The Revenue Limits of Tax and SpendWhether rates are high or low, evidence shows our tax system won’t collect more than 20% of GDP.By DAVID RANSONWall Street Journal – link to originalMay 17, 2020
The Greeks have always been trendsetters for the West. Washington has repudiated two centuries of U.S. fiscal prudence as prescribed by the Founding Fathers in favor of the modern Greek model of debt, dependency, devaluation and default. Prospects for restraining runaway U.S. debt are even poorer than they appear.
U.S. fiscal policy has been going in the wrong direction for a very long time. But this year the U.S. government declined to lay out any plan to balance its budget ever again. Based on President Obama’s fiscal 2011 budget, the Congressional Budget Office (CBO) estimates a deficit that starts at 10.3% of GDP in 2010. It is projected to narrow as the economy recovers but will still be 5.6% in 2020. As a result the net national debt (debt held by the public) will more than double to 90% by 2020 from 40% in 2008. The current Greek deficit is now thought to be 13.6% of a far smaller GDP. Unlike ours, the Greek insolvency is not too large for an international rescue.
As sobering as the U.S. debt estimates are, they are incomplete and optimistic. They do not include deficit spending resulting from the new health-insurance legislation. The revenue numbers rely on increased tax rates beginning next year resulting from the scheduled expiration of the Bush tax cuts. And, as usual, they ignore the unfunded liabilities of social insurance programs, even though these benefits are officially recognized as “mandatory spending” when the time comes to pay them out.
The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth.

The nearby chart shows how tax revenue has grown over the past eight decades along with the size of the economy. It illustrates the empirical relationship first introduced on this page 20 years ago by the Hoover Institution’s W. Kurt Hauser—a close proportionality between revenue and GDP since World War II, despite big changes in marginal tax rates in both directions. “Hauser’s Law,” as I call this formula, reveals a kind of capacity ceiling for federal tax receipts at about 19% of GDP.
What’s the origin of this limit beyond which it is impossible to extract any more revenue from tax payers? The tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect. That would explain why, as Mr. Hauser has shown, conventional methods of forecasting tax receipts from increases in future tax rates are prone to over-predict revenue.
For budget planning it’s wiser and safer to assume that tax receipts will remain at a historically realistic ratio to GDP no matter how tax rates are manipulated. That leads me to conclude that current projections of federal revenue are, once again, unrealistically high.
Like other empirical “laws,” Hauser’s Law predicts within a range of approximation. Changes in marginal tax rates do not make a perceptible difference to the ratio of revenue to GDP, but recessions do. When GDP falls relative to its potential, tax revenue falls even more. History shows that, in an economy with no “output gap” between GDP and potential GDP, a ratio of federal revenue to GDP of no more than 18.3% would be realistic.
In this form, Hauser’s Law provides a simple basis for testing the validity of any government’s revenue projections. Today, since the economy already suffers from a large output gap that is expected to take many years to close, 18.3% must be a realistic upper limit on the ratio of budget revenues to GDP for years to come. Any major tax increase will reduce GDP and therefore revenues too.
But CBO projections based on the current budget show this ratio reaching 18.3% as early as 2013 and rising to 19.6% in 2020. Such numbers implicitly assume that the U.S. labor market will get back to sustainable “full employment” by 2013 and that GDP will exceed its potential thereafter. Not likely. When the projections are tempered by the constraints of Hauser’s Law, it’s clear that deficit spending will grow faster than the official estimates show.
Mr. Ranson is the head of research at H. C. Wainwright & Co. Economics.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

The New Yort Times – link to original

OP-ED CONTRIBUTORS

By MICHAEL LEWIS and DAVID EINHORN

Published: January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

Related

Op-Ed Contributors: How to Repair a Broken Financial World (January 4, 2009)

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

Continued at “How to Repair a Broken Financial World.”

Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article

Economic liberty is key to societal well-being.

By RYAN STREETER AND ARTHUR C. BROOKS

Wall Street Journal Oct 26, 2009 – link to original

Since the fall of the Berlin Wall 20 years ago, the performance of market economies has been a powerful theme in assessing the health of societies around the world. But free enterprise has come under attack with the global economic crisis, the perceived threat of climate change, and a broader concern—most recently promoted by French President Nicolas Sarkozy—that growth alone does not indicate prosperity.

And at first glance, this year’s Prosperity Index, published yesterday by the Legatum Institute, seems to provide evidence that capitalism is in trouble. The index aims to be a holistic measure of societal well-being, measuring not only things like economic freedom and property rights but also factors such as education, health, and good governance. The Institute found that four of the five most prosperous countries are democracies of Northern Europe: Finland, Sweden, Denmark and Norway—all well-known as high-tax, social welfare states. And while the U.S. and U.K. rank ninth and 12th respectively, France, Germany and Spain are not far behind. Fourteen of the top 20 countries are European. So does that mean capitalism needs to be reigned in as many of its critics consider? Far from it.

Consider the Wall Street Journal/Heritage Foundation Index of Economic Freedom, which measures the key factors in political and economic freedom, such as strength of democratic checks and balances, protection of property rights, enforcement of contracts, ease of starting a business, and of hiring and firing staff. Due to their strongly capitalist systems, Hong Kong and Singapore score very highly in the WSJ index. Their lower personal freedoms and scores on interpersonal trust and community engagement drag them down to 18th and 23rd respectively on the Prosperity Index. Similarly, the top performers of Northern Europe do not do as well in the WSJ Index as they do in the Prosperity Index, since their economic fundamentals are not stellar.

Many people—especially Americans—think of wealth as the basis of health and happiness, too. In other words, market economies with good economic fundamentals drive us to more fulfilling lives. Europeans often counter that a narrow pecuniary viewpoint gives a distorted picture of the human experience. Worse yet, it can lead to the tyranny of materialism. Who is right?

A statistical analysis of both indexes shows that economic prosperity and more holistic indicators overlap significantly, but not completely. It’s no coincidence that the Prosperity Index calls its economic and democracy sub-indexes the drivers of wealth, and implicitly, prosperity. If one strips out the three main economic sub-indexes from the Prosperity Index, one can compile a ranking from the six remaining sub-indexes that have more to do with quality of life than economic growth. Using statistical techniques, one can test how much of the WSJ Index explains the Prosperity Index’s broader well-being indicators. The relationship is statistically significant, with just under two thirds of Legatum’s well-being indicators explained by economic and political freedom.

While free enterprise is not the only important factor explaining national differences in well-being, it probably does explain most of it. This means subverting the mechanisms of free enterprise would not just lead to lower economic growth but also lower social scores. The fact that the Nordic countries do so well in the Prosperity Index has largely to do with the fact that apart from their welfare policies, they also encourage entrepreneurship, free trade, and have stable monetary policies—even as they employ strong rhetoric against capitalism. Finland, Sweden and Denmark all score higher than Switzerland and nearly all of their southern European counterparts on their capacity to commercialize innovation, through factors such as business start-up procedures, business registration rates, and royalties on patents. All of this drives dynamic entrepreneurship, and spurs people to innovate and take risks, as they are more reassured that good ideas will pay off.

U.S. policy makers would do well to note this fact as they contemplate more “European” policies. And as the West contemplates ever tighter regulations on how and where money can be spent, lent and invested, their leaders should remember that economic and political liberty—while not the whole story—play a key role in prosperity. They are the engine driving much of what makes life worthwhile.

Mr. Streeter is a senior fellow of the Legatum Institute. Mr. Brooks is president of the American Enterprise Institute.

by Joseph Y. Calhoun, III -

Sep 13th, 2009 - Alhambra Investment – link to original article

From the NY Times, June 28: “At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

WASHINGTON, Sept 9 (Reuters) - The U.S. Commerce Department said on Wednesday it had imposed preliminary duties ranging from 10.90 percent to 30.69 percent on $2.6 billion of steel pipe from China used to transport oil.

WASHINGTON, Sept. 11 – The Obama administration will put steep import duties of 35% in the first year on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.

So how should we interpret this? Does this mean the recession is over? Or does it mean that imposing two new tariffs in one week is not a giant, flashing neon protectionist signal? Or does it mean that we should be careful about sending protectionist signals but actually taking protectionist actions is okay? Does it mean that President Obama has decided to emulate the Bush administration he spent an entire campaign railing against and manages to blame for every ill facing the country? Does it mean, that unlike other Democrats, President Obama has a secret admiration for Herbert Hoover?

There are a lot of contentious subjects in economics, but one area of near unanimous agreement is free trade. Even partisan political hack economists who disparage their former colleagues from the pages of the New York Times favor free trade:

If economists ruled the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case – that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest.  Paul Krugman

President Bush flirted with protectionism in his first term when he imposed steel tariffs. The move was intended to save a few steel jobs – and garner a few votes – but the overall economic effect was negative due to the loss of jobs in steel consuming industries. The tariffs were ultimately declared illegal by the WTO so the net result of the policy was a loss of jobs, no political gain, higher steel prices and a violation of world trading rules. Why President Obama would expect different results this time is a mystery.

President Hoover, of course, signed the infamous Smoot Hawley Act which raised tariffs in 1930 and most economists agree was a major factor in the Great Depression. Economists may disagree about the degree to which the act influenced events, but it is hard - if not impossible - to find an economist who dismisses it as a contributor. Hoover actually initially opposed the bill because he had pledged international cooperation to combat the economic downturn, but in the end he bowed to the political pressure from his party – Republicans were the protectionists back then – and signed the bill. Sound familiar?

Protectionism is not sound economic policy and as Hoover and Bush found out, it isn’t even sound political policy. The steel unions to which Bush deferred didn’t support him in the next election and FDR attacked Smoot Hawley almost from the day it was signed. By the time the 1932 election rolled around, the effects of the tariffs were so obvious even the farmers Hoover sought to protect voted for FDR. President Obama may find the political benefits just as elusive. The Chinese are already considering how to retaliate and they don’t lack for options:

Sept. 13 (Bloomberg) — China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.

Chinese industries have complained that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site today. The ministry is also looking into subsidies for the products, it said. It didn’t specify the imports’ value.

So anything we gain in the trade in tires and steel pipes will be lost in autos and chickens or something else. This might be a good time to recall that one of the few places on the planet where GM sales are rising is China. Tariffs are taxes which are borne by the consumer so the big losers in this high stakes game are American consumers and companies who will pay higher prices for tires and steel pipe. There may be a marginal benefit to US steel and tire workers, but higher prices will mean less steel and tires sold so the idea that this will increase employment in those industries is debatable at best. The effect on jobs at companies who sell the imported tires is anyone’s guess, but it won’t be a positive number. One also shouldn’t be fooled into believing the tariffs will be beneficial to tire and steel company profits. The tire companies did not support these tariffs – the steelworkers union filed the complaint – because they manufacture tires in China. In other words, the President of the United States just imposed tariffs on US based companies. Are higher prices, lower profits, fewer jobs and reduced exports too high a price to pay for union support for health care reform? Apparently not for President Obama.

President Obama’s economic policies may be sold as a benefit to the working class and the poor, but the overall effect is just the opposite. Cash for clunkers raised the price of used cars that are bought primarily by the working poor and while it was also intended to benefit GM and Chrysler workers, one cannot help but note that both companies reported lower sales during the program period. The tire tariffs are aimed at low priced Chinese tires that are bought primarily by – you guessed it – poorer Americans. The recently enacted higher minimum wages limit the ability of young Americans and especially young, minority Americans to gain entry to the workforce. It is not a coincidence that youth unemployment is at an all time high, over 25%. Higher wage costs also tend to hurt small businesses more than larger ones and therefore limit new job creation. The last administration signed off on the higher minimum wage, but President Obama supported the policy in Congress so I guess he shares the same level of concern for the poor as former President Bush. Poor Americans cannot be helped by punishing poor Chinese or by making it more expensive to hire them.

The policies of the Federal Reserve and the Treasury since the last recession have also been conducted  – allegedly – with the average American in mind, but again it hasn’t worked out that way. The weak dollar policy of the Bush administration – continued by the Obama administration – was intended to correct a persistent trade deficit which many viewed – wrongly – as costing American jobs. The Fed’s maintenance of low interest rates was intended to keep the credit spigot open wide for all Americans during the last recession. The weak dollar policy pushed up the price of commodities and while all Americans pay the price at the pump and grocery store, the poor are hurt the most since a higher proportion of their earnings are dedicated to the purchase of these necessities. The low interest rate policy induced many Americans to take on debt they couldn’t afford, but again the hardest hit were the poor who took on loans they didn’t understand and never had a prayer of repaying for houses inflated in value, at least partially, by the weak dollar. The end result of these policies has cost more jobs than could ever be plausibly – or even implausibly - blamed on free trade or a lack of credit.

The bailouts of various financial institutions over the last two years were also sold as being in the best interests of average Americans. Saving too large to fail banks, brokers and insurance companies was seen as critical to maintaining access to credit for US businesses and consumers. Tried to get a loan recently? One begins to suspect that no matter what party is in power, policy is driven more by concern for campaign contributors than the well being of the nation as a whole. The special interests may change somewhat (although the financial industry seems to be bipartisan in its politician buying), the rhetoric may change, but political corruption is eternal and bipartisan.

There is a lot of debate now about the health of the US economy. Is the recession over? If so, how robust will the recovery be? How long will it last? Will we have a double dip? A triple dip? Over the last few months, I have consistently predicted a more rapid recovery than most commentators and to this point I think I’ve been proven correct. I have also consistently said that the quality of the recovery will leave a lot to be desired. The reason for that is that the improvement in the economic statistics is primarily due to the intentionally inflationary policies of the Federal Reserve. Inflation provides an illusion of economic growth, but it cannot produce real growth. Real growth is encouraged through all the other policies that affect economic performance – tax policy, trade policy, regulatory policy, etc. And on that front, I see little that can be called encouraging.

President Obama’s rhetoric produced an historic political victory, but his smooth delivery cannot substitute for good economic policy. Paying lip service to free trade while enacting policies that are proven beyond any reasonable doubt to be economically damaging will not fool the market. The dollar’s recent descent is a warning about current economic policy that should not be ignored as it was by the Bush administration. The nascent recovery in economic activity is not self sustaining and could be derailed quickly if supportive pro growth policies are not enacted soon. Setting off a trade war would be right at the top of a long list of things we can’t afford right now.

Friday, August 28, 2009

Rasmussen Reports – link to original

August 28, 2009

Sixty-two percent (62%) of Americans say it’s always better to cut taxes than increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their own money.

A new Rasmussen Reports national telephone survey finds that just 20% of adults disagree, and 18% are not sure.

The new findings mark a nine-point increase in support for taxpayers as the best judges of spending since January.

But then Americans by a two-to-one margin – 50% to 25% – believe that a dollar of tax cuts is always better than a dollar of public spending. One-in-four-Americans (25%), however, aren’t sure.

Similarly, just 25% say public spending provides much more bang for the buck than tax cuts when it comes to economic policy and creating jobs. Fifty percent (50%) disagree that public spending is better for the economy than tax cuts. But again 26% are undecided.

(Want a free daily e-mail update? If it’s in the news, it’s in our polls). Rasmussen Reports updates are also available on Twitter or Facebook.

Women are more likely than men to prefer government spending over tax cuts. Investors favor cutting taxes more than non-investors.

Republicans are almost twice as likely as Democrats to think that taxpayers are the best judges of how to spend their own money. Sixty-seven percent (67%) of adults not affiliated with either party agree.

While two-thirds (67%) of Republicans and the plurality (49%) of unaffiliateds say a dollar of tax cuts is always better than a dollar of public spending, Democrats are evenly divided on the question.

Seventy percent (70%) of voters favor a government that offers fewer services and imposes lower taxes over one that provides more services with higher taxes. Fifty-four percent (54%) worry the federal government will try to do too much to fix the economy rather than not enough.

Support for tax cuts over new government spending has been consistent in years of surveys. As for taxpayers’ confidence in themselves over bureaucrats, consider that 74% of Americans trust their own economic judgment more than that of the average member of Congress. By a two-to-one margin, voters also trust their own economic judgment more than President Obama’s.

When it comes to Obama’s trillion-dollar health care reform plan, most voters think they understand it better than Congress does – and about as well as the president himself.

Fifty-four percent (54%) of voters say tax cuts for the middle class are more important than new spending for health care reform, even as the president’s top economic advisers signal that tax hikes may be necessary. Seventy-six percent (76%) believe it is at least somewhat likely that taxes will have to be raised on the middle class to cover the cost of health care reform.

Sixty-eight percent (68%) say government spending will go up under the Obama administration.
While a government job looks less attractive to Americans than it did at the beginning of the year, it remains the top employment choice in today’s economic environment.

Still, for nearly four-out-of-five voters, the problem is not their unwillingness to pay taxes. It’s their elected representatives’ refusal to cut the size of government.

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BY STEPHEN L. CARTER

WWW.WASHPOST.COM

The Miami Herald – link to original

July 3, 2009

A specter is haunting America: the specter of profit. We have become fearful that somewhere, somehow, an evil corporation has found a way to make lots of money.

Flash back three years. In 2006, Exxon Mobil announced the highest profit in the history of American corporate enterprise. Politicians and pundits stumbled over each other to call for an investigation and for some sort of confiscatory tax on the money the company earned. Profit, it seemed, was an evil, but large profit was even worse.

Today, the debate on the overhaul of the health-care system sparks a shiver of deja vu. The leitmotif of the conversation about the coming shape of health insurance is that the villain is the system of private insurance. “For-profit” firms come under constant attack from activists and members of Congress.

Thus, a recent news release from the AFL-CIO began with this evidently alarming fact: “Profits at 10 of the country’s largest publicly traded health insurance companies rose 428 percent from 2000 to 2007.” Even had the figures been correct — they weren’t — we are seeing the same circus. Profit is the enemy. America could be made pure, if only profit could be purged.

This attitude was wrong in 2006. It is wrong now. High profits are excellent news. When corporate earnings reach record levels, we should be celebrating. The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want.

To the country, profit is a benefit. Record profit means record taxes paid. But put that aside. When profits are high, firms are able to reinvest, expand and hire. And profits accrue to the benefit of those who own stocks: overwhelmingly, pension funds and mutual funds. In other words, high corporate profits today signal better retirements tomorrow.

Another reason to celebrate profit is the incentive it creates. When profits can be made, entrepreneurs provide more of needed goods and services. Consider an example common to the first-year contracts course in every law school: Suppose that the state of Quinnipiac suffers a devastating hurricane. Power is out over thousands of square miles. An entrepreneur from another state, seeing the problem, buys a few dozen portable generators at $500 each, rents a truck and drives them to Quinnipiac, where he posts them for sale at $2,000 each — a 300 percent markup.

Based on recent experience, it is likely the media will respond with fury and the attorney general of Quinnipiac will open an investigation into price-gouging. The result? When the next hurricane arrives, the entrepreneur will stay put, and three dozen homeowners who were willing to pay for power will not have it. There will be fewer portable generators in Quinnipiac than there would have been if the seller were left alone.

When political anger over profit reduces the willingness of investors to take risks, the nation suffers. According to news reports, one reason the Obama administration has had so much trouble finding buyers for the toxic assets it hopes to remove from financial institutions’ balance sheets is a concern by financiers that should they go along with the plan and make rather than lose money, they will be hauled before Congress to explain themselves.

And although it is easy to be dismayed by excess, trying to regulate profit makes things worse. Capital flows to places where returns are highest. The more exercised our political leaders become when profits rise, the more investment capital will remain abroad.

The search for profit has dangers. There are few legal ways to enhance profits other than cost-cutting, improving efficiency or innovating. This can lead to wondrous inventions — the iPod, say — but it can also create serious dislocations, as when companies close plants and lay off workers. Remedying those human costs is part of what most of us want government to do. What we must avoid, however, is making the remedy so severe that profitability becomes impossible.

Consider the bills in Congress that seek to limit the freedom of federally aided automakers to close dealerships or to build the cars that buyers want. Preserving local jobs and building greener cars are admirable objectives, but a firm that is forced to sacrifice profitability to attain them is unlikely to be competitive over the long haul. Indeed, one reason the “public option” health insurance program under debate may turn out to be more expensive than advocates suggest is that here, unlike in Europe, we are unlikely to put up with government restrictions on what sorts of care will be available, especially for seniors. A board of experts might decide to limit access to hip replacements, for instance, but there is little chance Congress will let them get away with it.

Private insurers, by contrast, will cut whatever they can. This puts them at constant war with regulators and patients, but beneath this tension is a certain useful discipline. We want health care to be cheaper, and the for-profit health-care industry has every incentive to make it so. Supporters of the public option tout Medicare’s cost advantages over private insurance, but those are largely obtained by setting below-market reimbursement rates for medical services (meaning that private patients subsidize Medicare patients). Moreover, the costs of compliance with the hundreds of pages of Medicare regulations are also transferred to the providers, and thus, again, to private patients.

I have no problem with a system in which private patients subsidize public patients. I do not even mind calling it a tax. Those who have good jobs should be helping out, and carping about it is uncharitable, especially now. But an expanded public option will be possible only if the for-profit sector remains vibrant and strong — and profitable. Thus, we should all await, with grateful anticipation, the day when American firms again begin to earn the highest profits in history.

Stephen L. Carter, a Yale law professor, is most recently the author of “Jericho’s Fall.”

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The ghosts of Clinton Care

 new United Nations report called “State of the Future” concludes: “People around the world are becoming healthier, wealthier, better educated, more peaceful, more connected, and they are living longer.”

Wall Street Journal – link to original article

Oct 5, 2007 

By STEPHEN MOORE

I’m old enough to recall the days in the late 1960s when people wore those trendy buttons that read: “Stop the Planet I Want to Get Off.” And I will never forget that era’s “educational” films of what life would be like in the year 2000. Played on clanky 16-millimeter projectors, they showed images of people walking down the streets of Manhattan with masks on, so they could avoid breathing the poison gases our industrial society was spewing.

The future seemed mighty bleak back then, and you merely had to open the newspapers for the latest story confirming how the human species was speeding down a congested highway to extinction. A group of scientists calling themselves the Club of Rome issued a report called “Limits to Growth.” It explained that lifeboat Earth had become so weighed down with humans that we were running out of food, minerals, forests, water, energy and just about everything else that we need for survival. Paul Ehrlich’s best-selling book “The Population Bomb” (1968) gave England a 50-50 chance of surviving into the 21st century. In 1980, Jimmy Carter released the “Global 2000 Report,” which declared that life on Earth was getting worse in every measurable way.

So imagine how shocked I was to learn, officially, that we’re not doomed after all. A new United Nations report called “State of the Future” concludes: “People around the world are becoming healthier, wealthier, better educated, more peaceful, more connected, and they are living longer.”

Yes, of course, there was the obligatory bad news: Global warming is said to be getting worse and income disparities are widening. But the joyous trends in health and wealth documented in the report indicate a gigantic leap forward for humanity. This is probably the first time you’ve heard any of this because — while the grim “Global 2000″ and “Limits to Growth” reports were deemed worthy of headlines across the country — the media mostly ignored the good news and the upbeat predictions of “State of the Future.”

But here they are: World-wide illiteracy rates have fallen by half since 1970 and now stand at an all-time low of 18%. More people live in free countries than ever before. The average human being today will live 50% longer in 2025 than one born in 1955.

To what do we owe this improvement? Capitalism, according to the U.N. Free trade is rightly recognized as the engine of global prosperity in recent years. In 1981, 40% of the world’s population lived on less than $1 a day. Now that percentage is only 25%, adjusted for inflation. And at current rates of growth, “world poverty will be cut in half between 2000 and 2015″ — which is arguably one of the greatest triumphs in human history. Trade and technology are closing the global “digital divide,” and the report notes hopefully that soon laptop computers will cost $100 and almost every schoolchild will be a mouse click away from the Internet (and, regrettably, those interminable computer games).

It also turns out that the Malthusians (who worried that we would overpopulate the planet) got the story wrong. Human beings aren’t reproducing like Norwegian field mice. Demographers now say that in the second half of this century, the human population will stabilize and then fall. If we use the same absurd extrapolation techniques demographers used in the 1970s, Japan, with its current low birth rate, will have only a few thousand citizens left in 300 years.

I take special pleasure in reciting all of this global betterment because my first professional job was working with the “doom-slaying” economist Julian Simon. Starting 30 years ago, Simon (who died in 1998) told anyone who would listen — which wasn’t many people — that the faddish declinism of that era was bunk. He called the “Global 2000″ report “globaloney.” Armed with an arsenal of factual missiles, he showed that life on Earth was getting better, and that the combination of free markets and human ingenuity was the recipe for solving environmental and economic problems. Mr. Ehrlich, in response, said Simon proved that the one thing the world isn’t running out of “is lunatics.”

Mr. Ehrlich, whose every prediction turned out wrong, won a MacArthur Foundation “genius award”; Simon, who got the story right, never won so much as a McDonald’s hamburger. But now who looks like the lunatic? This latest survey of the planet is certainly sweet vindication of Simon and others, like Herman Kahn, who in the 1970s dared challenge the “settled science.” (Are you listening, global-warming alarmists?)

The media’s collective yawn over “State of the Future” is typical of the reaction to just about any good news. When 2006 was declared the hottest year on record, there were thousands of news stories. But last month’s revised data, indicating that 1934 was actually warmer, barely warranted a paragraph-long correction in most papers.

So I’m happy to report that the world’s six billion people are living longer, healthier and more comfortably than ever before. If only it were easy to fit that on a button.

Mr. Moore is a member of The Wall Street Journal Editorial Board