Archive for September, 2010
Unintended Consequences
Posted by Tom in Business, Centrally Managed Economy, Economics, Taxation on September 29, 2010
Frequently big government legislation and rule making has unintended consequences. For the most part those are of the left field or right field sort effecting some unthought of outlier that may have adverse consequences. But seldom is proposed legislation likely to have the exact opposite effect as that stated as the reason for its proffered enactment in the first place. Such is the case with the Obama plan to end the tax deferral for foreign subsidiaries of U.S. companies.
Under current law a foreign subsidiary of a U.S. company pays the tax of the host country and defers the difference between that tax and the U.S. tax until the profits which generated that tax are “repatriated,” or brought back to the U.S. So Microsoft earns profits on its operations in Ireland and pays the Irish tax of say 20% but defers the difference between that tax and the 35% U.S. tax until the profits which generated the tax are brought back to the U.S. Note that the 15% difference is paid but at a later date.
U.S. companies must compete internationally with companies of foreign nations. The competition is ferocious; every efficiency counts. Now the U.S. is the only major country that has “extra territorial taxation;” it taxes its citizens and corporations on earnings in other countries. So for example, Microsoft may have invested previously taxed capital in Ireland, employed Irish workers, used Irish technology, and paid Irish taxes on the profits earned in Ireland, and it will still owe the higher U.S. taxes, but only when it repatriates those profits to this country. No other major industrial country taxes those foreign earned profits.
It is an understatement to say that U.S. countries competing internationally are at a disadvantage before they earn a dime. They have two strikes against them before they start to compete, because of the U.S. tax structure . Nations like Germany have no extra-territorial taxation of German companies that compete with U.S. companies on U.S. soil.
So it’s hard to believe that Obama would want to make the situation worse by eliminating the foreign tax deferral and thereby increasing the adverse effect of the unusual extra-territorial taxation of U.S. companies. Monday’s WSJ calls it “The Send Jobs overseas Act.” But that is what our president is proposing under the guise of bringing jobs back to these shores. “…(F)or years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries. I want to change that.”
Add to that the high U.S. tax rate and our companies are at a real disadvantage. Here is the Cato table used in the WSJ article under the heading “Capital Punishment.
| Effective Corporate Tax Rate in 2009 | |
| United States | 35% |
| G-7 average | 28.8 |
| OECD average | 19.5 |
| World average (80 nations) | 18.2 |
| Source: Cato Institute/World Bank—effective rate includes net federal/state rates. |
The direct effect of this legislation will be to for U.S. companies that stay on these shores to lose business to foreign competition. Alternatively, they will move to foreign jurisdictions. In either case jobs will be lost in this country. The article referenced above offers an excellent example in the shipping industry.
Obama does not have anyone experienced in business in his administration. He appears to be anti-business. He loves taxation and big government. He is certainly a statist. It’s hard to argue that he is not a socialist.
Going Postal!
Pricing power, the ability to raise prices without concern of competition, is rare in the marketplace. It is EARNED by those who have advantage because of technological, productive or investment excellence; and it is often short lived in a competitive marketplace.
Well, the USPS has pricing power, unearned pricing power. It’s raising it rates once again. According to Monday’s WSJ editorial ‘The Post Office Hustle” the price of a stamp will go to 46 cents. Prices here have increased at four times the increase in the CPI. The post office lost $3.5 Billion last quarter alone and is expected to have cumulative losses of $238 Billion in the next decade! Operational efficiency is obviously not its strong suit!
Strange isn’t it that Fed EX and UPS seem to be profitable. Of course they don’t employ non-productive government workers. Postal employees earn an average of $83,000 per year in salary and benefits. And the APWU is demanding more! Seems that the union is in charge.
How do you want your tax dollars spent? How much benefit subsidy do we need beyond that stamp price? Oh yeah, and while you pay for your stamps, Harry Reid, Nancy Pelosi, Dina Titus and the rest of that ilk send their mail for free using the franking privilege! Yep, in some small way, your tax dollar is paying to get them re-elected!
Don’t you just love monopolistic pricing power!
I Want Your Money
Posted by Tom in Centrally Managed Economy, Congress, Deficit, Democrats, National Character, National Debt, Politics, Presidency, Taxation on September 29, 2010
Check out this trailer for an upcoming must-see movie. It states the November choices pretty clearly.
Employment Since the Recession
Posted by Tom in Centrally Managed Economy, Economics, Employment on September 21, 2010
The private sector basically supports the public sector, so it’s interesting to look at employment changes during the recession. This graphic is complements of the Heritage Foundation using BLS published data.
How long will the taxpayers allow this to continue? If unchecked, the parasite might indeed kill the host!
One Dynamite Cartoon by John Trever
While aimed at Cuba, it portends the future for the United States.
Ever heard the expression, “the wheels are coming off?”
Constitution? He Don’t Need No Stinking Constitution!
Posted by Tom in Business, Centrally Managed Economy, Congress, Constitution, Financial Policy, Government Regulation, Presidency, Statism on September 19, 2010
Our little dictator Hussein Obama really doesn’t want any “checks and balances” not even when his own party has complete control of them. Yep, Obama has appointed that darling of the left, Elizabeth Warren, “assistant to him and special advisor” to the Treasury Secretary with respect to the new Consumer Financial Protection Bureau. She will oversee all aspects of consumer protection including personnel and planning. The bureau has independent rule making authority and can grant itself an annual budget of up to $646 million from the operations of the Fed. No need of Congressional appropriations.
Instead of appointing her Director of the bureau which would have required the “advice and consent” of the Senate, he makes her a tzar answering to no one. She offices in the Treasury Department which has no authority over her. She will have “direct access” to the supreme dictator himself.
A WSJ editorial, Elizabeth III, pretty well sums up her power–and inferentially Comrade Obama’s power. No constitutionally required “advice and consent,” and no Congressional appropriations! Absolute rule making that can only be overturned by a 2/3 vote of the new Financial Stability Oversight Council.
The Constitutional requirements are pretty clear. Obama knows them. “On July 21, Mr. Obama signed a bill passed by both Houses stating that the “Director shall be appointed by the President, by and with the advice and consent of the Senate.” Yet he ignores them in the face of opposition from his own party. Democratic Senator Chris Dodd warned the president that she was not confirmable. Obama’s answer–take your Constitution and shove it!
This is so outrageous that even the liberal Washington Post editorial leads with “President Obama picks Elizabeth Warren…and thumbs his nose at the Senate.” It concludes, “for all intents and purposes, the president has created, and filled, a de facto directorship. This might have been in keeping with the letter of the laws, but not with their spirit.”
Now think for a minute the power this de facto dictator will have over fiance laws and regulations. It will cover not only banks but merchants extending credit. Think of the conflicts with banking regulations that are sure to occur. And finally, think of the business uncertainty compounded by the prospect of new regulations and new conflicts.
With the voracious trial lawyers waiting in the wings to sue banks and merchants for a misplaced comma or unbolded printing, expect a slow down in the extension of credit and a consequent slow down in credit dependent sales. Force these slow downs back through the chain of production and you have a general economic deterioration. All coming at a time that our recovery is very weak.
I can’t help but recall Tom Cargill’s chess match analogy: when the referee announced an impending rule change in the middle of the match, the players had little incentive to continue playing, so the match stopped! This is exactly what Team Obama is doing to our economy!
Socialistic Dreams From B.H. Obama Sr.
Posted by Tom in Economics, Foreign Policy, Presidency on September 18, 2010
Dinesh D’Souza’s Forbes article, How Obama Thinks, takes analysis to a new level cataloging, comparing, and contrasting the President’s memoir, Dreams From My Father, with his father’s article, Problems Facing Our Socialism, and the President’s history and actions in office since his election.
In essence, D’Souza contends that the President wants to be the embodiment of his father who fought neocolonialism in Kenya advocating some form of socialism in the reforms attendant to its independence. “…our President is trapped in his father’s time machine.”
Newt Gingrich calls D’Souza’s insight, “most profound” and suggests it’s predictive of the President’s future behavior. Are we being governed by a ghost?
I’ve read D’Souza’s article and highly recommend it. I’ve also read Problems Facing Our Socialism and confirmed the historical facts Dinesh builds upon.
A Great Moral American’s View
Posted by Tom in Individual Freedom, Law, Morality & Religion in the Public Square, National Character on September 17, 2010
The video of Dennis Prager’s Q & A at the University of Denver is too good not to post. So here it is, enjoy and get involved:
Your Stimulus Money At Work
Posted by Tom in Centrally Managed Economy, Democrats, Government Regulation, State Finances, Stimulus/Bailout on September 16, 2010
LA City Controller reports that the city has “created or saved” 55 jobs with the $111 Million in stimulus money. The breakdown as reported by Fox News,
- Public Works Department created 7 private sector jobs and saved 7 public sector jobs for $70 million spent,
- Transportation Department created 9 jobs for $40 million spent.
You argue that 7 + 7 + 9 doesn’t equal 55. You’re right, and there’s no explanation offered. But, I suppose as they say it’s “close enough for government work!”
The stated reasons for the poor job creation:
“1. Bureaucratic red tape: 4 highway projects did not even go out to bid UNTIL 7 months AFTER they were authorized.
2. Projects that were supposed to be competitively bid in the private sector went instead went to city workers.
3. Stimulus money was not properly tracked within departments
4. Both departments could not report the jobs created and retained in a timely fashion.”
To cap it off Wendy Greuel the city’s controller suffer’s Obama’s disease of grade inflation; ”I would say maybe in a grade, a B- in creating the jobs,”
The half of the citizens who pay taxes to keep the half that don’t pay on welfare should take note. Their hard work and taxes paid are being wasted big time! We need to get rid of these fools and this November is a start!
Anything As Important As Housing? Should There Be?
Posted by Tom in Economics, Financial Policy, Real Estate on September 13, 2010
A couple of Chapman University economists, Steven Gjerstad and Vernon Smith, penned a bit of economic history in the WSJ last Friday concluding, “Why We’re in for a Long, Hard Economic Slog.” In essence every recession recovery since the Depression has been led by residential construction resurgence “confirmed by a recovery in consumer durable goods expenditures.” If there is no housing recovery, then there is no economic recovery! Think about it, a new house purchase begets washer, dryer, furniture, TV, computer, etc. purchases. Housing is the leader.
The average recovery in new residential construction in the 10 postwar recessions has been 26.3%! In the past year the comparable recovery is 6.3%, not a good omen. And, the authors point out that the market is saturated with foreclosed houses and $771 Billion in negative equity!
Which leads to the next point, the banks’ balances of REO. That’s a pejorative in banking circles, meaning Real Estate Owned. This is something banks avoid, they only own real estate when they foreclose on it. And they are not very good owners. No tender loving care.
Today’s WSJ points out that the banks’ share of distressed sales has fallen from 45% in January of 2009 to around 30% today. Banks are more likely to slash prices and unload REO, a toxic asset as far as capital ratios are concerned. Except–and this is a big caveat–when the government intervenes. This the government did with low mortgage rates, tax credits, low down payment loans, and even mortgage modification programs. Now these programs are wearing off and we have rising supply and falling demand!
So existing homes can be bought for less than the construction costs of comparable new homes. Market clearing prices will eventually be reached and the overhang of supply and the slow growing demand will eventually balance. But this will be a long slog. The worst thing government policy can do is to delay or moderate it. To do so would be delaying the inevitable, something Japan did which costs that country two “lost decades.” The recent article concludes that, “Banks’ Plans for Foreclosed Homes Will Drive (the) Market.”
Back to the title questions, is anything as important as housing? This is rather basic, it’s low tech, yet it drives so much. But it also foretells something much more important–demand for increases in housing stock means there is an increase in population. Absent government interference, this is an increase in productive population, the most healthy economic driver there is. Even more basic to this is a healthy economy in need of that productive population.
So, my layman’s answer to the second question is emphatically no. No new technology whether it be time travel, bi-location, or merely the latest iSomething from Apple will ever replace the basic human need of housing as an economic driver.
Quod Erat Demonstrandum, we’re in for a long hard economic slog!