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Free Markets, Free People

Economic Statistics for 28 Aug 14

The Commerce Department’s second estimate of First Quarter 2014 GDP came in at 4.2%, annualized. This is stronger than expected and stronger than the initial 4.0% estimate. The GDP Price Index rose at a 2.1% annualized rate.

Corporate profits in the Second Quarter of 2014 came in at $1.840 trillion, following $1.735 trillion for the First Quarter.

The pending home sales index for existing home sales rose a strong 3.3% in July to 105.9, up from 102.7 in June.

The Kansas City Fed manufacturing index slipped from 9 in July to 3 August.

Weekly initial jobless claims fell 1,000 to 298,000. The 4-week average fell 1,250 to 299,750. Continuing claims rose 25,000 to 2.53 million.

The Bloomberg Consumer Comfort Index rose 0.7 points to 37.3 in the latest week.

The Fed’s balance sheet rose $0.8 billion last week, with total assets of $4.414 trillion. Total reserve bank credit rose by $2.5 billion.

The Fed reports that M2 money supply rose $32.0 billion in the latest week.


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Climate change treaty: “Constitution? Obama don’t need no stinkin’ Constitution!”

Well, if reports are true it appears our self-crowned king has decided he’s found a way to obligate us to a treaty without following the Constitution’s proviso for doing so.

In seeking to go around Congress to push his international climate change agenda, Mr. Obama is echoing his domestic climate strategy. In June, he bypassed Congress and used his executive authority to order a far-reaching regulation forcing American coal-fired power plants to curb their carbon emissions….

American negotiators are instead homing in on a hybrid agreement — a proposal to blend legally binding conditions from an existing 1992 treaty with new voluntary pledges. The mix would create a deal that would update the treaty, and thus, negotiators say, not require a new vote of ratification.

Countries would be legally required to enact domestic climate change policies — but would voluntarily pledge to specific levels of emissions cuts and to channel money to poor countries to help them adapt to climate change. Countries might then be legally obligated to report their progress toward meeting those pledges at meetings held to identify those nations that did not meet their cuts.

“There’s some legal and political magic to this,” said Jake Schmidt, an expert in global climate negotiations with the Natural Resources Defense Council, an advocacy group. “They’re trying to move this as far as possible without having to reach the 67-vote threshold” in the Senate.

“Political magic”?  Is that the state of our nation now – we resort to “political magic” when we can’t get our way as the Constitution requires?  Well, yes.

Here’s how:

President Obama seems to be following a script laid out in May, 2014 by former Undersecretary for Global Affairs Timothy Wirth, who was the Clinton Administration’s lead negotiator for the Kyoto Protocol, and former South Dakota Senator Thomas Daschle who astutely asserted that “the international community should stop chasing the chimera of a binding treaty to limit CO2 emissions.” They further noted that more than two decades of U.N. climate negotiations have failed because “nations could not agree on who is to blame, on how to allocate emissions, or on projections for the future.”

Wirth and Daschle are advocating that the climate negotiators adopt a system of “pledge and review” at the 2015 Paris conference of the parties to the UNFCCC. In such a scheme nations would make specific pledges to cut their carbon emissions, to adopt clean energy technologies, and to wring more GDP out of each ton of carbon emitted. The parties would review their progress toward reducing greenhouse gas emissions every three years and make further pledges as necessary to achieve the goal of keeping the increase in average global temperature under 2°C. Since there would be no legally binding targets, there would be no treaty that would require politically difficult ratification. If insufficient progress is being made by 2020 they argue that countries should consider adopting globally coordinated price on carbon.

Now this isn’t to say that this is going to work or even have an effect, but it is a blatant attempt to have one’s way (via “political magic”) while avoiding the unpleasantness of a failure to get a ratification by tw0-thirds of the Senate (its all about getting the leverage to pass a carbon tax).

And, as usual, Mr. Obama doesn’t care one whit about much more than getting his way – just ask Senate Democrats:

President Obama’s election-year plan to win a new international climate change accord is making vulnerable Democrats nervous.

The administration is in talks at the United Nations about a deal that would seek to reduce global greenhouse gas emissions by “naming and shaming” governments that fail to take significant action.

The State Department on Wednesday denied a report in The New York Times that the plan is to come up with a treaty that would not require Senate confirmation, but that appeared to provide cold comfort to Democrats worried the issue will revive GOP cries about an imperial Obama presidency.

One Democratic strategist said the proposal would put swing-state candidates who are critical to the party keeping its Senate majority “in front of the firing squad.”

“You’re … making it more difficult for them to win and certainty putting them in a position to lose,” the strategist said.

Silver linings … always look for the silver lining to those storm clouds.

And then there’s immigration …

~McQ

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In support of Burger King

I’ve never really been much of a Burger King fan, but guess what I’m having for lunch today?

Why?  Because Burger King has given us an opportunity to point out one reason why our economy is lagging. And, as usual, it has to do with government policy.  Politicians would like to play the blame game and point at corporations like Burger King moving to Canada (after a merger with Canadian based Tim Hortons) as the reason.  Instead, it is the federal government’s oppressive and unprecedented corporate tax rate that is helping to keep our economy floundering by providing incentive for corporations to leave.

Megan McArdle writes a great column today.  To begin with she cites a paragraph from Matt Levine that makes the point that most in the media and almost all politicians opposing the merger fail to make:

The purpose of an inversion has never been, and never could be, and never will be, “ooh, Canada has a 15 percent tax rate, and the U.S. has a 35 percent tax rate, so we can save 20 points of taxes on all our income by moving.” Instead the main purpose is always: “If we’re incorporated in the U.S., we’ll pay 35 percent taxes on our income in the U.S. and Canada and Mexico and Ireland and Bermuda and the Cayman Islands, but if we’re incorporated in Canada, we’ll pay 35 percent on our income in the U.S. but 15 percent in Canada and 30 percent in Mexico and 12.5 percent in Ireland and zero percent in Bermuda and zero percent in the Cayman Islands.”

Got it?  The US government does something no other first world government does.  McArdle explains:

The U.S., unlike most developed-world governments, insists on taxing the global income of its citizens and corporations that have U.S. headquarters. And because the U.S. has some of the highest tax rates in the world, especially on corporate income, this amounts to demanding that everyone who got their start here owes us taxes, forever, on anything they earn abroad.

This is a great deal for the U.S. government, which gets to collect income tax even though it’s not providing the companies sewers or roads or courts or no-knock raids on their abodes. On the other hand, it’s not a very good deal for said citizens and corporations, especially because our government has made increasingly obnoxious demands on foreign institutions to help them collect that tax. Both private citizens and corporations who have a lot of income abroad are deciding that they’d rather renounce their ties to the U.S. than deal with the expense and hassle of letting it tap into income that they have earned using some other country’s roads and sewers and police protection.

Practically speaking, global taxation is hard to enforce and loaded with bad incentives, which is why our fellow members of the Organization for Economic Cooperation and Development have moved away from global taxation of corporate income, and abandoned global taxation of personal income. If anything, the U.S. has gone in the other direction — by insisting, for instance, that foreign companies report various financial transactions with U.S. citizens to the Internal Revenue Service, and taxing foreign cost of living allowances, which makes it more expensive for companies to employ expats. On the corporate side, the Barack Obama administration has repeatedly suggested tightening up on tax deferral of foreign income and other credits, which would make it even more expensive to be a corporation based in the U.S.

So why base in the US with this being the case?  Why wouldn’t any sane US based corporation be trying to find a remedy to this pernicious and oppressive tax code?  In reality, this describes it rather well:

[I]t boils down to “the police kept people from sacking your first headquarters, so therefore you owe us 35 percent of everything you make, forever.” Loan sharks and protection rackets offer more reasonable terms than this.

Yes, they likely do.   You know you have a problem when more and more of government begins to resemble criminal gangs.  And that’s where we are headed.  Instead of looking at a solution that will benefit a corporation and give them an incentive to remain and pay taxes, our government and the politicians seem bound and determined to make the corporation the bad guy with absurdly Orwellian insults like “economic patriotism” and “corporate deserters”.  This, instead, should be the bottom line:

If we’re worried about inversion, then the U.S. government should follow the lead of other developed countries, and move to territorial taxation. Otherwise, we should stop complaining when people and corporations decide that they’d rather be a citizen of some more sane system somewhere else.

Indeed.

~McQ

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Economic Statistics for 26 Aug 14

Durable Goods orders for July soared by 22.6%, Sadly, it was all due to aircraft orders. Ex-transportation, orders fell -0.8%. On a year-over-year basis, orders were up 33.8% overall, but only 6.6% excluding transportation orders.

The FHFA purchase only house price index rose a respectable 0.4% in June, but the year-on-year rate slowed by -0.4% to 5.1%.

The S&P/Case-Shiller home price index fell -0.2% in June, though it was up 8.1% on a year-over-year basis.

The Conference Board’s consumer confidence index for August once again rose above expectations, up 1.5 points to 92.4.

The Richmond Fed manufacturing index rose 5 points to 12 in August, as manufacturing strengthened in the mid-Atlantic district.

The State Street Investor Confidence Index rose a very sharp 7.0 points in August to a very strong 122.8.

ICSC-Goldman reports weekly retail sales rose 0.6%, and were up 4.2% on a year-over-year basis. Redbook reports a 4.0% rise in retail sales over last year.


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The “cash for clunkers” era of government failure

While perusing a Frank Bruni op-ed in the NYT, I ran across this:

Conventional wisdom says that better unemployment and job-creation numbers could save Democrats. But many Americans aren’t feeling those improvements. When asked in the Journal/NBC poll if the country was in a recession — which it’s not — 49 percent of respondents said yes, while 46 percent said no.

Got that, despite what 49% believe, the country is “not” in recession?  Why?  Because some obscure organization (NBER) that determines that has said so.

But here’s a little clue, if 49% believe that, no matter what is declared, how does one suppose they’ll act when it comes to their own little piece of the economic pie?  Yup, that’s right, like we’re in a recession.  In other words, it really doesn’t matter whether or not the recession is “official” or not, like Bruni says, but then seemingly ignores, “many Americans aren’t feeling those improvements”.  That’s because vastly more than the “official” unemployment number remain unemployed.  Then there are the underemployed.   They don’t give a rip what NBER says.  They know how they’re living, how their lives have changed and what they’re facing.  Which is why you see:

There’s a feeling of helplessness that makes the political horizon, including the coming midterm elections, especially unpredictable. Conventional wisdom has seldom been so useless, because pessimism in this country isn’t usually this durable or profound.

A feeling of helplessness has never been something, at least in my life time, that this country has ever had.  I’m sure during the Depression, there was certainly some of that, but then, I wasn’t living then.

The interesting point there though is the Depression is where the citizens of this country began to look more toward government as an institution of hope.  However misplaced that was, it is indeed what happened.  FDR.  The New Deal.  Yatta, yatta, yatta – for years it was credited with pulling us out of the economic pit we found ourselves in.  Popular myth had it that without government we’d still be mired in a substandard economy (nevermind the growing body of evidence which puts the onus of the Depression on government failure).  Of course, in reality it was WWII that pulled us out.  But that myth was popular and a certain segment of the political sphere nurtured and grew it.

Well, as I’ve always said, reality has a way of bitch slapping fantasy at some point in time and that’s pretty much what has finally happened in the last 6 years.  Reality has set in.  The myth of big government being able to handle such a crisis has been blown to hell.  Result?

In the most recent of Sosnik’s periodic assessments of the electorate, published in Politico last month, he wrote: “It is difficult to overstate the depth of the anger and alienation that a majority of all Americans feel toward the federal government.” He cited a Gallup poll in late June that showed that Americans’ faith in each of the three branches had dropped to what he called “near record lows,” with only 30 percent expressing confidence in the Supreme Court, 29 percent in the presidency and 7 percent in Congress.

There should be no surprise for anyone in those numbers.  None.  Big government has failed.  After all the promises, all the money, all the “policies”, all the assurances and all the faith put in its ability to handle any crisis, especially the economic crisis, the myth has exploded. The gullible, who have believed the myth all these years,  now feel angry with the institution into which they put so much faith.  It was literally a secular religion for some.

Well if there’s a silver lining in all of this mess is the fact that in the future, when this myth again tries to reemerge, we have an era to point to which demonstrates its bankruptcy.  We’ll call it “the cash for clunkers” era of government – when government came up a clunker.

~McQ

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Economic Statistics for 25 Aug 14

The Chicago Fed National Activity Index, a gauge of overall economic activity and inflationary pressure, rose 0.27 points to 0.39 in August.

The PMI Services Flash for August fell -1.5 points to 58.5.

New home sales rose for July rose less than expected, coming in at an annualized rate of 412,000.

The Dallas Fed general business activity index fell from 12.7 in July to 7.1 in August.


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Politicians feel businesses work for government and their only function is a source of tax revenue

I’m not sure how else you interpret this “inversion” nonsense.

Burger King Worldwide Inc. is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc., a deal that would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada.

The two sides are working on a deal that would create a new company, they said in a statement, confirming a report on the talks by The Wall Street Journal. The takeover would create the third-largest quick-service restaurant provider in the world, they said.

The point of this sort of a merger, beside the business aspect, is to move the headquarters of Burger King to a lower tax nation:

Inversion deals have been on the rise lately, and are facing stiff opposition in Washington given that they threaten to deplete U.S. government coffers. A move by Burger King to seal one is sure to intensify criticism of them, since it is such a well-known and distinctly American brand.
[...]

By moving to a lower-tax jurisdiction, inversion deals enable companies to save money on foreign earnings and cash stowed abroad, and in some cases lower their overall corporate rate. Even though many of the headline-grabbing inversion deals of late have involved European companies, Canada has also been the focal point for a number of them, given its proximity and similarity to the U.S. Canada’s federal corporate tax rate was lowered to 15% in 2012.

And surprise – Canada’s economy is picking up steam and corporations are eyeing it as a place to locate.  Imagine that.

Canada’s corporate tax rate in Ontario of 26.5% (the federal rate of 15% plus Ontario’s provincial corporate tax rate of 11.5%) is considerably favorable to the American corporate tax rate of 35% thanks in large part to the conservative Canadian government led by Stephen Harper. The Harper government lowered the federal tax rate to 15% in 2012 down originally from 28% since it took office in 2006.

In fact, a recent KPMG Report, Focus on Tax, ranked Canada as the #1 country with the most business-friendly tax structure among developed countries when adding up a wide range of tax costs to businesses from statutory labor costs to harmonized sales tax. When comparing developed countries to what companies pay in the U.S.; Canada came in at 53.6%, the U.K. came in at 66.6%, and the Netherlands at 74.5% of the U.S. corporate tax burden.

Meanwhile, our politicians are trying to find a way to prevent that, because, well because they apparently think corporations work for them and exist to pay whatever tax rate they deem necessary.  Of course, in a free country, this wouldn’t even be an issue.  Corporations, like people, have the right to move wherever they wish.  It is their call, not the government’s.

But, here that’s not the case:

Burger King’s possible merger to obtain the favorable Canadian corporate tax rate is a true reflection of the American corporate tax rate being the highest in the OECD. However, rather than taking the same stance on outright cutting the corporate tax rate as the Harper government did to keep the U.S. a competitive place to do business, President Obama calls tax inverting companies like Burger King “corporate deserters who renounce their citizenship to shield profits”. At the urging of President Obama, Congress is considering a bill to make it harder for companies to change addresses abroad. Treasury Secretary Jacob Lew called for a “new sense of economic patriotism,” asking Congress to pass curbs to inversions. The Treasury Department currently is also preparing options to deter or prevent corporate tax inversions potentially on its own.

“Corporate deserters”.  “Economic patriotism”.  It’s Orwellian Newspeak at its finest.  Imagine anyone trying to “shield profits” from a grasping and out-of-control government. It is also another, in a long line of indicators, that this is no longer a free country in the sense we used to believe it was.  It is now a country where every other entity is subservient to the needs or wants of intrusive, controlling government.

~McQ

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