Free Markets, Free People

Economy

Common sense reasons why GOP should stand firm on tax increases

James Pethokoukis provides the reasons.  As you’ll note, economically, they’re not rocket science, but they certainly are something that the left seems to want to ignore in focusing its solutions to the debt problem on getting tax increases included.

One – the economy will not tolerate a tax increase at this time.   It is simply not in the shape in which it can shrug a tax increase off.   And it certainly won’t matter if the tax is only on “the rich”.  As someone once asked, “ever get a job from a poor man?”  The increase in revenues generated by taxing the rich (or anyone for that matter) will not offset the loss it will generate in hiring or expansion of business.  Pethokoukis points out that the economy is in incredibly fragile shape at the moment.  Thus:

…[T]he economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.

Common sense 101.

Two –  Tax revenue isn’t our problem when it comes to debt.  Spending is the problem.  Yet as I pointed out Saturday, the solution the left seems to prefer involves nothing but tax revenue increases or tax increases.   What they’re less inclined to do is focus on the spending problem and make appropriate spending cuts.  “Greek heroin” is the reason.  Take a look at this:

By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.

That means that if the so-called “Bush tax cuts” (they’re just the current tax rates) are left in place, that’s where we find ourselves in 2035.   As Pethokoukis proves, it isn’t tax revenue that’s the problem.   Unless you believe that it’s the government’s money in the first place and they have every right to determine how much you get to keep. 

Let’s go with that.  Let’s see what happens if the left gets its way:

But let’s say all the Bush tax cuts were left to expire, as was AMT relief. Assuming no economic fallout, according to the CBO, revenue would be 23.2 percent of GDP by 2035. Three problems here: a) even with all those tax increases, the annual budget deficit would still be nearly an unsustainable 10.7 percent of GDP in 2035; b)  the U.S. tax code has never generated that level of revenue and almost certainly can’t without a value-added tax; and c) there would be tremendous economic fallout. Axing all the Bush tax cuts would chop three percentage points off GDP growth, according to Goldman Sachs, certainly sending America back into recession. Tax revenue would again plummet.

Spending, not tax revenue, is the obvious problem.

Common sense 101.

Three – boosting economic growth is the fastest way to increasing tax revenues.   However there’s one problem to that as far as an intrusive government is concerned.   It has to get out of the way.

Pethokoukis and I part ways a bit here as he endorses a consumption tax vs. an income tax and further endorses raising the revenue percentage of government’s part of the GDP to 19%.   Can’t go there with him even if Rep. Paul Ryan’s plan is similar.  I’m not so much against a consumption tax (it at least taxes what you consume thereby not penalizing you for what you save, nor do you get double taxed assuming the income tax goes away) but I am against such an increase in the tax percentage.  I think very aggressive cuts in government spending plus fairly massive deregulation (and the obvious cuts in compliance spending by businesses that would save) would yield a fast recovering and growing economy.  Granting an increase in the historic percentage of GDP that government has taken opens a door of precedence I don’t want opened.  It is time government lived within its means and understood that that economic growth takes precedence over government growth – every time.  

It is spending – uncontrolled and wasteful spending – that is our problem.   Not tax revenue.  Government must be cut and cut fairly severely.  That’s something the heroin addicts don’t want to hear.   So they spin out solutions which always end up in one place – “the problem is revenue, we need more revenue”. 

No.  They don’t.

And the GOP, if it is to have any credibility with voters come 2012, had best not cave on this point.

Again, Common Sense 101.

~McQ

Twitter: @McQandO

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The Greek tragedy (or socialism runs out of other people’s money)

And, of course, Greece isn’t the only country going through this at the moment, it is only the worst off of the bunch.   In fact, it is a case study in the end result of socialist programs (although you’d think, given its fairly recent collapse, that much could have been learned from the Soviet Union).   Greece has, for decades, piled up more and more debt than the other European socialist countries and, with the global economic downturn, was the first of the Euro zone to hit the shoals of bankruptcy – although Europe is doing everything it can to forestall that.

The problem is that socialism and its benefits (whether they’re affordable or not) are like being hooked on heroin.  Even if you know you have too, you just can’t seem to get off the stuff.   Addicts deny reality, fight the cure because it is horribly painful and thus somehow come to believe they can continue to survive on the drug as they have before.   And it slowly and inexorably kills them.

Greece, if it isn’t able to kick the habit, is on its economic death bed.  Europe understands this and also sees the possibility that Greece’s inability to break this habit, i.e. pass and impose austerity measure – draconian austerity measures – might also mean the death of Europe’s currency, the Euro and conceivably the break up of the European union.

That’s how serious it is.

But the addict continues to fight the cure.  Led by the two major unions, Greece has been shut down for 2 days as protesters vent their spleen about the unacceptability of these austerity measures.   The irony, of course, is the measures are being imposed by a socialist government which has been given no choice but to impose such measures.

However, that government is seen as week and socialist members who supported the measures at first are now opposing them.

But the austerity program has met with resistance from within the ranks of Mr. Papandreou’s own party, especially over the privatization of state companies whose workers have traditionally been at the heart of the Socialists’ constituency.

As many as four Socialists in Parliament have said they will consider opposing the measures, including one who opposes the planned privatization of the water utility of Thessaloniki, in her district.

Another Socialist, Alexandros Athanasiadis, said he would vote against the plan to reduce the state’s stake in the Public Power Company to 34 percent from 51 percent. Some of the company’s coal-burning plants are in his district in northeastern Greece.

Naturally the socialists oppose privatization because, you know, the government has done such a bang up job to this point of running businesses it has no business being involved in.  Why?  Because the government, and therefore the parliamentary members, control the jobs, pay and pensions.   More heroin.  As government gets more involved in areas it has no business and it (those who run it) begin to understand the power such intrusion brings them, they’re loathe to give it up, even when they’re doing a horrible, inefficient and costly job that could be better and more cheaply done by private industry.

The symbiotic relationship between the unions and the MPs is mutually beneficial and ensures an incumbent who properly plays the game (support union demands) remains in power (see public sector unions and Democrats here).  That, of course, has led to unaffordable pensions, wages which aren’t competitive and a public stuck with the ever increasing bill.

Well, the bill has come due.

On Monday, Mr. Venizelos, a Socialist veteran known for his ability to rally his troops, told lawmakers that the measures might be “tough and even unfair” but that they were unavoidable. “We have to finally come to our senses and get serious,” he said.

With 2 days of protests, one has to wonder whether indeed the Greeks are going to actually come to their senses and get serious”, because if they don’t the repercussions could be devastating.

And knowing all of that, and looking at our debt problems, one also has to wonder why we seem bent on creating an addiction of our own, given the real world examples of where that must eventually lead.

It makes absolutely no sense, does it?

~McQ

Twitter: @McQandO

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GOP–pay attention to this poll

Pay attention to this because it is important:

The portion of Americans who say they believe the U.S. is on the wrong track is higher than it was at any point during Ronald Reagan’s presidency, when unemployment peaked at 10.8 percent after the 1981-82 recession, according to an ABC News/Washington Post poll. The ABC poll showed the wrong-track number during Reagan’s first term peaking at 57 percent in October 1982. The Bloomberg poll shows 66 percent of Americans think the U.S. is going in the wrong direction now.

This is the number I continue to talk about because to me it is the truest indication of the mood of the country.  The mood is obviously critical to the re-election, and wrong track polling has consistently indicated the way previous elections are going to go.  There is a threshold that portends bad news for the incumbent, and we’re well past that.  The question is, will it stay there?  The answer seems to be, by all indications and forecasts, yes.

As the public grasps for solutions, the Republican Party is breaking through in the message war on the budget and economy. A majority of Americans say job growth would best be revived with prescriptions favored by the party: cuts in government spending and taxes, the Bloomberg Poll shows. Even 40 percent of Democrats share that view.

This should be something every GOP politician should have tattooed on his or her inner eyelid to help them focus.  Concentrate on the message about the economy – it’s a winner.  Wander off into wedge issues and you give your opponent an opening and a way to distract the public.   If you do that you deserve to lose.

~McQ

Twitter: @McQandO

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Repatriating corporate profits with tax breaks

It’s under consideration, and if you read the article, the NYT isn’t particularly thrilled about it.

Why?  Because those nasty corporations didn’t create jobs the last time this was done:

But that’s not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage.

Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks, according to a study by the nonpartisan National Bureau of Economic Research.

This money comes from overseas operations and in some cases accounting maneuvers that shift domestic profits to low-tax countries. The study concluded that the program “did not increase domestic investment, employment or research and development.”

My question is, it didn’t increase “domestic investment, employment or research and development” where?  Because unless the stockholders took their money and buried it in a coffee can in the back yard, that’s most likely exactly where it went – via a more circuitous route that the NBER didn’t bother to follow.  That money didn’t just disappear when it went to share holders.  Where did it go?

Well, first remember that share holders are what?  Investors.   So even if all they did was let that money ride, it was “invested”. 

If, in fact, it was invested elsewhere, then one would assume that those companies in which the investment was made may have increased employment or R &D.  But you have to chase the money to find that out.

Bottom line, repatriation of overseas profits means more tax revenues, even at the reduced rate that would be found in a “holiday” as is being proposed.   And even if shareholders get the lion’s share of the money (and that’s why they’re called “shareholders” NYT, because they own a share of that money), they’re going to spend it, save it or invest it themselves.  

If one could get past the first step in the process and look at how money usually flows and is used, they’d realize that whining about “shareholders” getting most of the money is about as ignorant as complaining that if government gives taxpayers a tax break we wouldn’t spend the money properly, ala Bill Clinton.

Injecting billions of dollars of private money into the private economy in times like this isn’t going to hurt anything.  But it stands a great chance of helping.   But hey, those damn corporations wouldn’t spend it the way the NYT thinks they should, so they’re against it.

~McQ

Twitter: @McQandO

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New CAFE standards could cost a quarter million jobs

When is a "green job" not a job? When you lose yours because of the initiative:

The Detroit News’s dogged David Shepardson has unearthed a study by one of world’s most respected automotive research firms that reveals that President Obama’s radical CAFE mandate that vehicles average — average! — 62 MPG by 2025 “could force vehicle prices up by nearly $10,000, reduce sales by 5.5 million vehicles annually, and eliminate more than 260,000 jobs.”

Shepardson is quoting from the Michigan-based Center for Automotive Research and the 260,000 job loss figure (consistent with past job losses from CAFE rule hikes) is another dent in White House’s propaganda that Green creates jobs.

The CAR study also reveals that Obama’s NHTSA and EPA have been gaming the figures when it comes to the cost of their new rules. The center’s study predicts it will cost between $3,744 and $9,790 per vehicle, while the agencies have low-balled the figure at $770 to $3,500 per vehicle.

The resulting costs would shrink the new-car market, with 5.5 million potential buyers disappearing (and manufacturing jobs with them) by 2025. That assumes that the auto fleet can even be built to meet such an absurd spec. Currently, no car — much less the average — meets 62 mpg. Indeed, only a handful of small vehicles meet the 35-mpg fleet-wide standard mandated in just five years.

Yes friends, just like the story I covered the other day, we have an administration which is more agenda driven than reality driven. We’re in the middle of a horrible recession, unemployment hasn’t really moved in over a year, the future doesn’t look much better, but the agenda to raise the price of energy (at the cost of jobs) and CAFE standards (at the cost of even more jobs) continues apace.

If you’ve ever wondered what market distortion and intrusion by government looks like, this is a good example.  And this intrusion will cost hundreds of thousands of jobs and price many consumers out of the new car market (again, this administration sees that as a feature, not a bug). 

Another in a litany of reasons Mr. Obama needs to be retired in 2012.

~McQ

Twitter: @McQandO

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So why aren’t businesses hiring?

For a number of reasons actually.  Some numbers tell the story:

Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. A capital rebound that sharp and a labor rebound that slow have been recorded only once before — after the 1982 recession.

Demand has increased enough that business is producing at least as much as it was before the recession, according to the NYT, but businesses aren’t hiring.  Why?

Well, in lean times, headcount is the first casualty.  Layoffs are the rule.  That’s the fastest way to reduce the bottom line and either cut the losses being suffered to a manageable level or eek out a profit.

But, you say, once the recession is over, shouldn’t they rehire?   Well, like all markets, not if the cost of the commodity is too high (labor) and an acceptable alternative is available (equipment).  In this case that appears to be software in many cases.  

So – business cuts back during bad times, finds it can either get along without the extra headcount or finds a technological alternative (equipment) and when a level of prosperity returns, doesn’t hire (although I’m not sure I’d agree a proper level of prosperity has returned at this point, but I think it is clear that much more employment was expected by now, which is why we see the word “unexpected” appended to every down employment report).

Why is this happening?  Well in addition to the above, there’s an added problem that is often ignored or not mentioned.  Government tax policies.  In the case of equipment buying, the government has incentivized such purchases to the detriment of another – namely employment (labor).

With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.

“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”

Indeed, equipment and software prices have dipped 2.4 percent since the recovery began, thanks largely to foreign manufacturing. Labor costs, on the other hand, have risen 6.7 percent, according to the Labor Department. The rising compensation costs are driven in large part by costlier health care benefits, so those lucky workers who do have jobs do not exactly feel richer.

There’s your choice as a business – lower prices and tax incentives to purchase software and equipment or higher labor costs for workers.  If the machine can do the job, the business doesn’t have to pay healthcare, payroll, payroll taxes, etc.  In fact, the machine gives them a bottom line write off on their tax bill.  It’s a no-brainer.

~McQ

Twitter: @McQandO

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In the midst of terrible economic times, let’s raise energy prices dramatically and lay people off …

“Never let the reality of the situation stand in the way of a political agenda”, ought to be the slogan of the Obama reelection campaign.

In the midst of the worst economic downturn the executive branch of the Federal Government (the Obama administration), under the guise of the EPA is ratcheting up standards that will shut down many coal fired plants and their jobs as well as cost billions for utilities to keep other coal plants open.  Result:

Consumers could see their electricity bills jump an estimated 40 to 60 percent in the next few years.

The reason: Pending environmental regulations will make coal-fired generating plants, which produce about half the nation’s electricity, more expensive to operate. Many are expected to be shuttered.

Of course the timing of the increase is predictable:

The increases are expected to begin to appear in 2014, and policymakers already are scrambling to find cheap and reliable alternative power sources. If they are unsuccessful, consumers can expect further increases as ore expensive forms of generation take on a greater share of the electricity load.

Yup, safely reelected (he hopes), Mr. Obama will smile benignly as he watches more of you hard earned money go for what should be cheap and plentiful energy based on incredibly abundant coal.  Instead we’ll be chasing “reliable alternate power sources”.   One would like to believe we’d go to natural gas, but then those abundant finds are also being slow walked through the red tape of the government approval process.

More than 8,000 megawatts of coal-fired generation capacity has been retired in the U.S. since 2005, according to data from industrial software company Ventyx. Generators have announced they plan to retire another 21,000 megawatts in the near future, and some industry consultant studies estimate 60,000 megawatts of power, enough for 60 million homes, will be taken offline by 2017.

This in the midst of projected energy shortages as demand increases while we shut down power generation assets.

Certainly we may want to, at some time in the future, shut down all coal fired plants.  We may collectively wish to see other energy sources used as well.  But that would require a coherent transition plan, viable alternatives, phasing and a little common sense (or essentially being in touch with the reality that one finds around them).

This is  a agenda driven, safely-after-the-election, regulatory fiat that will cost workers their jobs and consumers a higher portion of their earned income in poor economic times.

Another, among a myriad of reasons why the man in the White House needs to be in his own house come 2014.

~McQ

Twitter: @McQandO

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Unemployment: The real numbers and the real problem

Not only the real numbers, but the real reason:

Labor-force participation, the share of Americans who are working or looking for jobs, has fallen to its lowest percentage since the mid-1980s. That’s partly because people have grown discouraged about their ability to find jobs and have given up looking. With those workers on the sidelines, the unemployment rate has been lower than it otherwise would be.

The official unemployment rate hit 9.1% in May. Including all of those who had part-time jobs but wanted to work full-time as well as those who want to work but had given up searching, the rate was 15.8%.

Of course Dale has been saying that for some time with his own calculations.   Discouraged workers, however, may also have taken another option – retirement – since it is the age of Baby Boomer retirement.   So it’s not clear yet how many of those who were workers and lost their jobs are “discouraged” workers or retired workers.  Bottom line, though – a lot of people have seen their lives drastically changed.

Here’s the inherent problem in long-term unemployment:

[T]he odds of finding a job steadily decreased the longer someone was out of work. Some 30% of Americans who had been out of work for less than five weeks found new jobs last year.

Those odds deteriorated for the long-term unemployed. Of those who had been unemployed for more than six months, slightly more than 10% found new jobs. Nearly 19% dropped out of the workforce.

The problem endures this year: As of May, 6.2 million had been out of work for more than six months and more than 4 million haven’t work in more than a year.

And the outlook, at least at the moment, doesn’t look like it will change anytime soon.

This is Obama’s political Achilles heel.  This is what gets incumbent presidents an early retirement.  I’m not hoping that this persists through the 2012 election, I’m suggesting that there is nothing to indicate it won’t.  

That is Obama’s challenge.  And it is also the GOP’s attack line.  This is Obama’s record – something he has to run on for the very first time.  Time to begin pointing it out now.

~McQ

Twitter: @McQandO

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Top 10 cities with the most pink slips and the 5 worst states to do business in

What do they have in common?  Well, you tell me (but my guess is onerous taxation, over-regulation and an anti-business climate).  Here are the cities that have lost the most jobs recently according to the Daily Mail?

  1. Los Angeles, California, 17,393 workers
  2. New York, New York, 14,312
  3. Chicago, Illinois, 7,835
  4. San Francisco, California, 5,117
  5. Riverside, California, 4,852
  6. San Diego, California, 4,382
  7. Philadelphia, Pennsylvania, 2,747
  8. Seattle, Washington, 2,601
  9. Sacramento, California, 2,467
  10. Pittsburgh, Pennsylvania, 2,205

OK, you say, LA has a lot more jobs to lose than say, Montgomery AL.   True and understood.  But, there’s more.  Take a look at the states in which you find the job losses.  Now peruse the list of the “best/worst states to do business in”.

Bottom 5?

46 Michigan

47 New Jersey

48 Illinois

49 New York

50 California

All deep blue states.  If you’re wondering, PA comes in at 39th just ahead of OH, WV, HI, CT and MA and behind MS.  Yeah, that’s right, MS.  Everyone’s 50th state in most every other comparison.  WA was 34th.

Contrast that with the top 5 states  – TX, NC, FL, TN and GA.  All red, all right to work states, all southern states.  Draw your own conclusions.  By the way, the ratings of the “best/worst states” came from a group of people who ought to know and be able to make such a determination as it relates to business.  The rankings are the product of surveying 550 CEOs.

And, as they indicate, it isn’t rocket science needed to attract and keep businesses in a state:

Business leaders graded the states on a variety of categories grouped under taxation and regulation, workforce quality and living environment. “Do not overtax business,” offered one CEO. “Make sure your tax scheme does not drive business to another state. Have a regulatory environment and regulators that encourage good business—not one that punishes businesses for minor infractions. Good employment laws help too. Let companies decide what benefits and terms will attract and keep the quality of employee they need. Rules that make it hard, if not impossible, to separate from a non-productive employee make companies fearful to hire or locate in a state.”

That, in my estimation, is the primary difference between Texas and California, and why Texas is booming and California is drowning.

Food for thought.

~McQ

Twitter: @McQandO

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Revisiting the Obama administration’s unemployment promise

The folks at e21 remind us of something that should be at the forefront of every person’s memory as they consider what this administration has and hasn’t accomplished in its promise to “stimulate” the economy and create jobs.   I call it the “big promise”.  I don’t call it a “lie” since I use the traditional definition of a lie (a known falsehood) vs. the more modern one in use today by activists on both sides (being wrong about something).  But that’s fodder for a future post. 

In this one I want to issue a reminder of what was promised and what has been delivered.  Promise:

Back in January 2009, Christina Romer and Jared Bernstein produced a report estimating future unemployment rates with and without a stimulus plan. Their estimates, which were widely circulated, projected that unemployment would approach 9% without a stimulus, but would never exceed 8% with the plan.

They got their “stimulus” – $800 plus billion in mostly borrowed money with which they were to stem the tide of unemployment then rising and keep it under 8% as promised.

Result?

updated unemployment stimulus graph

 

The result wasn’t even close.  In fact, other than two months of this year, the unemployment rate has stayed above 9%.  By this time, according to the administrations plan, we were told we’d be at about 6.5%.

So it is clear that the “plan” was a total and unmitigated but costly failure.

What’s their explanation for such a huge miscalculation? 

Romer and Bernstein defend their estimates with the argument that the economic situation turned out worse than they had anticipated; and so the economy would have done even worse without a stimulus.

Is that so?  Then, as e21 says, they owe us a much deeper explanation of why that was so and why they considered their solution at the time to be the proper thing to do.  Because it is seeming more and more like a very expensive boondoggle at the moment:

The recession “officially” ended two years ago, yet the first quarter of 2011 only saw 1.8% growth. The Administration and Congress should have a more robust discussion about their self-proclaimed “2010 Recovery Summer” – if for no other reason than to better inform the public about the recovery challenges the U.S. still faces in 2011.

For example, there is new research that suggests that the stimulus may actually have resulted in a net loss of jobs. Regardless of the exact number of jobs lost or created, however, the fact that some economists are even arguing that it had a negative impact tells you that the stimulus may very well have been a wash overall.

Larry Lindsey offered his own review of the stimulus this week, arguing that it failed what’s colloquially known as the Sharp Pencil Test. As he explains, “if you sit down and do a back of the envelope calculation of the [stimulus] program’s costs and benefits, there is no way to conjure up numbers that allow it to make sense.”

Lindsey went on to offer this analysis:

[E]ven if you buy the White House’s argument that the $800 billion package created 3 million jobs, that works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide.

The 3 million claim is dubious at best  with no mention of the type, quality or sector these jobs were supposed “saved or created” (the stimulus propped up a lot of state budgets which helped delay layoffs to government workers).  And as Lindsey points out, the cost of what can only be a temporary “save” are way out of whack with the benefit.  Instead, it appears the stimulus was a giant waste of money that did little if anything to create jobs in the private sector and mostly benefited government at a huge cost per job.

I’m not sure how anyone could economically justify such an outcome.  But I sure would like to hear them try.   I think they owe us some answers on this.   And I’d like to see the GOP begin asking those questions.   This is one part of the Obama record they need to pound on – starting now.

~McQ

Twitter: @McQandO

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