taxed by the corporate income tax at the same rate as the wealthiest one percent. The bottom one percent probably pay no personal income tax but their share of corporate income is tax at the highest corporate rate.
There is an additional important reason for integrating the corporate income tax with the personal income tax. An eminent University of Chicago economist in a seminal article which has been largely ignored argues that the corporate income tax is shifted to American consumers and is therefore a regressive tax but that it cannot be shifted to foreign consumers when exported because its foreign competitors are untaxed.This puts American corporations at a competitive disadvantage in international trade as we pointed out on this site in a recent posting. ...
December 31, 2012, is a date that will live in economic infamy
December 31, 2012, is a date that will live in economic infamy. Six days after Christmas, Republican and Democratic leaders decided to reverse the effects of Santa Claus. They agreed to steal from America's children so that adults could have some short term benefits.
Instead of reducing the federal budget deficit from $1,327 billion to $825, as would have occurred automatically, had the negotiations failed, the final deal will only reduce budget deficits by $63.5 billion according to Fox News' Ed Henry. Up to $100 billion more could be subtracted following the sequester debate. The national debt will continue to grow at at least a $1,163 billion per year pace while GDP will probably continue to grow at about its current $647 billion per year pace....
The Reverse-Santa-Claus Negotiations Continue
If they can't cut the budget deficits right after a presidential election, when will they do so?
It is the final day of the Reverse-Santa-Claus fiscal cliff negotiations. The main thing that has already been decided by the Republican and Democratic leaders negotiating is that they will steal from America's children. Almost everything has been taken off the table that would reduce the budget deficits. The latest to go is the provision that would slow the cost-of-living increases for entitlements.
They have already negotiated away the fiscal cliff's automatic $502 budget deficit reduction of the $1,327 billion budget deficit. Every time a new deficit reduction target is revealed, the amount of projected deficit reduction has been reduced, $260 billion, then $220 billion then $200 billion. This week, they have stopped mentioning figures altogether.
They justify their irresponsibility by holding that a recession would occur in 2013 if they did not act. There would indeed be a recession, but it would not reach the 9.1% unemployment rate for the fourth quarter of 2013 predicted by the Congressional Budget Office. Ideal Taxes Association has continually been correct regarding the ineffectiveness of budget deficits in one prediction after another:
A Genuine Tax Reform: Increased Use of the Estate Tax and Integration of the Corporate And Personal Income Tax
Congress makes changes in the personal income tax code annually. This affects the behavior of investors violating the basic principle of certainty. For example, effective January 1, 2013, the rate of taxation of realized capital gains will increase from 15% to 20%. For many years, capital gains had a different treatment. Fifty percent of long-term realized capital gains was counted as taxable income.and was subject to a maximum tax rate of 25%. Congress changed the treatment several times since then and for the taxable year 2012, there was a single tax rate of 15% applied to long-term realized capital gains. During some years, gains from the sale of dwellings were untaxed if a new dwelling costing more than the realized gain was purchased within two years. During the Clinton administration, the condition that a new dwelling must be purchased within two years was eliminated. As we have shown, there is only one correct treatment of capital gains, namely that realized gains be taxed as ordinary income if consumed and left untaxed if reinvested. A realized appreciation of capital is income only if the proceeds are not reinvested. Capital gains of a decedent escape taxation when the capital asset is inherited. The U.K. until a few decades ago did not tax capital gains believing that an appreciation in the value of capital is not income at all. Indeed they began to tax realized capital gains but not under the income tax. Most American economists have been raided to believe that accrued (unrealized) capital gains are also income but if that were true, an accrued capital gain is simultaneously the source of income and income itself. An accrued capital gain can be defined as the present value of an increase in the expected stream of income as we have shown previously in our book and on this blog. Economists can be wrong. If the economists advising the Congress and the administration, how can we expect rationality from the Congress and the federal administration? .
The owners of corporations are their shareholders. Corporations pay income tax and shareholders pay income tax on corporate dividends. It is not surprising that shareholders try to convert some of their corporate income into capital gains which have been taxed at lower rates than dividends. Corporations pay income tax on income generated domestically and on income earned abroad when and if the income is repatriated. A great deal of corporate income earned abroad is never repatriated. Many governments have a territorial definition of income and do not tax income earned abroad at all. But our unitary definition of income holds that income wherever earned is subject to tax. It is to be expected therefore that the political parties change policies whenever they win an election.
The parties also differ on the estate tax. The conservative opposition to the federal estate tax is misguided. By all the criteria or principles of taxation, the estate tax is one of the best taxes. It accords with ability to pay, it is not arbitrary, it has good interpersonal equity both horizontal and vertical, its economic effects are good or at least not bad, it is economical to administer and to comply with. ...
Will this be Boehner's "Peace in Our Time" Moment?
After insuring World War II by capitulating to Adolf Hitler in Munich, British Prime Minister Neville Chamberlain defended the agreement that he had just negotiated in what has come to be known as his "Peace in Our Time Speech." Chamberlain claimed that all parties at Munich wanted to avoid war. He said:
If a fiscal cliff settlement is arranged along the lines currently being discussed, look for House Speaker John Boehner to make a similar speech in the near future. He would say that all parties in the negotiations wanted to rein in the American budget deficits, something like this:...
Sarah Palin: "We’ve Already Gone Over the Fiscal Cliff, Now It’s About How Hard We Hit Bottom"
This November 30 interview with Sarah Palin restores my hope that there is intelligence left within the Republican Party:
She's right that we're already over the fiscal cliff in that there's not going to be a painless way to bring down the budget deficits and prevent the collapse that will occur if they continue to grow, in proportion to GDP.
Meanwhile, the House Republicans are currently negotiating an agreement with President Obama that will substitute $200 to $250 billion in budget cuts for the $502 billion that would place if no agreement was reached.
By not dealing with the problem right after the election, they are insuring that trillion dollar deficits will continue to raise the U.S. debt-to-GDP ratio into the forseeable future.
As Palin points out, they are simply postponing the pain and making it much much worse when it does come in the future. This future is easily foreseen:...
Fiscal Cliff: Negotiation Failure Could be the Best Option - we're published in today's American Thinker
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$260 billion in deficit cuts is not enough
If they can't agree to bring the budget toward a sustainable balance when the next elections are 2 years away, when will they do it?
According to Politico, the tax increases and spending cuts of the compromise deal being worked out between President Obama and the Republican House leadership will only reduce the federal budget deficit by about $260 billion per year.
Currently the U.S. federal government budget deficit is $1,327 billion per year. Without this deal, the tax increases and spending cuts of the fiscal cliff would have reduced the deficit to $825 billion per year. This deal will only reduce the budget deficit to $1,067 billion per year, resulting in a 6.7% rate of budget deficit growth which is about 4% faster than GDP growth.
Here's how this growing debt to GDP ratio will eventually play out, according to the Congressional Budget Office:
And here is how my father, son and I described this future in our American Thinker article about the fiscal cliff (The Fiscal Cliff is a Good Thing):
Mark Faber predicts economic future if House Republicans kick fiscal cliff down road
In an interview on CNBC's Squawk Box, Mark Faber, author of "The Gloom, Boom, & Doom Report," laid out the economic future if the House Republicans kick the can down the road in the Fiscal Cliff negotiations.
In his scenario, the fiscal cliff results in nothing more than minor tax increases and minor cuts in spending. Meanwhile, the world economy will continue to stagnate until it goes over the precipice with a "complete collapse of society in 5 or 10 years time".
The Fiscal Cliff is a Good Thing -- we're published in today's American Thinker
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Obama's Freudian Slip: He Wants to Export Jobs -- we're published in today's American Thinker
You can read it here: http://www.americanthinker.com/2012/10/obamas_freudian_slip_he_wants_to_export_jobs.html
Even though we wrote it before the debate, much of what we said tied in directly with what the candidates said last night. Again last night, Romney highlighted his plans to crack down on China's trade cheating. It was in his five point summary of his position. We began our American Thinker piece with that promise.
In this piece we quoted a portion from the last 2008 debate when Obama claimed (falsely, as it turned out) that he would take on China's currency manipulations while McCain said that he would instead send unemployed manufacturing workers to community colleges for non-existent jobs.
Last night Obama, channeled the 2008 McCain. He noted that he was re-educating manufacturing workers at community colleges for existing jobs, while Romney pointed out that half of college graduates can't find employment.
Again in the debate last night and again in his closing statement, Obama rehashed his phony way of dealing with trade from the 2008 campaign, his proposed tax on outsourcers. We explained that issue this morning, when we wrote:...
Writing for National Journal, Jim Tankersley raises what he terms "The Only Debate Question that Matters" of "Why aren't you serious about trying to solve the jobs crisis?" in a forceful way. Tankersley notes that neither candidate has a jobs plan that can credibly be claimed to be up to the scale of the jobs challenge...
The New Jobs and Trade Numbers are Related
President Obama claims to be a champion of U.S. manufacturing workers. In his advertising, he accuses Romney (falsely) of outsourcing jobs when he was CEO of Bain Capital. In his stump speech, he claims to be the champion of "made in the USA." But the latest economic reports from the U.S. Labor and Commerce Departments tell a different story:
The relationship between trade and unemployment was first observed by John Maynard Keynes. In a chapter toward the end of his 1936 book, The General Theory of Employment, Interest and Money, he discussed the danger of tolerating mercantilism, the trade strategy designed to produce trade surpluses. Keynes wrote:
Of the overall U.S. trade deficit of $42 billion in July, about 2/3 ($28 billion) could be attributed to China. The following graph shows that our merchandise trade deficit (negative net exports) reached a record $310 billion for the twelve months ending in July:
The Chinese government keeps out American products through high tariffs and through government fiat. For example:...
The U.S. Housing Bubble Wasn't Special
Some narratives about the housing price bubble in the United States that are adopted by the political right (community reinvestment act) and the political left (corrupt bankers left unregulated) fail a basic and simple test. Both are explantions that are United States centric. They focus on policy changes enacted in the U.S. and seek to explain housing price changes in the U.S.
But they ignore the fact that many other countries experienced similar housing booms (some haven't fully gone bust yet either) at roughly the same time.
The USA Must Follow Spain's Lead in Ending Wind and Solar Subsidies
Spain has cleared the decks for its economic recovery by ending its subsidies to “Green” energy. The crisis in the Eurozone requires Spain to bring its fiscal budget in better balance. Spain has ended its subsidies for building wind and solar plants. New wind and solar plants will have to be financed by investors with no subsidies in the form of cash grants and tax subsidies. The average wind and solar plant built in the U.S. receives subsidies from state governments and the federal government which amount to an estimated 50% of the total costs of the project. This is at the expense of the American taxpayer who, in addition, pays higher prices for electricity and outsourcing of his job. Spanish Associate Professor of Economics, Gabriel Calzada Alvarez, of King Juan Carlos University concluded that the wind and solar plants crowd out two jobs in the economy’s private sector for every job they create in the alternative energy sector. He testified before a U.S. Congressional Committee that the same is true of the alternative energy plants built in the U.S.
More than $69 billion of wind and solar plants have been installed in Spain since 2004. The unreliability of wind and solar energy means that there is no saving in capital since back-up power facilities using traditional fuel sources are required to ensure a continuous supply of electricity.
To make matters worse, public utilities have been ordered to purchase electricity from wind and solar plants at prices exceeding the costs of electricity from traditional sources, coal, natural gas, nuclear, etc. The same is true in the U.S. The effect is to raise the prices of electricity to households and businesses on whom it acts like a sales tax. It raise the cost of living and it dampens the desire to invest in new factories in the U.S. since it will increase the future prices of electricity. ...
Does China Have a "New Economic Policy" for Dealing With Foreign-Owned Enterprises
Dr. Derek Scissors of the Heritage Foundation in testimony before the U.S-China Economic and Security Review Commission in March, 2011 described the fall and subsequent rise of Chinese state-owned enterprises. From 1993-2001, the state sector shrank but from 2008 it grew and currently predominates over the private sector. What is the future of the private sector in China? We believe there is a good likelihood that all foreign enterprises in China will eventually be nationalized.
The Chinese Communist strategy can be divined by studying Lenin’s New Economic Policy (NEP), which lasted from March, 1921 to 1929. It became necessary because of the shortages of food that reigned as a result of the policy of forcing farmers to “sell” all their product to the government at a price that gave farmers no incentive to produce more than they could consume. The new policy permitted peasants to sell their products on the open market after meeting some obligatory transfers to the government. Its success led to the denationalization of small-scale industry, and even permitted foreign companies to build factories. Lenin insisted that the NEP had to be pursued "seriously and for a long time." Under NEP the Soviet economy revived reaching in the middle 1920s to its pre-war levels or close to it. A capitalist class was emerging, creating demands by ideological communists for an end to NEP. It was ended by Stalin in 1929, with tragic consequences for the independent farmers and ultimately for the Soviet Union itself.
If the orthodox communists in China behave similarly, China may have a similar experience. China has clearly adopted its own NEP which, if it learns from Russia’s experience, it will pursue “seriously and for a long time” at least until it surpasses its major competitor for world supremacy, the USA....
How Keynes would save the euro
World leaders are lending euros to the PIGS (Portugal, Italy, Greece and Spain); that won't work. They are trying to recapitalize the PIGS' banks; that won't work. The loans will simply flow out of the PIGS to buy imports.
The real problem is trade balances. In statistical terms, trade balances (i.e., current account balances) explain more than 40% of the variation in unemployment rate within euro-zone countries that have GDPs of at least $100 billion (and more than 20% of the variation worldwide). As shown in the graph below, all of the failing countries of the euro-zone have high unemployment rates and large trade deficits (as a percentage of GDP):
Keynes summarized the relationship between trade balances and unemployment in the chapter about mercantilism in The General Theory of Employment Interest and Money (1937):
Less than 2 years before his death, negotiating for the United Kingdom at the Bretton Woods Conference, Keynes tried to create an international organization that would keep trade balanced. The resulting organization, the International Monetary Fund, has largely been a failure.
It doesn't even bother to enforce its own Articles of Agreement. For example, China and many other emerging market countries freely violate Article IV which prohibits "manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."
The organization that Keynes tried to create would have had different rules for trade deficit and trade surplus countries. Trade deficit countries would be allowed to charge tariffs, while trade surplus countries would be required to stimulate their demand for imports. Such rules are vitally needed in the euro-zone today.
If Keynes were in charge, Germany and the other trade surplus countries of the euro-zone would be required to stop charging their value-added tax on the products of the trade deficit countries of the euro-zone. Meanwhile, the trade deficit countries would be permitted to charge trade-balancing tariffs on the products of the trade surplus countries. These steps would lead to business investment in the trade deficit countries and save the euro.
The same principle applies to the rest of the world as well....
The Undiscussed Measures That Would Result in an Economic Boom
Why have we not recovered from the recession? Because governments all around the world and particularly the USA have ignored the major causes of this recession. This depression was caused by the bursting of the housing bubble. The bubble was the result of the Community Reinvestment Act of 1977, sponsored by sentimental politicians who fell for leftist propaganda that the banks were systematically red-lining disadvantaged neighborhoods. The CRA was the wrong tool. The Fed was in effect forcing the banks to make loans to unqualified persons. It had the support of Democrats who wanted to enable the poor, especially blacks, to own their own homes and Republicans who wanted to enable more families to own their own homes. After all, home owners tend to be conservative. The CRA made blackmailers like ACORN rich and powerful. The loose lending policy led to the housing bubble.
Congress put in charge of administering the CRA the same Federal banking agencies that are responsible for keeping depository institutions healthy, namely, the Federal Reserve Board, the FDIC, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision(OTS). In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs. Paul Volcker was the Fed chairman at the time. Why he and his successor Alan Greenspan went along with legislation that made the Fed an agent to determine what loans the banks should make reflects on their understanding of how free markets are supposed to work. (See Wikipedia for more information about the CRA.) In any case, these supervisory agencies permitted the banks to to pay blackmail, to employ ACORN and other leftist groups as mortgage initiators, and to enncourage banks to make loans with little or no money down to everyone pretending to be a legitimate home buyer. The only duty of the Fed should be determining the supply of money needed for stable growth....
Saving Greece, Spain, Portugal, Italy, France, and the U.S. From Bankruptcy
Greece, Spain, Portugal, Italy, France and the U.S. are close to bankruptcy and they all have the same causes: profligate government, large trade deficits, and bewildered economists. They are dysfunctional and incapable of doing what is necessary to survive as prosperous nations. By contrast, Germany, China, and Japan are doing very well. As the following table reveals, the countries on the list that face economic collapse are those with large trade deficits and the countries doing well are those with large trade surpluses. No revolution is required for the former to resolve their problems.
That the troubles of Greece and the other eurozone countries and the recession in the U.S. are related to their trade deficits is evidenced in the following table relating the level of employment in various countries to their current-accounts balance:
The International Monetary Fund, whose SDRs (special drawing rights) are a candidate to succeed the dollar as the world’s monetary standard, reported in early April that China’s enormous trade surplus with the world was narrowing. It failed to note that China's trade surplus with the U.S. continues to increase. Is this coincidence or deliberate policy? The Wall Street Journal hailed the notion that world imbalances were being corrected by market forces. That is in line with its ideology of "free trade" but it ignores the reality that China's trade surplus with the U.S. continues to increase.
In a recent analysis in the New York Times (5/1/2012), Eduardo Porter, a member of the Times editorial board, citing IMF sources, notes that the Chinese trade surplus had fallen from 10 percent of its GDP in 2007 to 2.8 percent in 2011. The U.S. trade deficit declined from 5.1 percent of GDP to 3.1 percent during the same period. The fact is that the worldwide recession in 2008-09, reduced the exports and imports of every large trading nation creating the impression that trade was being balanced. The IMF did succeed in blunting the increasing demand that China allow its yuan to appreciate to make imports cheaper and exports more expensive. The IMF made it appear that market forces were doing the job of bringing trade into balance. In fact, the effect of the recession was only temporary....
Notwithstanding that the recesion of 1937-38 indicated that there was no Keynesian multiplier--as soon as the stimulus of the preceding four years was reduced, the economy tanked--Keynesians maintained that the Roosevelt administration reduced its stimulus spending too soon. The same agument is being made by Nobel prize winner Prof. Paul Krugman and former Chairman of the Council of Economic Advisers, Prof. Christina Romer, and many others after the failure of the $800 billion Recovery Act of 2009.
Keynes was a great English economist who sought a solution to the problem of depressions and business cycles in general. He thought he found the answer and wrote his epic, the General Theory of Employment, Interest, and Money (1936) . While Keynes took a scientific approach to the problem of recovering from a depression, he turned out to be wrong about his “multiplier”; increased government spending creates employment temporarily but the jobs disappear when the stimulus is ended.
Dr. Valerie Ramey, Professor of Economics at the University of California, San Diego recently published in the NBER Working Paper Series the results of her research entitled “Government Spending and Private Activity” in which she concluded that “For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggest that it significantly lowers private spending. .. The results imply a multiplier on total GDP of around 0.5.” And further, “For all but one specification, though, it appears that all of the employment increase is from an increase in government employment, not private employment.” ...
Santorum's Federal Reserve position shows economic common sense
In a February 23 interview on GBTV, Senator Santorum's discussion of the Federal Reserve showed off his economic common sense. Here is the relevant segment:
Santorum was being interviewed by Glenn Beck, who has taken the foolish position that the Federal Reserve should be eliminated and that the United States return to a gold standard. Santorum did not agree, but he had sensible ideas of how the Federal Reserve should be reformed. His discussion showed his understanding of three key economic principles:...
The Economist Declares the US Economy Is Being Suffocated By Over-regulation
We would like to call your attention to an editorial in The Economistof Feb. 18, 2012 entitled “Over-regulated America” and sub-titled, “The home of laissez-faire is being suffocated by excessive and badly written regulations.” It cites inter aliathe Dodd-Frank law of 2010 as “far too complex and becoming more so. At 848 pages…”. Yes, you read that right! “Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the ‘Volcker rule’, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.” And “.. of the 400 rules in mandates, only 93 have been finalized. So financial firms in America must prepare to comply with a law that is partly unintelligible and partly unknowable.”
As for Obamacare, “Every hour spent treating a patient in America creates at least 30 minutes of paper-work , and often a whole hour. Next year the number of federally mandated categories of illness and injury for which hospitals may claim reimbursement will rise from 18,000 to 140,000.” And a study for the Small Business Administration “found that regulations in general add $10.585 in costs per employee.” The Economist is to be congratulated for calling attention to the problem of over-regulation that is so harmful to the American economy.
Unfortunately, The Economist is not against government regulations but only to their complexity....
The Revealing Moon Debate -- We're published in today's American Thinker
Republican candidates revealed how they think during the moon debate
The discussion of Gingrich’s moon colony proposal at the January 26 Republican presidential candidate debate tells us a lot about the Republican Final Four. It reveals how they would approach their decisions as President and lets us predict the economies that they would produce. (Click here to watch this portion of the debate.)
Speaker Gingrich: The Big Idea Man
Speaker Gingrich initiated the discussion of a possible moon colony during a speech in Florida designed to appeal to NASA workers that was televised by CSPAN the day before the debate. He urged that the United States set a new national goal to put a permanent colony on the moon by the end of the decade and make that colony the 51st state. But the most creative part of his idea was his method for involving entrepreneurs in the venture.
He is aware that NASA, as is true of almost all government-run institutions, has deteriorated over time. These days, it can’t even get satellites up into space. Gingrich would largely replace NASA with contests. He said:...
Obama's SOTU: Still No Manufacturing Jobs -- we're published in today's American Thinker
Here's how we begin:
To read the rest go to:
Follow the following link to download the MP3:
Real house prices will probably keep falling
On December 29, S&P Case-Shiller published its October estimate of average house prices using sales and resales of the same houses to make their estimate. The latest data shows the continuing fall in real house prices since June 2010 shown in the graph below:
The latest data agrees with our prediction of how fast house prices would fall. Specifically, in the April 14, 2011, American Thinker (House Prices in Free Fall) we wrote:
Romney's Theory about Why Companies and Countries Decline - We're published in today's American Thinker
Follow the following link to read it:
Romney’s Theory about Why Companies and Countries Decline
When Republican presidential candidate Gov. Mitt Romney was growing up, his father was rescuing American Motors Corporation by focusing upon a new type of car, the compact, putting his company’s resources into the Rambler. When his father took over, American Motors stock was selling for $5 per share. After the success of the Rambler, it rose to $95.
How did American Motors succeed when it was competing with General Motors, which had all the advantages that experience, size and wealth confer? In his 2010 book No Apologies, Romney writes:
Romney is a student of why companies and countries go into decline. After graduate school, he went to work for the Boston Consulting Group where his boss did a study of the advantages of leadership:
According to Romney, companies and businesses decline for the same reasons. They ignore challenges and threats. They squander their advantages. Due to easy money, they stop doing the things which made them great in the first place. According to Romney, the following made America great and should be part of our revival:...
Required Reading, Michael Lind's "The Cost of Free Trade"
Every once in a while, we read an article or a commentary that we believe should be called to everyone’s attention. If you want to know why the U.S. went from being the world’s leading creditor to leading debtor in three decades, we are unable to recommend anything better that Michael Lind’s superb article in The American Prospect on December 1, 2011(www.prospect.org/article/cost-free-trade) entitled The Cost of Free Trade. Mr. Lind is policy director of the Economic Growth Program at the New America Foundation. He describes the politics of free trade and protectionism from the founding of the republic, how politicians in both the Democratic and Republican parties not only allowed but encouraged the deindustrialization of the U.S., and how all the presidents since WWII, Republican and Democrat, sacrificed American industry and American workers to achieve international political objectives and continue to do so to this day.
Every citizen should be aware of this history. But knowing how it all came about and developing policies to correct the situation requires more than one article. We disagree with the policies the author recommends. We believe we have proposed on this site the correct policies to balance our trade and restore our manufacturing sector. But his assessment of how and why we became the world’s leading debtor and how much it cost us is a pre-requisite for doing anything about it.
Lind argues that our international trade policies need to be reversed “both in general and in particular toward China.” We would include Japan and Germany as well. “Over the past two decades, leading U.S. manufacturers, both the venerable (like General Electric) and the new (like Apple), have offshored millions of jobs—by one recent estimate, 2.9 million—to China to take advantage of the cheap labor, generous state subsidies, and low currency valuation that are linchpins of China’s mercantilist development strategy.” In our view, China has been implementing a number of mercantilist (promoting exports and discouraging imports) policies in addition to those mentioned....
Balanced Trade Monetarism
Economic depressions, like the present one which began in the first quarter of 2008, are long periods of economic stagnation, characterized by high unemployment. They result from insufficient Aggregate Demand (AD) for the goods that an economy can produce. Aggregate Demand can be divided into its components:
AD = C+ I + G + (X-M)
where C = Consumption, I = Investment by businesses in tools and structures, G = Government consumption, and (X-M) is net exports (eXports minus iMports).
John Maynard Keynes was the first to point out that if a country had a trade deficit (i.e., negative net exports), then the trade deficit would act as a drag on Aggregate Demand. He more or less predicted the current depressions in the United States, Greece, Spain, Portugal and Italy in 1936 in his chapter about mercantilism and its victims from his magnum opus (The General Theory of Employment Interest and Money) when he wrote:
(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
Modern mercantilism is based upon the twin goals of mercantilism as explained by University of Chicago economist Jacob Viner: (1) maximizing a country's power through accumulation of foreign assets while (2) maximizing long-term consumption by delaying present consumption in favor of future consumption. In order to accomplish these ends it places tariffs (and other barriers) upon foreign products while at the same time buying foreign assets (mainly interest-bearing bonds today; gold in the past) in order to produce trade surpluses. In other words, mercantilist governments maximize their power and their people's future consumption, and bring down their trading partners' power and future consumption, through the combination of import barriers and foreign loans.
But American economists never paid attention to Keynes' and Viner's writings about mercantilism. They thought that an economy beset by mercantilist trading partners could increase AD simply by increasing Consumption or Investment or Government purchases. The methods that they have been recommending have all been failing: ...
Two Great Economists Offer Solution to Restore U.S. Economic Growth
“Any considered examination of the prospects for a major economy is dependant, as never before, on that economy’s performance in the realm of international trade.” With that remarkable beginning, Profs. Ralph Gomory and William Baumol note that their fellow economists, “having been nurtured on the doctrine of mutual gains from trade, seem to resist serious consideration” of the possible negative effects of free trade “and the threat they pose to the welfare of the United States and other countries.” Their article entitled, “Trade, education, and innovation: Prospects for the U.S. economy” appeared in the Journal of Policy Modeling recently.This lack of awareness among economists was the principle reason for writing our own book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before It's Too Late (Pittsburgh: Ideal Taxes Assn, 2008). And as we have stated many times on this site, the so-called "free trade" ideology has been an unmitigated disaster for the U.S.
Profs. Gomory and Baumol in their seminal book Global Trade and Conflicting National Interests (MIT Press, 2001) challenged the centuries old doctrine of mutual gains from trade based on the Ricardian theory of comparative advantage. They showed in the book and summarize their argument in this paper that countries can, by employing mercantilist or protectionist policies, achieve a competitive advantage that is harmful to their trading partners.
They arrive at the remarkable conclusion that the invention of new products, like I-pad, laptop computers, and many others, without retaining the manufacture of those products in the U.S. is causing Americans a great deal of harm. Citing China as an example, they note that China has no tradition of inventing new products but it has succeeded in inducing American inventors to outsource the production of their inventions to China. Andy Grove, a founder of Intel, recently pointed out that a large number of high tech American product innovations are outsourced for production in China, with the effect that Apple, HP, Dell and dozens of others have ten times as many employees in China than they have in the U.S. Chinese workers gain good manufacturing jobs while U.S. manufacturing workers face a lower standard of living competing for fewer and relatively inferior jobs. ...
An Economist's Look at Mythical Man-Made Global Warming(AGW)
As an economist and a former student of Prof. Milton Friedman at the University of Chicago, I am by education skeptical about any theory of climate change that explains warming but not cooling. The anthropogenic theory of climate change (AGW) blames man-caused carbon emissions for global warming but cannot explain past periods of global warming and cooling when there were no human beings to blame for climate change. Another economist who shares this view is former Czech President and Prime Minister,Vaclav Klaus, who fought against Communism and recognized in the movement that blames man for causing global warming, a new threat to our freedom saying:
It not only cannot explain past periods of global warming and cooling, it cannot explain the most recent decade of global cooling. Just fifty years there were allegations that we were entering a period of global cooling. There are reasons to be skeptical.
But even if the AGW theory had some basis, economists have to ask , “What is the best policy to deal with global warming?” Whatever policy is selected should meet the standard economic criteria of economic benefit-cost analysis. World leaders have picked the worst policy --forcing businesses and households into the most costly and ineffective policy -- reducing man-made carbon emissions which has had the effect of lowering living standards of workers around the world. ...
Obama's Jobs Act Wouldn't Work. Here's What Would -- We were published in today's American Thinker
Here's the link:
The Current Depression Is Caused By Fanatical Belief in Man-Made-Global-Warming
We know what caused the recession of 2008-09. It was the bursting of the housing bubble which created a financial crisis that endangered every large bank in the U.S. and many abroad. The federal government enacted Troubled Asset Relief Program (TARP), the program which sustained the liquidity of almost all of the large financial institutions, giving them time to deal with the enormous number of mortgages in default on their payments. An economic stimulus was enacted which succeeded in stabilizing the level of unemployed at about 9.2% of the workforce not counting involuntary part-timers and the number who dropped out of the labor force. Then much to the surprise of the administration’s economic team, employment fell, causing a substantial drop in the securities’ markets and concern to be expressed about the possibility of a double-dip recession.
Meanwhile, the eurozone had to face the possibility that Greece would not be able to pay its soon to mature sovereign debt much of it created pursuing man-made-global-warming. The principal other country having difficulty managing its sovereign debt is the USA but fortunately its debt is expressed in dollars and it has the ability to print as much of it as it needs. Greece does not. The euro standard is much like the gold standard. If a country runs out of euros, there is nothing it can do except tighten its belt.
No one mentioned the fact that the reason that Greece was short of Euros with which to pay its debt was its international trade deficit which in 2010 amounted to an estimated €14 billion. Of course it was not the only European country experiencing a trade deficit. What all the PIIGS had in common in 2010 were trade deficits: Spain, €-45.5 billion; Italy, €-48.5 billion; Portugal, €-15.9 billion; Greece, €-14 billion; and Ireland, €-1.1 billion. France likewise had a trade deficit, €-38.9 billions. But Germany had a trade surplus, €134.6. ...
Here Is a Real Jobs Plan in Contrast to Pres. Obama's No-Jobs Plan
As we pointed out yesterday on this site, President Obama’s American Jobs Act does not, for practical purposes, create any jobs at all. He proposed one-time cuts in payroll taxes for businesses and their employees when business needs long-term solutions. It makes huge transfers to the States to pay teachers’ salaries which is not a federal responsibility at all and does not create any new jobs at all. It is nothing but a list of earmarks for his voting constituencies none of which wants to create any real jobs in the private sector. Nothing in the proposed bill would be a stimulus to business to invest here rather than abroad nor discourage outsourcing which has been increasing for decades.
As the bankruptcy of Solyndra, whose $535 million of borrowed capital was guaranteed by the federal government under the 2009 stimulus plan and which received other benefits such as tax credits, demonstrates the fact that the President favors green energy plants over more efficient fossil fuel plants. And as his opposition to private oil and natural gas development on public lands and offshore in the Gulf, Alaska, and the Arctic shows, he is willing to sacrifice millions of jobs to create an uneconomic green economy that will impoverish the American workers. As Tapan Munro, a “clean energy” proponent wrote on August 8, 2011, in an article entitled “U.S. Clean Energy's Bubble is Set to Burst”, because “Clean energy today is more expensive and less reliable than coal- and natural-gas-based energy. Large subsidies artificially maintain clean energy's price competitiveness. These subsidies are likely to cease in a few years because of severe budgetary cutbacks proposed for coming years. This should not be a surprise to us. The industry has crashed before -- in the mid-1990s, in 2002 and 2004 -- mostly because Congress did not extend the tax credits that made the industry commercially viable.’ The Energy Department has closed $37.8 billion in loan guarantees for 36 nuclear, wind and solar projects. Solyndra is not the largest loan guarantee. The DOE reported a $967 million loan guarantee for the Agua Caliente Solar Project.
Not one green plant would be profitable without government subsidies. By contrast private corporations paid $304 billion in federal corporate income taxes in 2010, although all you hear or read in the media is about those companies like General Electric (an administration darling!) that paid no corporate income taxes last year. Private corporations, except when the president wants to rescue his union supporters as was the case with GM, got few subsidies and no protection from foreign competition. ...
A return to manufacturing?
Writing in the September 4th Washington Times, Harold Meyerson presents stark and sobering statistics about the decline of America, and the increasing interest in regaining American manufacturing power. What he does not discuss is a road to get there. But it is good that he and others are increasingly advocating efforts to strengthen manufacturing by ending the blythe policies that have produced imbalanced trade and deindustrialization.
How Economic Recovery Is Being Sabotaged By Bad Economic Policies
President’s economic advisors want to spend more trillions to stimulate the economy. They are joined by a large number of Keynesian economists. The huge federal budget deficits of 2009 and 2010 of over $1.5 trillion each, and the President’s $800 billion dollar economic stimulus plan of 2009 – 2011, as we pointed out in this site several times, was poorly designed to stimulate investment in the private sector, a sine qua non for a growing industrial economy. The trillions spent by the federal government must be considered an utter waste of precious resources. Very little of it was de gned to stimulate the demand for new housing or stimulate other private investment. The hundreds of billions spent on subsidizing activities intended to reduce carbon emissions was totally wasted.
Business reluctance to invest in housing is understandable with so many millions of houses awaiting foreclosure and so many mortgages in default. There is thus a surplus of houses, which will take years to work off. The government has made housing into an unattractive investment. As we have indicated on this site more than once, Democrats wanted to make it easy for unqualified households to purchase homes and Republicans supported the policy because home-owners are more likely to be conservative and vote Republican.
It is not hard to explain the reluctance of American businesses to invest in the U.S. while they continue to invest huge sums abroad. The answer is that they can produce their products much cheaper abroad and they can import the products they produce abroad free of duties. Both parties are committed to the false doctrine of “free trade”. ...
Economic Stagnation: Have We Run Out of New Products? No, But We Are Outsourcing Their Production
The stagnation of the U.S. economy in spite of federal deficits of $1.5 trillion dollars in both 2009 and 2010 has added to the belief that Keynesian deficit spending is ineffective. We subscribe to that thesis. The President’s $800 billion dollar economic stimulus plan, 2009 – 2011, as we pointed out in this site several times, was poorly designed to stimulate investment in the private sector, a sine qua non for a growing economy. None of the investments in wind and solar energy would have passed cost-benefit analysis and they provided very little sustainable employment. The housing sector has not recovered from the burst of the housing bubble which stranded millions of construction workers who are still mostly unemployed. In the manufacturing sector, investments in new plant in the U.S. barely cover the depreciation allowances let alone stimulate net new investment.
The failure of the Recovery Act of 2009 to increase employment while spending over $782 billion and running budget deficits of $1.5 billion per year had a number of possible causes: 1) the continued malaise in the housing sector hung over by hundreds of billions of dollars of mortgages in default, 2) the fact that the stimulus package ear-marked spending for every cause backed by Obama supporters, none of which included incentives to unsubsidized private investment, 3) the continuing trade deficits, which increased to $53 billion in June, 2011, represent a continuous drag on the GDP of over $600 billion a year, and keep costing us millions of manufacturing jobs, 4) government policies actually impede the development of fossil fuel exploration, drilling, and production by the Obama administration in its subservience to its anti-carbon emission obsession, 5) the anti-business policies of the Democratic Congress including its actions to regulate banks and other firms in the financial sector and EPA’s inflicting foolish environmental burdens on new and existing manufacturing businesses,
All of the foregoing contribute to the unwillingness of businesses to invest in new or expanded production facilities in the U.S. New products like the I-Pad and mobile telephones were invented here but are produced overseas, with most of the product exported free of duty to the U.S The only exceptions are the investments of foreign automobile makers in the U.S.,and investments in the highly subsidized so-called renewable energy plantations. As to the latter, it is worth noting in the news today (8-15-11) the announcement of the bankruptcy of Evergreen Solar which listed $485 million of debts, much of it owed to state and federal agencies which subsidized the building of its solar panel factories in Massachusetts and Michigan. Last year the company began producing solar panels in China. That entity is expected to survive the bankruptcy with different ownership. ...
Morici: Obama's proposal for taxing U.S. oil companies would reduce U.S. economic growth
On July 15, U. of Maryland economist Peter Morici (US debt ceiling deal a prelude to ultimate default) pointed out that President Obama's proposed tax hike for foreign oil companies would actually slow economic growth. He wrote:
How to Cut Government Expenditures and Create Millions of Jobs Doing It
No doubt in coming days, the debt limit will be raised -- more’s the pity – but the country will be no better off as a result. Oh, raising the debt limit might prevent uncertainty in stock and bond markets but we do not suffer angst at the problems of investors in those markets. We are depressed by the fact that nothing – literally nothing of significance --is being done to create good jobs for the 26 million unemployed and underemployed (part-time) workers who are without good full-time jobs. We have two parties afraid to offend any significant block of voters. The Republicans to their credit are willing to make changes as the Cut, Cap, and Balance legislation passed in the Republican House and tabled in the Democratic Senate shows. There is no Democratic proposal to cut expenditures on the table, only proposals for increased taxes.
We have two parties – except for the Tea Party supporters and libertarians -- beholden to their corporate contributors which derive most of their profits from foreign subsidiaries and then add insult to injury by importing their foreign-made products. We have one party dedicated to union leaders who have a Luddite mentality. When was the last time you bought a costly advanced technological product made in the U.S.? Only the Tea Party, which is not beholden to any special group, are willing to do something serious about our problems.
The Cut, Cap, and Balance Act of 2011 which passed the House and was tabled in the Senate reduces discretionary spending by $31 billion compared to last year, and reduces mandatory spending by $51 billion in fiscal year (FY) 2012. From FY 2013-2021, the legislation caps federal spending at the same levels (as a percentage of GDP) as the House-passed FY 2012 budget resolution. Ultimately the legislation will save $5.8 trillion over 10 years. And what has the President proposed? Nothing but higher taxes and growing deficits.
But there are many cuts that should be made outside of the entitlement programs. The Department of Education spends $36 billion per year. There is no evidence of improved educational outcomes as a result of federal spending of hundreds of billions of dollars. End the program; it is not a federal responsibility at all. Saving $36 billion per year. And there is more. ...
Government Leaders and Their Economic Advisers Have No Idea How to Create Jobs
Princeton Prof. Alan Blinder, in an opinion piece in the Wall Street Journal, 7-13-11 demonstrates the mental bankruptcy of most of America’s leading economists when it comes to developing solutions to reduce unemployment. He finds the May and June, 2011 unemployment reports “catastrophic”. The fraction of the population that is employed is lower than it was “when the recession officially ended in June, 2009”. (Officially?!). Republican proposals “to slash government spending” are “ways to kill jobs, not create them”. So what does the professor, a former member of the Board of Governors of the Federal Reserve System and a member of Pres. Clinton’s first Council of Economic Advisors, recommend?
He prefaces his recommendations with two statements one of which we challenge. First, he writes, there is no magic bullet. Yes there is as we show below– it is called “balancing trade” by our single-country scaled-tariffs. Over the last four decades, China and other countries, including Japan, Germany, and the OPEC countries have siphoned an estimated five to eight million jobs from the U.S. manufacturing sector. We can recover those eight million jobs.
Second, “there is no free lunch” by which he means the U.S. taxpayers will have to pay for the solution. And what is his solution? He begins his proposal with the statement that “Creating jobs cost money –whether it’s via tax cuts or more spending." We have already spent trillions of dollars since 2009 in tax cuts and more spending, including a Keynesian $800 billion economic stimulus plan, and as Blinder pointed out, the result of all this spending was a level of employment lower in 2011 than it was in 2009. ...
How to Restore America's Manufacturing Innovation -- we're published in this morning's American Thinker
Here's how we begin:
How to Encourage Manufacturing Innovation
On December 5, 1791, President Washington’s Treasury Secretary Alexander Hamilton presented a Report on Manufactures to Congress which established America's tariff-based industrial policy for the next 150 years. He began by noting the general recognition of the importance of manufacturing to an economy:
And later in the report he noted the general recognition that the American people have a special aptitude for innovation:
In June 2011, President Obama’s President’s Council of Advisors on Science and Technology (PCAST) put together a Report to the President on Ensuring American Leadership in Advanced Manufacturing with a similar emphasis upon the importance of manufacturing and manufacturing innovation....
Keynesian Economists Offer No Solution to the Deepening Recession
In the Wall St. Journal of June 21, 2011, Prof. Alan S. Blinder of Princeton U. opined that “Right now, I’m worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes’s teaching, government spending destroys jobs.” He asks, “How exactly, could more government spending ‘kill jobs’? and “ [H]ow is it that public purchases of computers destroy jobs but private purchases of computers create them?”
In the first place Keynes’s teaching was shown many decades ago by Prof. Milton Friedman, Nobel laureate, of the University of Chicago Prof. Franco Modigliani, Nobel laureate, of Harvard and other economists, to be wrong about the consumption function that Keynes assumed. As a result, as we pointed out in this space, a week ago, there is no such thing as the Keynesian multiplier. It took workers to make the computers and when they have been produced and sold, the stimulus ends. As soon as government purchases end, any employment created by the government order comes to an end. Pres. Obama’s stimulus plans created jobs only while the spending continued. As soon as the spending wound down, GDP went down.
Prof. Blinder’s choice of computers in his example was unfortunate. All the computers sold in the U.S., are produced abroad, mainly in China. While companies like Apple, Dell, Hewlett Packard, and many others make some things in the U.S. and make profits on the computers, et. al., they import from their subsidiaries abroad, they have ten times as many employees abroad than they employ in the U.S. If the government purchase of computers stimulated employment, it was in China, not in the U.S.. Using employment as a criterion, the companies mentioned are Chinese, not American. ...
A Program for a Strong America? Not from these parties
In his most recent column (Published June 15 in the Virginia Pilot) David Brooks describes himself as a "Pundit under protest" because he thinks neither national party is seriously proposing policies that will tackle the major structural problems of the U.S. economy.
"I'm registering a protest because for someone of my Hamiltonian/National Greatness perspective, the two parties contesting this election are unusually pathetic... The Republican growth agenda -- tax cuts and nothing else -- is stupefyingly boring, fiscally irresponsible and politically impossible. ... As for the Democrats, they offer practically nothing. They acknowledge huge problems like wage stagnation and then offer ... light rail! Solar panels!"
Brooks is right that neither party offers an effective program to address the policy challenges that he has identified. The challenge: to solve the problems.
Our War On Drugs Has Cost Us the War in Afghanistan
Our invasion of Afghanistan was to punish the Taliban for giving haven to Osama Bin Laden and his supporters. The Taliban, who outlawed the growing of poppies in 2000-2001 and whose brutality reduced the production of poppies to nearly zero, became hated in the countryside and our troops were welcomed as liberators. In a whirlwind operation, we quickly eliminated the Taliban as a fighting force. They were exiled and bankrupt and no longer had an army. We thought the Taliban would never come back. But we could not let well-enough alone.
We decided to recreate Afghanistan in our image. Unfortunately, our image included one of our blemishes, our failed war on drugs. At the urging of the United Nation’s Office of Drugs and Crime (UNODC), in a reversal of the Opium wars in which the European powers forced China to allow the importation of opium, we established a policy to get rid of the growing of poppies, Afghanistan’s leading agricultural crop.
In return for the Taliban’s reversal of its ban on the growing of poppies, the drug traffickers financed the Taliban and helped it create a new military force. The Taliban’s new policy was successful beyond their expectations and ours. The costs of the war in Afghanistan, which had been falling, escalated since 2006 and has cost us an estimated trillion US dollars. Our army was enlisted in the war on poppies and was used to destroy poppies growing in the fields. Billions were spent trying to get the poppy growers to plant wheat and other grains which yielded less than poppies. The Taliban were welcomed back as liberators by the growers of poppies and the hundreds of thousands who are dependent on the poppy industry for their livelihood. We became their oppressors. ...
9.1% unemployment shows that Obama's recovery & QE2 have failed
This morning, the Bureau of Labor Statistics announced that unemployment rose to 9.1% in May, after a rise to 9.0% in April. With unemployment staying high, it is clear that the Obama recovery and Ben Bernanke's QE2 have both failed. And let's not forget the projected Unemployment Rate, shown in blue, that was made by President Obama's economic advisers based upon their expectations of how well his recovery plan would work.
Those who have been reading my postings should not be surprised. I predicted all of this. For example, I predicted the failure of Obama's recovery plan after I read President Obama's inaugural address. I wrote on January 23, 2009:...
Prof. Krugman Gives Congress Bad Advice on How to Reduce Unemployment
In his NYT column that I read in the Sacramento Bee today, Tuesday, May 31, 2011, economist Paul Krugman writes that we could “cut back joblessness”: 1) by employing FDR’s “WPA-type programs putting the unemployed to work doing useful things like repairing roads.” We have the money for repairing roads and some of the 2009 Recovery Act’s $782 billion went to the states to repair roads and bridges. How many jobs were created? Not as much as the money appropriated would indicate. Most of the road and bridge projects were already planned by the states; only the source of funding changed. 2) “We could have a serious program of mortgage modifications, reducing the debts of troubled homeowners.” That is exactly what the Obama government has been doing, spending a lot of money and hardly making an impact on the problem. 3) “We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.” During the past 12 months the Consumers Price Index increased to 3.2 percent,
A worse set of recommendations can hardly be imagined. Inflation is not likely create much employment. All it will do is create economic distortions. Leading economists like Obama’s Harvard professor Lawrence Summers, who was his chief economist, Prof. Christina Romer, his chief of the Council of Economic Advisers and one of the authors of the Recovery Act of 2009, must have given the president similar advice. So Krugman is only saying, “Do more of the same” i.e., another economic stimulus plan that will widen the enormous budget deficit and create a trillion more of debt. The Tea Party supporters may not be economists but their instincts tell them that widening the budget deficit is no solution at all.
Is increased government spending the answer? Of course, not. ...
Like every other goal, increased expenditures on the environment are subject to the economic law of diminishing returns. The first billion makes an enormous contribution to a better environment. The second may make an even greater contribution\ but eventually additional billions make a lesser and lesser or no contribution at all. For the past half decade, our government has wasted hundreds of billions of dollar on environmental programs that for all practical purposes have yielded no benefits at all and created practically zero sustainable jobs. Meanwhile the waste of resources has been dramatized by our failure to do anything to control hurricanes and tornados like the one that inflicted enormous losses to lives and property in Joplin, Missouri. Even if it turns out that carbon emissions have contributed to global warming, it is not clear that global warming has more costs than benefits.
Our citizens have embraced the anthropogenic theory of global warming and have already spent billions on trying, without success, to reduce carbon emissions in the atmosphere. We have spent hundreds of billions of dollars as a nation and succeeded only in reducing the living standards of the American workers.
And while its proponents claim the theory is settled, hundreds of scientists are on record as saying the theory is wrong. They allege that 50 years of global warming is correlated with increased carbon emissions but, as every statistician knows, correlation is not proof that carbon emissions are the cause of global warming, especially when the data is confined to about 50 years. How are periods of global warming and cooling during the past millennium to be explained? Moreover, the proponents have no idea why the past decade has been one of global cooling. A British scientist who correctly predicted the cold winters this year and last has been quoted as saying that we are at the beginning of a period of global cooling. ...
In the last year or two there has been increased attention paid to the budget deficit. However, most of the plans that have been proposed so far are remarkably weak. Debt reduction is not in the plans. Not in the Ryan plan, not in the Bipartisan Deficit Reduction Commission plan, not in the President’s plan. The graph below shows projected debt held by the “public” (by which is meant both ordinary citizens and foreign central banks) under the Ryan plan over the next ten years as projected by Ryan's plan itself. Note that the line increases pretty steadily throughout the ten years. Thus, even with all of the smoke, mirrors, and optimistic assumptions in this and all deficit reduction plans, it clearly does next to nothing to tackle the debt, except to the extent that inflation and economic growth may reduce its weight.
Ask Not for Whom the Trade Deficit Tolls. It Tolls for the American Worker and America’s Future.
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced last Wednesday that total March exports of $172.7 billion and imports of $220.8 billion resulted in a goods and services deficit of $48.2 billion, up from $45.4 billion in February. March exports were $7.7 billion more than February exports of $165.0 billion but March imports were $10.4 billion. The trade deficit has the effect of reducing our Gross Domestic Product in March by $48.2 billion and represents a drag on employment of 482,000 workers.
The Pollyannas in Washington and New York greeted the data by saying and writing that increased exports and increased exports mean jobs. None of them said that imports increased even faster and that increased imports means a loss of jobs.
For the three months ending in March, exports of goods and services averaged $168.4 billion, while imports of goods and services averaged $215.3 billion, resulting in an average trade deficit of $46.9 billion, a drag on employment of 469,000 jobs. If the trade deficit is extrapolated to the remainder of the year, we can expect that the trade deficit for 2011 will be in the neighborhood of $562.8 billion, a drag on employment of 5.6 million jobs.
In February and March, 2011, the following group of selected countries recorded trade deficits as indicated, in billions of dollars. In the third column, we estimate the 2011 trade deficit based on the numbers in the first two columns. In the fourth column, we estimate the number of jobs that would be created if trade were balanced at the level of imports from each.
If trade were to be balanced, it would create up to 5.52 million jobs mostly in manufacturing, arresting the deindustrialization of the U.S. and restoring the labor force to full employment....
Why weaker dollar won't help exports very much
Most economists think that the weaker dollar will revive American exports. The sequence of events they hypothesize is the following: weaker dollar -> higher profits -> investment in new factories -> greater exports. There is no way to get much greater exports without increased investment in new highly-efficient modern factories.
The weaker dollar does indeed lead to higher profits, but the higher profits don't lead to much investment in new factories. That's because investments are based upon long-term considerations, and manufacturers don't see the weak dollar as being a long-term change. They expect that the exchange rate will bounce up again as it has been doing. The chart below, shows how the dollar's price has yo-yo'd up and down versus the euro for the past five years:
House Republican Budget would Benefit the Poor -- We're published in today's American Thinker!
Here is a selection:
To read it, go to: http://www.americanthinker.com/2011/05/house_republican_budget_plan_w.html
Has the dollar started to collapse?
At the moment, Bernanke's huge expansion of the monetary base to buy long-term US Treasury bonds (QE2) is bringing the dollar perilously close to a collapse. In fact that collapse may have already begun, as shown by the near vertical line shown at the tail end of the chart below:
I explained why QE2 might cause a dollar collapse in a November 15 commentary (Will QE2 End in Disaster?). I wrote:...
"Green" Energy Is an Economic Disaster in the Making
Increasingly, questions are being raised about the “science” of anthropogenic global warming. For all practical purposes, there is no dissent at American universities. What little there is has been and continues to be stifled. Billions of dollars of research is being funded by the U.S. government but none of it goes to any scientist who challenges the notion that man’s consumption of fossil fuels is responsible for global warming. Some physicists have protested and a Senate committee has listed the names of a couple of hundred academicians who believe the theory to be baseless. There is a growing awareness among what is a small band of scientists that we have a lot to learn about the causes of climate change.
A novel experiment known as CLOUD, is being conducted at CERN in Geneva, Switzerland under the direction of Prof. Jasper Kirkby (firstname.lastname@example.org). The CLOUD project is an attempt to ascertain whether and how cosmic rays from outer space may be affecting the earth’s climate. It includes among its collaborators, besides CERN, such institutions as Caltech, U Frankfurt, FMI Helsinki, U Helsinki, U Innsbruck, UEF Kuopio, U Leeds, Ift Leipzig, U Lisbon, LPI Moscow, PSI, RAL, U Reading, INRNE Sofia, U Tampere, and U Vienna. The experiment is taking place at the CERN Proton Synchrotron and aims to study, under controlled conditions, the effects of cosmic rays on aerosol nucleation and growth, cloud droplets and ice particles. In earlier studies, Prof. Kirkby made some palaeoclimatic reconstructions which showed that the climate has frequently varied during the last 10,000 years by amounts comparable to the past century’s warming. Since man was not burning fossil fuels until the last two centuries, his studies have cast doubt on the current theory that anthropogenic greenhouse gases are responsible for global warming.
While the world awaits the results of the CLOUD experiment, many political leaders around the world have become aware of the enormous government subsidies required to induce production of “green energy”, its few benefits, and its negative economic effects....
How to achieve Economic Recovery and Full Employment --Balance the Budget and Balance Trade
Princeton Professor Alan S. Blinder in an opinion piece in the Wall St. Journal on April 10, 2011 excoriates Rep. Paul Ryan’s plan for reducing the federal budget deficit as just about the worst conceivable, far inferior to the Bowles-Simpson and the earlier Domenici-Rivlin budget cuts proposal. Republican Sen. Paul Ryan’s plan would reduce the deficit by $4.4 trillion over ten years by repealing Obamacare, substituting private health plans and making block grants to the states for Medicaid. It also imposes hard spending caps on domestic spending. What is Prof. Blinder’s principle complaint? It is regressive, it is “reverse Robin Hood redistribution.” He ignores the fact that the bulk of government expenditures disproportionately “benefits” lower-income families, from public schools, parks and libraries to entitlements like medicare. Too bad he did not analyze similarly Pres. Obama’s economic stimulus plan. He would find that Pres. Obama had sold out the American worker in the name of climate change.
If Prof. Blinder were to do that, he would discover real regressivity. About a third of the nearly $800 billion stimulus plan simply kept teachers and other state and municipal employees in their jobs. These are by no means an underpaid group. Teachers get superior annual salaries for working less than ten months a year. That apparently is what Prof. Blinder meant when he said the Recovery Act prevented a depression. It obviously did not increase employment in the private sector.
And talk about regressive, about a third of the Recovery Act’s billions went to uneconomic wind and solar plants that in addition to the direct subsidies for their construction are subsidized by the higher prices guaranteed them for the electricity they produce – double or triple the cost of electricity produced by natural gas, coal, or nuclear energy. Worse, these plants hire very few permanent workers. As we reported previously, a $220 million wind or solar plant creates only about 40 permanent jobs. WOW! Each sustainable job created required $55 million of expenditure per job. Not only a really regressive expenditure but one quite likely to usher in another depression when manufacturers flee abroad as a result of rising energy prices....
American People the Big Losers in the Budget Deal
Dick Morris has a pretty clear assessment of what happened. He wrote (It's no deal, it's a sellout):
Retired Gulf VP Charles Campbell nails US economic problems and their solution
Retired Gulf Oil Senior VP Charles Campbell nails our chief problems and their solutions in his brilliant March 23 Baltimore Sun commentary (End America's addiction to Mideast oil: Only hope for U.S. economy is to bring down our trade deficit, become self-sufficient in energy).
He is correct that if we fail to solve these problems, we are headed toward economic disaster. In fact, our government debt problem may be about to get worse as a result of upcoming sales by Japan of dollar reserves and the expense of Obama's military intervention in Libya. As far as energy production is concerned, his area of expertise, he argues that we need to develop domestic energy resources but are moving in the opposite direction. He writes:
Richard Duncan names the current depression the "New Depression"
In a February 22 commentary (The Great Depression and the New Depression) that appeared in The Daily Reckoning, Richard Duncan, who had predicted the current depression years before it began, compared the two depressions. Here is a selection:
He does not think that the depression is over:...
How to Avoid the Coming Dollar Collapse
There has been increasing concern in American foreign policy circles lately about the coming dollar collapse. The writers often point to "Triffin's Dilemma" as an explanation of why the crash is inevitable and why only delaying actions are possible. Here's Wikipedia's summary of that dilemma:
In a June 2010 paper (How Dangerous Is U.S. Government Debt? The Risks of a Sudden Spike in U.S. Interest Rates), CFR's Francis E. Warnock argued that we are now nearing the endgame in which the flight from the dollar produces a dollar collapse. In fact, he even claimed that we almost experienced that crash in 2009:...
71% of Americans oppose raising the debt ceiling
According to a Reuters/Ipsos poll, 71% of Americans oppose raising the debt ceiling. Here's a selection from a Reuters article about the poll results:
When asked where to cut:...
The Irresponsible Tax Compromise
The current leaders of both political parties have been totally irresponsible. They are following the same foolish strategy that some of my beginning economic students try in one of the simulation games that we play. They continually run large government deficits to keep their economy stimulated. At first the government deficit spending helps. But eventually debt payments become such a huge part of government spending that the government loses its ability to ever balance its budgets. From then on, the growing government spending causes hyper inflation which makes the economy totally unmanageable.
Peter Morici had a great Seeking Alpha commentary on December 20 (Downgrade U.S. Treasuries to Junk). He pointed out that the irresponsible tax compromise between the Obama administration and the Republican congressional leadership will result in huge budget deficits into the distant future:
Then he pointed out that this will cause term-term U.S interest rates to climb and climb, as has already begun:...
UN bureaucracy being expanded by Cancun Climate Conference
Viscount Monckton of Benchley reports the happenings of the Cancun conference in a December 9 commentary (The Abdication of the West) published on the Science and Public Policy website. Here is his paragraph in which he lists all of the new bureaucratic agencies being created to be paid from a $100 billion per year fund (by 2020) from the advanced economies:...
Mort Zuckerman: Western decline caused by trade & budget deficits
In a December 1, 2010, commentary (The Danger of a Global Double Dip Recession is Real), Mort Zuckerman, editor in chief of U.S. News and World Report, comments on the decline of the west in general and the United States in particular. He largely attributes the decline to the combination of trade deficits (i.e., "current account deficits") and budget deficits. Specifically:
And, as he notes, U.S. policy makers have no solutions:...
Roger Altman may replace Lawrence Summers
According to news reports, President Obama may soon pick Roger Altman, a former Deputy Secretary of the Treasury under President Clinton, to replace Lawrence Summers as his chief economic advisor. I just listened to an hour long July 2009 interview that Charlie Rose had with Altman, you can watch it here:
The good news is that Altman is a budget deficit hawk. More good news is that he thinks the higher U.S. private savings rate is a good thing because it will help long-term growth. Maybe he will bring some long-term thinking to the U.S. government.
The bad news is that he doesn't understand mercantilism. He thought that the trade deficits would stay down after the November 2008 crash. He did not foresee that our trade deficits would shoot up and stifle the recovery because the Asian nations would increase their mercantilist predations. He did not realize that China intentionally keeps its people's savings high by denying them credit....
Program for economic recovery and 2012 victory -- we're published in today's American Thinker
Here's how we conclude:
Follow the following link to read it: http://www.americanthinker.com/2010/11/program_for_economic_recovery.html
Bernanke on China
QE2 could becomeTitanic2
“QE2” are the initials of the Queen Elizabeth 2, a great ocean liner which was the sequel of a great ocean liner. They are also the initials of “Quantitative Easing 2,” Federal Reserve Chairman Ben Bernanke’s second huge increase in the United States money supply. Although QE1 was a huge success, QE2 could end in disaster. If so, it may be renamed “Titanic2,” after another ocean liner, one that sank.
QE1 restored liquidity to the U.S. money supply during and after the October 2008 financial crash. The extra liquidity provided by the Fed let American banks lend short term so that businesses could meet payrolls and buy inventory. As part of the QE1 package, Bernanke even made currency swaps with fellow central banks, which made dollars available around the world to foreign businesses whose debt payments required dollars. QE1 was Bernanke at his best.
QE2 is designed to reduce American private savings and also to cause private foreign savings to flee from the United States. Its goal is to increase inflation from its current 1% to at least 2% or 3% while keeping short-term U.S. interest rates close to 0%, producing an “inflation tax” upon private American and foreign savers.
Bernanke hopes that reducing private American savings will increase American consumption and that sending private savings abroad will improve America’s trade balance. Indeed, the short-term result of QE2 will be beneficial. Consumption will increase and private savings will flee the country for better interest rates abroad. Already, the dollar has weakened versus most foreign currencies, which makes American products more competitive in U.S. and world markets.
But in the long term, Bernanke’s discouragement of American savings will reduce investment in America’s economic future and his decision to increase inflation will provide a new element of uncertainty in business decision making.
The effect upon the dollar can’t help much. It will either be temporary or disastrous, depending upon what foreign central banks do:...
Message from the People of Kentucky: America's Problem is Debt
Victorious Kentucky Senator-elect Rand Paul eloquently summarized the message of his election in his victory speech on Tuesday. America's problem is debt.He is correct. First came excess consumer debt, which spread to include bank debt when houses fell in price, which spread to include government debt when the Bush and Obama administrations tried to stimulate the economy while letting the trade deficits expand. Here's what Rand Paul said:
If you watch to the end, you'll see the snide sophisticated CNN commentators pretending that Paul is a madman threatening to cause a worldwide depression. But Rand Paul is right and Washington is wrong.
There is a simple recipe for both short-term and long-term growth. Balanced Trade Monetarism simply requires: (1) balanced budgets, (2) balanced monetary growth, and (3) balanced trade.
Caterpillar's New Chinese Factory ignites Voter Rage
This week, Caterpillar announced that it will build its new factory in China in order to have access to the Chinese market. Meanwhile, many of Caterpillar's American workers are laid off.
But Caterpillar doesn't have any choice, were Caterpillar to expand its American factories it would be able to protect its proprietary technologies, but it would have little access to China's rapidly growing market due to the Chinese government tariff, non-tariff, and currency-manipulation barriers. And U.S. markets are not growing, due to our government's toleration of Chinese tariff, non-tariff, and currency-manipulation barriers.
Tim Sullivan, CEO of American heavy-equipment manufacturer Bucyrus International, explained the Chinese market to Presidential candidate John McCain back in April 2008. Business columnist John Torinus witnessed the exchange:
Meanwhile, American voters are furious with Washington and with American corporations according to the latest Wall Street Journal/NBC News poll. Here's how WSJ reporter Janet Hook summarizes the results:...
Why Summers Resigned
My father predicted Larry Summers resignation as Obama's chief economic advisor after observing Summers' body language when he was interviewed by reporters after coming back from his trip to Beijjing earlier this month. Let's review the situation. Here's what I wrote on September 7:
Summers economic policy has failed and his last-ditch attempt to rescue it in China failed. So he is taking the dignified way out. The White House has a different story. Bloomberg reports:...
Obama Did Create 3 Million Jobs -- In China (we're published in this morning's American Thinker)
We're published in this morning's American Thinker, just follow the following link:
Paul Craig Roberts: Balance Trade and Budgets Now or Dollar Crash Soon
Paul Craig Roberts, head of policy at the Department of Treasury under Reagan, predicted an upcoming dollar crash in an August 16 commentary (The Ecstacy of Empire). He began: "The United States is running out of time to get its budget and trade deficits under control." He goes on to describe the upcoming dollar crash if this is not done:
Part of Roberts' solution is to bring U.S. troops home now. The other part is to switch our tax system to a value-added tax which has two tax rates, depending upon where the value is added. If the value is added abroad, the rate is higher. He wrote:...
Cato Institute's Richard W. Rahn only sees 2 alternatives for reviving economy
In his August 3 commentary about the latest GDP figures in the Washington Times (Evidence and Denial) Richard W. Rahn was quite accurate about the economic dreamworld that the Democrats are living in. He writes:
Last Friday, it was reported that economic growth was only 2.4 percent in the second quarter of this year - far below what the Obama administration had forecast. Yet the administration and its supporters continue to be in denial about the fact that their policies are not working. Psychologists refer to the refusal to change one's mind when confronted with contrary evidence as cognitive dissonance.
But he misses the fact that the Republican establishment is living in a dreamworld also If he were to look closely at the second quarter numbers, he would have discovered that the rising trade deficits caused GDP to fall. Obama’s failure to deal the trade deficits is sinking his presidency....
Pres. Obama's $787 Billion Recovery Act Has Produced Few Sustainable Jobs
On Feb. 13, 2009, Congress passed the $787 billion American Recovery and Reinvestment Act of 2009 (ARRA), commonly referred to as Pres. Obama’s economic stimulus plan. As of May, 2010, about 62% has been paid out. According to Prof. Romer, the Chairman of the Council of Economic Advisers, the act has saved or created 2.5 million to 3.5 million jobs. If the purpose of the act was to save some jobs, it may have succeeded. Indeed, analysis of the expenditures suggests that the act was poorly conceived. If its object was to create jobs and promote a recovery, it was a complete failure. The employment data of the Bureau of Labor Statistics as the following table shows does not evidence any net job creation. The number employed fell by 3.0 millions from March 2009 to December, 2009 and increased just over 1.1 million by the end of March, 2010 for a net job loss of 1.9 million jobs.
Prof. Blinder Believes He and Obama are Keynesians But Keynes Would Disown Them
In the Wall Street Journal 7-19-10, Alan S. Blinder, a professor of economics and public affairs at Princeton University writes in an opinion piece entitled “Obama’s Fiscal Priorities Are Right”, writes: that the “deficit hawks” believe the federal budget deficit is already too large and that the first stimulus failed. He disagrees. He writes, “The hawks have even dug in their heels against extending unemployment insurance benefits at a time when the unemployment rate is 9.5%, or helping states and localities avoid laying off teachers in September. That’s pretty anti-Keynesian thinking.” The first part is not even true; the Republican leadership wants Congress to specify the source of the funds. Why not the Tarp program or the economic stimulus bill? They are loaded with billions of unspent funds. Why are the Democrats against specifying the source of the funds? And while it may not be popular in the polls to say so, many economists believe, that many, not all, receiving unemployment compensation are really not making a serious effort to find work. And these economists could be Keynesians and they include Prof. Blinder. Prof. Blinder’s answer later in his piece is that “the right level of unemployment insurance means balancing these costs and benefits—a tricky calculation.”
As for school districts that the economic stimulus plan is supporting, not a single new job has been created supporting them. Yes, Prof. Blinder, we believe the economic stimulus bill has been a failure. We believe the money should have been used to stimulate private investment in new factories and equipment. New factories create sustained employment and have a real multiplier effect. ...
Real Policies for a Sustained Economic Recovery
For reasons that we have mentioned many times in this space, we believe the Obama administration’s policies to recover from this depression (technically, a recession) have been practically worthless, notwithstanding their enormous cost. The administration’s economists, who should know better, have endorsed the economic stimulus plan notwithstanding the fact that it throws money at a variety of programs that provide no sustainable stimulus to the private sector. Oh, the rebates, the klunkers’ program, subsidies for energy spending give temporary stimuli but nothing sustainable. To achieve sustainable economic growth, investment in manufacturing and industry is required. Stimuli to alternative sources of energy, principally wind, solar, and biochemical will not produce sustainable growth until we begin to run out of petroleum and natural gas which is likely to be delayed three to six decades.
All the while, there were cost-free and revenue-producing measures that could have been taken to stimulate private investment. In a posting on this site on June 28, 2010 entitled “ Bush and Obama's Economic Stimulus Attempts”, we criticized the administration’s policies as well as Republican proposals and promised to put forth our own proposals for a speedy recovery. Our first proposal is to end our foreign trade deficits which have caused the closing of thousands of American factories and the loss of millions of good-paying industrial jobs. We need to stop the outsourcing of the production of goods that Americans consume and produce the products of American ingenuity here. ...
Outsourcing Production Is Committing National Suicide, Says Andy Grove, Former Intel CEO
There is growing concern in this country about the outsourcing of manufacturing production and its effect on American jobs. In our book, Trading Away Our Future (Ideal Taxes Assn., 2008), we blamed foolish U.S. government policies recommended by foolish free trade academics for permitting the trade deficits that have led to our industrial decline and permitted our former enemies Germany and Japan, and our current enemy China to grow their industry dramatically at the expense of the American worker. In the July 5, 2010 issue of Business Week, Andy Grove, a founder of Intel and its former CEO makes the spectacular prediction that the outsourcing of production of technologically advanced products by our product innovators is an act of economic suicide. He writes,
The great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years. …Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers. … Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.
American economists viewed this development with benign neglect. Groves cites the following quote by Princeton professor and former member of the Council of Economic Advisers under Clinton and member of the Board of Governors of the Federal Reserve System under Greenspan: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.” (Italics mine.)...
The First Step for a Sustainable Economic Recovery -- Balanced Trade
Now gather round all you Democrats and all you Republicans, and all you left and right leaning independents and all you tea party people and we’ll tell you how to quickly turn this recession into sustainable prosperity, with real jobs, millions of them. We know most of you who haven’t read our book, Trading Away Our Future (Ideal Taxes, 2008) are in a state of disbelief. How could we, three relatively unknown Ph.D.s, know what we must do when the former Chancellor of Harvard University, economist Larry Summers, and his protégé, former head of the Federal Reserve Bank of New York, Secretary of the Treasury, Timothy Geithner, and, Cristina Romer, Chairman of the President’s Council of Economic Advisers, approved the 2009 Recovery Act that budgeted the costly $787 billion economic stimulus program which created not a single net new sustainable job to date? The answer my friends is not blowing in the wind, nor even on Facebook. The answer is because the economic elite to which they belong are Keynesian and we aren’t. And they are ideologues on "free trade" and we are not.
They believe that increased government spending regardless of what it is spent on will stimulate the economy and promote a recovery. We maintain that an increase in deficit spending will provide only a temporary stimulus which will disappear as soon as the money runs out. Lord Keynes would turn over in his urn to observe what is being done in his name.
It isn’t that the Obama economic stimulus program doesn’t create or save some jobs, especially for teachers and other government employees, ninety-nine percent of whom voted for Obama, surely a coincidence. It just has no sustainable stimulating effect, i.e., it has no multiplier. It raises GDP temporarily and the stimulus disappears as soon as the money appropriated is exhausted. Plus, they are “free trade” ideologues. We know of no economic theory that holds that free trade is beneficial to both trading partners even when it is one-sided. Free trade does work in the 50 states where the U.S. Constitution forbids the states from imposing barriers to trade and the free movement among the states of workers and capital. Free trade works only when the trading partners are subject to those conditions, which means nowhere except in the U.S. ...
Why is the Fed no longer effective?
In a June 22 Seeking Alpha commentary (The Fed, the Yuan and the Failure of Diplomacy), Peter Morici accurately discussed U.S. economic history, pointing out the ineffectiveness of the Federal Reserve in recent years:
Fed policy is much less relevant to US growth and price stability than in the days of Fed chairman Paul Volcker (1979-1987), because China's yuan policy has substantially limited the importance of Fed interest rate decisions by severing the historic link between short interest rates - like the federal funds rate it targets - and long rates on mortgages, corporate bonds, and the securities banks use to finance lending on cars and credit cards.
He is thinking through the problem in the same way that we have been. As usual, he is way ahead of most of the economic profession, which is still living in a dreamworld in which unilateral free trade is a good policy.
But my father, son and I are actually still a bit ahead of Morici here. We are advocates of the economic philosophy called "monetarism." The founder of monetarism, Milton Friedman, was my father's dissertation advisor at the University of Chicago.
Back on December 4, 2008 (Keynesian borrowing won't solve our economic problems), we enunciated the general principles that should guide economic policy. We wrote:...
Senate only passes a quarter of Obama's $266 billion stimulus
Congress is starting to lose its enthusiasm for failing stimulus plans. Washington Post staff writer Lisa Montgomery reports (Election-year deficit fears stall Obama stimulus plan) that the Senate just recessed after only passing a quarter of President Obama's latest $266 billion stimulus plan:...
World needs US taxpayer bailout - but Atlas is about to Shrug
Fred Bergsten of the Peterson Institute for International Economics, a thinktank with close ties to the Obama administration, wrote a commentary for the Financial Times (New imbalances will threaten global recovery) which foresaw continuing world economic stagnation unless the US taxpayer bails out the world with increased deficit spending. Here is his reasoning:
Global imbalances are about to jump again. New estimates from the Organisation for Economic Co-operation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300bn (€251bn, £208bn) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further....
Are Data Problems Undermining U.S. Policymaking?
I recently recieved the following question:
"Interesting article... Is Manufacturing Going the Way of Agriculture? Manufacturing output may not actually be dropping in the USA even as employment in manufacturing is. How accurate do you think their #s are?"
My response: The authors are quite right that manufacturing employment has dropped more than manufacturing output. One explanation (presented as the only explanation in the article) would be that this is because productivity is increasing. Hence, manufacturing employment is going the way of agriculture employment. Few people work on farms anymore, but the U.S. still grows a lot of food because many of the farms that remain are extremely efficient and highly mechanized.
There is one thing that gives me pause about these figures, however, and that is that the manufacturing output and the productivity figures both are probably distorted by increased outsourcing of component production...
The Greek Crisis Reveals the Fatal Weakness of the Euro and the Gold Standard
The headline in the WSJ (4-28-10) reads, “Crisis Spreads in Europe, Debt Downgrades in Portugal, Greece Sow Fear of Contagion.” The same article recites “The yield on Germany’s 10-year bond fell to 2.99%.” The following day, the headline read “Contagion Fear Hits Spain.” What is Germany doing right that Greece, Portugal, and Spain are doing wrong? For one thing, and we believe the main thing, Germany exports more than it imports while the others import more than they export. So Germany accumulates euros and foreign exchange while the others run out of euros and foreign exchange. Since their debts are payable in euros, they become unable to service their debts. As the following table shows, Greece, Portugal, and Spain display trade deficits in 2008 and 2009, the first a more or less normal year of growth, the latter a recession year.
Source: CIA, World Fact Book
The solution the article talks about is a loan of €45 billion from the EU and the IMF, a condition of which would be for Greece to tighten its belt and balance its budget averting its need to borrow. But a balanced budget is no guarantee that exports will rise and imports will fall. The U.S. enjoyed a balanced budget in 2000. Nevertheless, the trade deficits exploded....
Tom Goergen foresees the coming financial crisis
The Democrats and Republicans in Washington are getting together this week on new financial regulations. But they are ignoring the cause of the last financial crisis and of the next. Meanwhile, writing in The Pilot, a local Soutnern paper, Tom Goergen nails it:...
Deficit Commission should address both deficits
The bipartisan U.S. Deficit Commission meets for the first time today (April 27). In December it will report its recommendations to Congress. The commission is expected to recommend some combination of tax increases and spending cuts to rein in our huge government budget deficits.
But there is another deficit problem that should be addressed at the same time. Our foreign debt has been skyrocketing. On July 13, 2009, we wrote a commentary (America Sliding Into a Pit of Foreign Debt) for the American Thinker about it. We wrote:
Eventually, when payments to foreigners get too high, a currency crash becomes inevitable. We also wrote about this back in July:...
Why Financial Reform Now? Why Not a Bill That Creates Jobs?
The President’s motives in offering a financial reform bill to regulate Wall Street and the banks has all the appearances of a Mein Kampf strategy for national socialism. Like burning down the Reichstag and blaming it on your political foes. Pretend that the banks and investment houses caused this recession when everyone in Washington knows it was the housing bubble that created the financial crisis, a bubble one of whose authors was Barney Frank who reported out the House version of this bill. Taking advantage of the negative public reaction to bailouts, which actually turned out to be pretty inexpensive, the reform bill speaks of avoiding the need for bailouts in the future. Why? TARP’s toxic assets were rendered harmless at very low cost. Why not plan on repeating it during the next recession? Say, sixty years from now.
You won’t need any new taxes, no phony fund to slice up companies too big to fail. Why break them up? Make them a loan and get back your principal with interest! That is what happened during this recession. The loans, negatively referred to as bailouts, stabilized the banking system at amazingly low cost to the taxpayers. In the future it will be at a very high cost represented by the taxes to create a fund that will have as little reality as the social security fund. The taxes will all be used as the social security fund is used, to finance government borrowing. ...
Congress Caused This Depression. Not Wall Street. Not the Banks
A bi-partisan Congress and successive Democratic and Republican administrations caused this depression. What else should one call an economic situation in which nearly 10 percent of the work force is unemployed and an additional 8.5 percent have given up looking for jobs. The administration would like you to believe that it was caused by the big investment houses on Wall Street and by the banks. The banks caved in under government threats and blackmail by ACORN and other self-appointed community groups and made the rotten loans whose defaults were responsible for this depression. Wall Street, seeing there were profits to be made, volunteered to raise the capital to convert the trillions of dollars of foolish mortgages into foolish investment vehicles. It turned out to be very profitable in the short-run but catastrophic in the long-run. But the bubble had been set in motion by Congress, not Wall Street and not the banks.
It all began innocently enough with the passage of the Community Reinvestment Act of 1977 which required the banks to end their alleged discrimination against the poor, mostly black, residents in poor, so-called, red-lined neighborhoods. It was leftist propaganda that accused the banks of deliberately discriminating against blacks and the line was bought hook, line, and sinker by Sen. Proxmire, the bill’s sponsor, President Carter, and a know-nothing Congress. Banks, including black owned banks, as is to be expected, made fewer mortgages in economically deteriorating neighborhoods. But the act ignored reality and required banks to make loans in such areas and if they failed to do so, they would suffer penalties. ...
Revaluing the Yuan Will Not Balance Our Trade with China; Tariffs Will.
Nobel Prize-winning economist Prof. Paul Krugman, in a series of recent op-eds, has decried China’s policy of keeping its currency, the renminbi or yuan, undervalued to maintain and grow its chronic trade surpluses with the U.S. and other nations. An increase in the value of the rrenminbi relative to the dollar would make Chinese goods more expensive to Americans and U.S. goods less expensive to the Chinese which economists believe would stimulate demand for U.S. made goods and reduce demand for Chinese made goods. The trouble with this view is that the Chinese government denies consumers the foreign exchange required to import U.S. goods and services. In 2008, our trade deficit with China reached $268 billion, representing a loss of about 2.7 million US industrial jobs over the course of the last two decades. In 1989, our trade deficit with China amounted to $6.2 billion, or about 1/40th of the 2008 deficit. In 2008, our trade deficit with the rest of the world totaled over $800 billion, roughly equal to Pres. Obama’s economic stimulus plan to exit the recession. Balancing the trade deficit at the 2008 level of imports would create 8 million U.S. jobs.
In his most recent op-ed which appeared on the internet, March 14, Prof. Krugman called for a 25% percent increase in the value of the yuan relative to the US dollar, implying that such a revaluation of the renminbi would bring our trade with China into reasonable balance. A hundred and thirty US legislators of both parties have called for the U.S. to put pressure on China to revalue her currency. We do not believe that fluctuating exchange rates would be successful in reducing the trade imbalance. We believe there are many ways for mercantilist nations to restrict imports and subsidize exports in spite of a revaluation of currencies. ...
The Obama Administration's Agenda to Balance Trade
On March 1, 2010, Ambassador Ron Kirk, United States Trade Representative, disclosed “The President's 2010 Trade Policy Agenda”, a suicide pill for the U.S. economy. For three decades, every administration had more or less the same agenda and ideology: Ignore the trade deficits and just accept them as the inevitable result of competitive forces, which they are not. It follows that if China, Japan, Germany, and others want to exchange their valuable goods for mere greenbacks, why should we complain? We can print more.
It is hard to believe that that was and continues to be the attitude of the vast majority of economists. They’ve been brain-washed into believing that market forces must inevitably restore a balance of trade. Economic theory does not support that view. It applies only under certain conditions as we pointed out in our book, Trading Away Our Future (Ideal Taxes Assn, Jan., 2008). China, like Japan before it, was and continues to deliberately pursue the mercantilist policy of promoting a surplus of exports over imports by erecting all sorts of barriers to imports while subsidizing exports, keeping its currency artificially undervalued to make its imports expensive and its exports cheap, by buying U.S. financial assets to keep U.S.interest rates low to American consumers, to discourage savings and encourage consumption. Not until recently did an eminent economist like Prof. Paul Krugman condemn China’s mercantilist practices and suggest U.S. counteraction.
The slow-acting suicide pill suddenly accelerated in the mid-1990s. The result was the loss of millions of U.S. industrial jobs. How many? To balance trade at the level of imports in 2008, we would have to create eight million industrial jobs. The defenders of U.S. trade policy point to our achievement of full employment in 2007, neglecting to mention that the competition of factory workers who lost their well-paying jobs lowered the earnings of all workers. As a result, wages have stagnated over the past three decades, fewer workers enjoy middle class incomes, income distribution has worsened, and the U.S. is on the verge of becoming a second-rate industrial power if it has not already achieved that distinction. ...
Germany, Greece, the Euro, and the Gold Standard
Many commentators believe that dysfunctional Greece is the cause of Greece’s pending bankruptcy and many believe that dysfunctional USA is the cause of the USA’s pending bankruptcy. Time has run out for Greece and is running out for the USA. But the U.S. is more fortunate than Greece; its bonds are payable in U.S. dollars, issued as needed by its central bank, the Federal Reserve System. Poor Greece, its debt is payable in euros which are printed by the European central bank whose policies require Germany’s approval. And Germany does not approve profligacy.
The cause of Greece’s problems is alleged to be financial profligacy but its immediate cause is really its chronic trade deficit with Germany and the European community which causes it to run out of euros. The cause of the USA’s problem is alleged to be financial profligacy but its immediate cause is its chronic trade deficits with China, Japan, Germany, and OPEC which flood the world with dollars which the world hoards as reserves or sends to the U.S. in return for U.S. Treasury bonds and other U.S. financial assets. Unfortunately, this is not sustainable. . . .
McCain's economic advisors cost him the Presidency and may cost him his Senate seat
A February 22 interview with the Arizona Republic editorial staff (Sen. John McCain: I was misled on bailout) shows that Senator McCain still doesn’t understand that his economic advisors' lack of common sense cost him the presidential election. They made four huge mistakes.
Mistake #1, The TARP Bailout
The American people have enough common sense to recognize a give-away to Wall Street lobbyists. Yet McCain voted for TARP, suggesting that his anti-lobbyist rhetoric was phony. Dick Morris and Eileen McGann noted at the time that McCain's TARP position may have cost him the presidency.
But McCain still doesn't understand his mistake. In his interview with the Arizona Republic editorial staff, he claimed that Paulson and Bernanke misled him about how the TARP money would be spent. But he again defended his vote, citing his economic advisors:...
Ralph Gomory: Does America Need Manufacturing?
Ralph E. Gomory is a former Senior Vice President for Science and Technology at IBM and the former President of the Alfred P. Sloan foundation. He is also the author of a mathematical theorem that bears his name.
Why There Has Been No Keynesian Multiplier
The Keynesian multiplier posited that an increase (decrease) in investment (I) or in government purchases (G) will cause an increase (decrease) in national output equal to 1/(1-MPC) where MPC is the percent change in consumption that results from an increase in income. To illustrate, an increase in domestic investment of $10 billion will increase income directly by $10 billion. If the MPC is 80 percent, the recipients will spend $8 billion on increased consumption, the recipients of the $8 billion will increase their consumption by $6.4 billion, which in turn will increase consumption by $ 5.12, and so on. The increase in I plus the successive increases in consumption amount to $50 billion. We believe there is no multiplier effect from governmnent-financed temporary employment. Mulltiplier effects can be expected only when enduring jobs are created increasing expected lifetime income, a conclusion that follows from Prof. Milton Friedman's hypothesis that consumption depends on expected lifetime income. Jobs that are expected to be temporary do not have multiplier effects.
The Bush and Obama administrations spent several hundred billions in the TARP program to stabilize the banking system in the belief that the banks in turn would make loans to businesses. No demand for loans for investment in factories and equipment materialized and there was no increase in private investment and therefore no multiplier effects. Pres. Obama's so-called economic stimulus program spent a couple of hundred millions to stimulate public works which created no expected increase in lifetime income because of the temporary natrure of the jobs created and spent hundreds of billions more on programs that simply supported existing state government budgets. No job creation there! It subsidized some school construction but created few jobs. Unemployment continued to rise throughout Pres. Obama’s first year which accords with the permanent income hypothesis.
We have no quarrel with the idea of the multiplier when it is applied to increases in productive investment. Our quarrel is with those who believe the multiplier applies to purchase of financial assets of financial institutions, to support of state and local government budgets, to subsidies like “klunkers”, to buying mortgages, to nationalizing businesses and insurance companies, to the gifts made to households by the Bush and Obama administrations, or to payments of unemployment compensation, etc., etc. None of the legislation that the administration has been pushing – health care, capping carbon emissions, man-made global warming grants and subsidies -- create enduring jobs.
There would be a multiplier only if there were increased private investment in enduring productive facilities. Unfortunately, private investment in manufacturing and construction in the United States has been nil. Investment in renewable resources subsidized by government is offset by the inefficiency of such enterprises which for all practical purposed produce nothing of value. The electricity they produce if valued at the cost of electricity produced by fossil fuels, hydro-electric, and nuclear plants would result in a negative return on investment which means they are equivalent to digging trenches and then re-filling them. The higher prices of electricity reduce the income of households and raise the costs of producing goods. Lowering demand and leading to a negative multiplier.
Nothing that either administration has done has positive multiplier effects.
Here are some of the things we have been recommending that do have multiplier effects:
Policies to Get the Economy Going
The news during the week Friday, January 8 to Thursday, January 14, 2010, was dominated by two events indicating a worsening economic outlook. The first was the disappointing employment news released by the U.S. Bureau of Labor Statistics that showed that total nonfarm payroll employment declined by 85,000 workers between November and December, 2009 while economists were expecting a much smaller decline as though any decline is good. The decline was led by a loss of 57,000 construction jobs and 27,000 manufacturing jobs. The former is understandable; the latter is scandalous.
The second was the trade data released by the Department of Commerce that showed that U.S. exports rose in November to $138 billion, up 0.9 of one percent but imports rose faster, up 2.6 percent to $175 billion, the difference equivalent to a loss of about 370 thousand jobs. Manufacturing jobs have been declining precipitously since the explosion of the trade deficits since the late 90s. This is the sector whose growth is the key to ending the recession. Below we offer some suggestions that will create millions of jobs in a few years and won’t require “trillion economic stimuli” based on a disproved theory of a Keynesian multiplier.
There are a number of reasons why we are not getting much investment in American manufacturing. The major reason is that it is much cheaper to produce goods abroad and export them to the U.S. than produce them here. The Obama administration and preceding Republican and Democrat administrations let Japan and Germany since WWII and China and other Asian countries more recently to employ mercantilist policies such as import barriers and export subsidies and keep their currencies undervalued in order to keep their products less expensive and American products more expensive. American manufacturers have learned that it is foolish to invest in manufacturing facilities in the U.S. They joined the club, producing abroad and exporting to the U.S.
There is a simple solution, balanced trade. Under the rules of international trade, countries experiencing chronic trade deficits have a right to impose tariffs and restrict imports. My recommendation is that a uniform tariff of one-third or more be levied on imports from those countries and only those countries with which we have sizable chronic deficits. Some fear China will retaliate. As Prof. Paul Krugman wrote in a recent article, we have little to fear. Besides, retaliation would hurt China more than it would hurt us. They and we will talk the talk and walk the walk.
Should the tariff be applied to oil companies who sell to the U.S.? Yes, to those which have large chronic trade deficits with us and belong to the illegal oligopoly called OPEC.
There are many other actions we could take. Millions of jobs could be created quickly at no cost to the US taxpayer or even increase government revenues as the tariff revenues would.
Drill, drill, drill! Permit drilling for oil on public lands and off shore in the Atlantic and Pacific and in the Arctic (as Russia is doing). This would diminish the demand for foreign fuel and lower world prices even if we continue to import crude oil. Likewise, we should be encouraging the use of natural gas, which is abundant, as an automotive fuel. Huge amounts are available and a pipeline from Alaska is being built from Prudhoe to Alberta and Saskatchewan by Alaska, Canada, and Exxon-Mobile. Under pressure from leftist environmentalists, the U.S. administration and Congress has ignored the job-creating potential of prospecting, producing, and distributing additional supplies of oil and gas. Hundreds of good-paying jobs are being forfeited on the altar of environmentalism. (I am tempted to use the word “treasonous” to describe some of the policies of environmental activists. Recent evidence suggests that the hypothesis that global warming is man-made may have been a hoax perpetrated by leftist academics. A large number of distinguished physicists believe that changes in the sun’s geomagnetic emissions are the principal cause of climate warming and cooling, not carbon emissions. Carbon emissions are unable to explain the earth’s recent cooling that lasted more than a decade and continues to this day.)
Abolish the Corporate income tax to stimulate manufacturing investment in the U.S. A distinguished American economist has shown that corporations that sell in the U.S. are able to shift the burden of the tax to consumers whereas they cannot do so in international markets. This puts the American corporation at a great disadvantage. Whereas foreign nations are permitted to rebate value-added taxes under WTO rules, income taxes may not be rebated. We should replace the corporate income tax with a value-added tax that can be rebated to our exporters and imposed on all our imports.
There is a lot we can do, but unfortunately we have elected one government after another that talks the talk but doesn’t act.
Cost of treasury bailout of FNMA and Freddie MXC
The Treasury Department announced on December 24, 2009 that it removed the $400 billion financial cap on the money it will provide to keep Fannie Mae and Freddie Mac afloat. According to the Associated Press, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years. Nevertheless, it appears that the Treasury did not believe its own forecast that $400 billion would be enough. The date chosen to remove the financial cap -- Christmas Eve -- was no accident. Not only was it buried by the passage the same day of the Senate's health care biil but it obviated the need for Congressional approval. "Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows." The two Government Sponsored Enterprises (GSEs) constitute the secondary for mortgages. The financial commitment provides a limitless supply of money to the two government run entities for four to five more years.
Foreclosures.com: "House Prices Will Roar Back in 2009"
If you are about to buy a house because of this forecast, then you are a sucker. Here's a quote from the story:
SACRAMENTO, Calif., Dec 09, 2008 (BUSINESS WIRE) -- The nation's foreclosure hemorrhage has finally slowed and 2009 should see a significant decline in foreclosures as buyers return, pushing home prices up and fueling a real estate recovery, according to the 2009 Outlook from ForeclosureS.com, the leading real estate and property information and education specialists.
But, here's the graph of the housing bubble so far:
As you can see, house prices are nowhere close to their normal levels. (.) A little review of how we got here could help.
This is non-seasonally adjusted data through September 2008
Interest rates probably caused some of the price appreciation after 1997. Governments around the world have been building up their dollar reserves since 1996, sending their countries’ savings to the United States. The increase of foreign savings flowing into the United States caused real-long term interest rates to fall precipitously from 4.5% in 1996 to 1.3% in 2005 (see Chapter 2 of our book). The fall in interest rates tends to push up house prices, both because it reduces mortgage interest rates and also because it reduces the returns to competing investments.
[Property owners] can claim the exclusion [from capital gains taxation] even if they convert an investment property or vacation house into their principal residence and live there for at least two years. This flexibility has been a boon to many tax-wise owners of multiple houses – particularly during the bubble years when values doubled in some parts of the country.
The Housing Bubble that began in 1998 had other contributing factors, but Vernon L. Smith, a Nobel Prize winning economist largely due to his laboratory study of economic bubbles, held that it was primarily caused by the 1997 legislation. He pointed out that, at the time it was enacted, the 1997 legislation was quite popular among the industries that were most severely hurt when the bubble burst. He wrote, sarcastically:
Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.
Smith argued that, instead, Congress should have done exactly what we recommend in our book. Specifically:
More daring than the action to exempt real estate from the capital gains tax -- and in lasting service to the poor -- would have been actions allowing capital gains on all assets to go tax free, provided that the capital was reinvested -- i.e., not consumed, and yes, good citizens, housing counts as consumption.
During the asset bubble, homeowners depleted their savings, leaving them with less money for a future downpayment. Tyler Cowen (2008) described this psychology in a New York Times commentary:
The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck….
In fact, people did more than stop adding to their personal savings. They began subtracting from their personal savings. As documented by Louise Story in the New York Times, bank advertising campaigns encouraged people to consider the rising value of their homes to be income, to be consumed in the present. They urged homeowners to take out second mortgages on their homes so that they could increase their current consumption and coined the new term “equity access” to replace “second mortgage.” Borrowing on home equity increased steadily.
[This piece was initially published on our old blog on December 9, 2008]
Wall Street Journal's take on Bush economic mistakes
On Friday [Jan. 16, 2009], the Wall Street Journal editorial staff analyzed President Bush's economic mistakes (The Bush Economy) while completely ignoring two of them: (1) tolerating the foreign savings inflows that caused the trade deficits and (2) causing the stock buybacks that slowed economic growth.
Tolerating Foreign Savings Inflows
The Wall Street Journal begins by correctly pointing out that Bush inherited a recession when he took office in 2000:
Mr. Bush inherited a recession. The dot-com bubble had burst in 2000, and the economy was sinking even before the shock of 9/11, the corporate scandals and Sarbanes-Oxley....
He also inherited a growing trade deficit. During the late 1990s, when the bubble was occurring, foreigners were selling their currencies to buy dollars so that they could buy US stocks. As a result, they bid up the dollar and caused the US trade deficits to worsen, as shown in the graph below:
After 2002, the trade deficit would have fallen, but foreign central banks greatly increased their dollar reserve purchases so that they could keep the dollar high compared to their currencies. In the graph below, the US trade deficit (i.e., the current account deficit) is shown in red and the portion caused by foreign central banks is shown in green:
Bush and Greenspan did nothing to stop these increased foreign central bank dollar purchases. Greenspan could have easily counteracted them by buying the same amount of foreign currency reserves. Because he didn't do anything, net fixed investment in US manufacturing collapsed, as shown in the graph below, making American products less and less competitive in world markets:
The other effect of the foreign government reserve purchases was that they caused US long-term interest rates to fall, which contributed to the house price bubble. The Wall Street Journal blames these low interest rates on Greenspan's monetary policy. But Greenspan wasn't causing inflation.
His real mistake was that he, like the Wall Street Journal editorial staff, believed in the "free flow of capital ideology" which holds that the inflow of foreign capital is good for a country, even when it causes trade deficits. That's why neither he nor Bernanke nor the Bush administration did anything to counteract the inflow, even when it was deliberately being produced by foreign central banks, at the behest of their governments, in order to steal manufacturing market share from American producers.
The main central bank to follow this strategy was the People's Bank of China. The Bush administration never counteracted their successful attempts to manipulate their currency and ours in order to steal market share from American manufacturers.
Causing Stock Buybacks with a Capital Gains Tax Cut
The Bush administration's record is not entirely negative. They did do a good job with a tax cut in 2003 that helped the economy recover from a recession. The Wall Street Journal editorial notes:
This time the tax rate reductions were immediate, and they included cuts in capital gains and dividends designed to spur business incentives. As the tax cuts became law in late May 2003, the recovery began in earnest. Growth averaged nearly 4% over the next three years, the jobless rate fell from 6.3% in June 2003 to 4.4% in October 2006, and real wages began to grow despite rising food and energy prices. The 2003 tax cut was the high point of Bush economic policy.
Indeed, Bush's tax cuts provided the short-term stimulus which got the economy out of the recession. Unfortunately, the capital gains tax cut part of the stimulus severely hurt the economy in the long-term. Capital gains tax cuts increase tax revenue because investors take advantage of them to cash in and consume their capital.
Investors always face the choice of whether or not to keep their capital invested in order to earn the future income. When capital gains tax rates fall, as they did in 2003, investors are more likely to choose present consumption over future income. When they cash-in their wealth, aggregate demand temporarily increases while future income permanently decreases.
After 2003, Corporate managers, especially, cashed in their companies' wealth through stock buybacks. They would have their companies borrow at the cheap interest rates produced by the foreign savings inflow and use the borrowed money to buyback their own stock. They gave themselves stock options and then bid up their own companies stock price through stock buybacks. In this way they took advantage of Bush's 15% capital gains tax rate, as compared to the 35% tax rate they would have had to pay if they had received salary bonuses.
In all, from 2004 through 2007, America’s 500 largest corporations earned $2,505 billion while spending $1,578 billion on buybacks and $853 billion on dividends, leaving only $84 billion of their profits for reinvestment and corporate income taxes. The increase in stock buybacks began immediately after the 2003 capital gains tax cut, as shown below:
When the financial crisis hit in 2008, the very same corporations that were coming to the government for help had been depleting their corporate reserves through buybacks.
[Note: We recommend the rollover tax treatment for capital gains: High tax rate when capital consumed, but taxation deferred when capital rolled-over from one asset to another.]
Bush Administration's Failures in 2008
At the end of their editorial, the Wall Street Journal blames the Bush administration for the fact that their February 2008 stimulus package and October 2008 TARP bill did not turn around the economy. They argue that if these stimulus packages had been different in their composition or if they had been timed differently, they would have worked.
But these stimulus packages completely failed to address the real cause of the current recession: The American consumer could not continue borrowing more and more money to pay for the trade deficits. As the economics analysis of the Levy Economics Institute of Bard College makes clear, no stimulus package will end this recession unless the trade deficits are also addressed.
In an May 15 commentary, we summarized Bush's economic mistakes with the following words:
There are four major Republican economic ideas. Two of them work and two of them don't. Unfortunately, President Bush chose the two that don't work, and that is the reason for the current U.S. economic stagnation. These two Republican economic ideas work:
1. Reduce the size of U.S. government.
2. Cut business taxes.
These two Republican economic ideas don't work:
1. Cut capital gains taxes.
2. Welcome foreign investment that costs jobs.
The Republican Party has lost the Presidency, the House, and the Senate because of President Bush's economic mistakes. It is ill-served when the Wall Street Journal ignores those mistakes.
[This was originally posted on Jan. 19, 2009 on our old blog.]
Requiem to an Improvident Generation
In his most recent column, Cal Thomas provides a sweeping summary of the financial difficulties faced by the American Republic. He argues that the projected 9.1 trillion next-decade budget deficit is actually overly optimistic, and that a more realistic figure would be 13 trillion. Thomas concludes with the warning that
If we don't [ask government to let us take care for ourselves and vote accordingly], the future belongs not to us but to China, Japan, Qatar, Venezuela and Saudi Arabia, among others -- all holders of our national debt.
Thomas' warnings concerning the improvidence of American government are well placed, but they are likely to go unheard. The last four decades have been decades of improvidence, a period in which government has heeded the calls of a narciscistic generation unwilling to plan and cooperate effectively for the future, whether personal or collective.
At the personal level many Americans have abandoned thrift and saving for improvident waste. Personal savings rates have recovered slightly over the last year, but this probably reflects the inability of the irresponsible to get additional credit more than a true change in national culture.
At the collective level the Federal government has run budget deficits through most of the last four decades. The current levels of deficit spending would be far more modest were it not for the massive interest payments that are already due, currently running about 400 billion per year. Democrats favor spending increases and Republicans favor tax cuts. Unless balanced by painful tax increases or spending decreases the result is quite the same in the end.
The Federal government under both Democratic and Republican administrations has also done little or nothing to stop three decades of massive trade deficits that have transformed the United States from a creditor to the worlds largest debtor. In the process, trade deficits (and the government policies that sustain them) have eviscerated American comparative advantage across a wide range of fields, diminishing the prospects that the U.S. will be able to successfully pay back decades of borrowing without suffering broad declines in living standards.
The illusion persists among those in the improvident generations that have wrought the current and coming crises that somehow they will escape. That this will all be passed on "to the kids."
Thomas remains in delusion. He writes "(the kids will be paying for this)." It is unquestionably the case that the kids will (and are) paying for this. But the assumption that only the kids will pay for this is an illusion of the first order. Perhaps Thomas plans to die soon. But it is us, and our parents as well as our children who will be and are paying for the improvidence of ourselves and our forebears. We have met the improvident and it is us.
It is also a delusion of the first order to claim that either the Republican or Democratic parties stand for fiscal responsibility or serious efforts to right our international balance of payments. Such efforts would smack too much of the self control, care for the future, and discipline that the improvident have ever lacked.
Thomas calls for mobilization:
Vote for a Democrat who supports substantial and specific spending cuts or a Republican who takes a stand for real and sizable tax increases if you can find one. They are rare in this improvident land.
[This is a re-post of an entry originally dated from October 2009 on our old trade and taxes blog. I'm reposting it because the old blog is currently not accessable, and I like this piece.]
Real Estate Taxation
Journal of Economic Literature:
Atlantic Economic Journal: