International trade in the US, which in 1960 only amounted to 5% of GDP, today accounts for 14%. Most countries today have a floating currency rate, and in theory should be fair to all. But what happens when one country devalues its currency against a trading partner's currency? Basically, devaluation makes domestic goods cheaper relative to foreign goods. In short, world demand for those goods will increase at the expense of other countries goods.
Such currency manipulations are explicitly forbidden by the International Monetary Fund (IMF). However, there are no enforcement procedures to insure compliance. Thus, currency manipulations by various countries does exist. These "beggar-thy-neighbors" practices inhibits exchange rates from acting as an automatic stabilizer to macroeconomic events and therefore leads to trade distortions and imbalances.
If there is active currency devaluation going on, it is especially crucial at the time of this writing to ferret it out. We are in the middle of negotiations for the Trans-Pacific Partnership (TPP), and much work needs to be done to insure a level playing field. Given that, what are the clues that a country has implemented a beggar-thy-neighbor policy? Probably the biggest smoking gun is a country that has accumulated a high balance of foreign exchange. Buy Swiss francs, buy US dollars, buy Euros, etc etc all with the intention of driving your currency down. Is China guilty of this practice? You betcha. China's foreign reserves as a % of GDP amounts to 35.5%. Compare that to the US which has less than 1%. But China is not the only offender. The Japan rate is 25.2%, Thailand 40.2%, Switzerland 79.2%, and Singapore 85.8%. But China is such a large player in international trade, that it is obvious why the focus would be on them.
In short, Mr. Trump has a point. And for the near term, the players in TPP must adopt mechanisms which will quelle unfair trade practices.
Thursday, April 28, 2016
Saturday, June 7, 2014
Why Do We Give Subsidies To Big Oil?
If you were to ask the man in the street if we should give subsidies to very wealthy oil companies, the overwhelming response would be a loud "No!". But if we peel back the curtain and look closer at this issue, we most likely will come away with a different opinion. First of all, most of the stockholders (owners) are from the middle class....many of whom are in union pension funds.
But what specifically are these subsidies? First of all, many "tax breaks" are not subsidies at all but rather accounting devices like depreciation of expensive equipment which lower taxes. These are the same "subsidies" that all companies, large and small, use. But of the true subsidies, in dollar terms, what did they amount to? In 2010 the total was $4.5 billion. Of that a little over $1 billion went to the Strategic Oil Reserve which is designed to protect the country from prolonged oil shortages. The second is tax exemptions for farm oil subsides which comes to another $1 billion. The 3rd is roughly $570 million for Low Income Home Energy Assistance. Those 3 programs account for $2.6 billion of the subsidies.
Most of the remaining "subsidy" is from section 199 of the IRS Tax Code. It is a credit to encourage manufacturing in the US rather than out of country. Microsoft and Apple take advantage of the same credit. This protects jobs and few would lobby to take it away.
In short, if we are to have an adult conversation on this issue, we need more than emotional political talking points. My hope is that for those that may have been enlightened by this article that if you are presented with the question posed at the beginning of this article, that you will now respond with a "yes!".
But what specifically are these subsidies? First of all, many "tax breaks" are not subsidies at all but rather accounting devices like depreciation of expensive equipment which lower taxes. These are the same "subsidies" that all companies, large and small, use. But of the true subsidies, in dollar terms, what did they amount to? In 2010 the total was $4.5 billion. Of that a little over $1 billion went to the Strategic Oil Reserve which is designed to protect the country from prolonged oil shortages. The second is tax exemptions for farm oil subsides which comes to another $1 billion. The 3rd is roughly $570 million for Low Income Home Energy Assistance. Those 3 programs account for $2.6 billion of the subsidies.
Most of the remaining "subsidy" is from section 199 of the IRS Tax Code. It is a credit to encourage manufacturing in the US rather than out of country. Microsoft and Apple take advantage of the same credit. This protects jobs and few would lobby to take it away.
In short, if we are to have an adult conversation on this issue, we need more than emotional political talking points. My hope is that for those that may have been enlightened by this article that if you are presented with the question posed at the beginning of this article, that you will now respond with a "yes!".
Wednesday, January 15, 2014
What Is Supply-Side Economics?
First some definitions. All of economics involves a dance between supply and demand. And government policies toward these two variables can have a profound effect. Keynesian economics is all about the demand side. If in a period of high unemployment a government spends more revenue than it takes in from taxes, this will spur demand and help the economy recover. Virtually every country in the world practices Keynesian economics by regularly running fiscal deficits. Problem is that even in good times they still persist in running deficits, and this has a very dark side. It results in too much demand and inflation in prices, and it also increases federal debt. The other side of the equation is supply. This affects the producer of goods and services. Companies that are hiring in good times, and laying off in slow periods. Let's look closer into the supply side.
Many critics of supply-side economics argue that it favors only the rich. The argument goes that most people that run and/or invest in business are already wealthy, so why would we have policies that benefit only them? This complaint is short sighted and just plain specious. Economic journalist the late Warren Brooks did an analysis of Reagan's supply-side policies , and focused on how much more taxes Americans would have paid if the Reagan tax cuts had not happened. He found that the average filer with an income of less than $10,000/yr would have paid $500 more in taxes, or 134% higher. People with incomes between $10,000 and $30,000 would have paid roughly $2000 more, or 79% higher. People with income of $60000 would have paid $6000 more.* As you can see, these were not tax cuts for just the rich.
Harvard economist Lawrence Lindsey showed that taxes paid by the rich were substantially higher than they would have been if the top tax rate had remained at 70%. In a famous study published by the Journal Of Public Economics he found that for all of Reagan's income tax cuts, between one sixth and one quarter of expected revenue loss was "recouped by changes in taxpayer's behavior." But what was most remarkable about Lindsey's findings was that the tax cuts for the richest Americans raised revenues. He found that about $17.8 billion more was collected from these wealthy individuals than had been predicted. Lindsey concluded, "Some of the more extreme supply-side hypothesis were proven false. But the core supply-side tenant -- that tax rates powerfully affect the willingness for taxpayers to work, save, and invest, and thereby also affect the economy -- won as stunning a vindication as has been seen in the last half century of economics.**
In short, the student of economics should conclude that fiscal tools of both supply and demand need to be used to insure a strong economy.
* Warren Brooks, "The Tax Capitalization Hypothesis", Policy Review, Winter 1987
** Lawrence B. Lindsey, "Individual Taxpayer Response to Tax Cuts: 1982 -84: With implications for the revenue maximizing tax rate," Journal of Public Economics, 1987, Vol. 33,issue 2, 173-206.
Many critics of supply-side economics argue that it favors only the rich. The argument goes that most people that run and/or invest in business are already wealthy, so why would we have policies that benefit only them? This complaint is short sighted and just plain specious. Economic journalist the late Warren Brooks did an analysis of Reagan's supply-side policies , and focused on how much more taxes Americans would have paid if the Reagan tax cuts had not happened. He found that the average filer with an income of less than $10,000/yr would have paid $500 more in taxes, or 134% higher. People with incomes between $10,000 and $30,000 would have paid roughly $2000 more, or 79% higher. People with income of $60000 would have paid $6000 more.* As you can see, these were not tax cuts for just the rich.
Harvard economist Lawrence Lindsey showed that taxes paid by the rich were substantially higher than they would have been if the top tax rate had remained at 70%. In a famous study published by the Journal Of Public Economics he found that for all of Reagan's income tax cuts, between one sixth and one quarter of expected revenue loss was "recouped by changes in taxpayer's behavior." But what was most remarkable about Lindsey's findings was that the tax cuts for the richest Americans raised revenues. He found that about $17.8 billion more was collected from these wealthy individuals than had been predicted. Lindsey concluded, "Some of the more extreme supply-side hypothesis were proven false. But the core supply-side tenant -- that tax rates powerfully affect the willingness for taxpayers to work, save, and invest, and thereby also affect the economy -- won as stunning a vindication as has been seen in the last half century of economics.**
In short, the student of economics should conclude that fiscal tools of both supply and demand need to be used to insure a strong economy.
* Warren Brooks, "The Tax Capitalization Hypothesis", Policy Review, Winter 1987
** Lawrence B. Lindsey, "Individual Taxpayer Response to Tax Cuts: 1982 -84: With implications for the revenue maximizing tax rate," Journal of Public Economics, 1987, Vol. 33,issue 2, 173-206.
Friday, January 10, 2014
The Great Recession of 2008
The cause was the housing bubble, but just how did we get there? In 2001 after the dot.com collapse, housing prices actually rose. This gave a false sense of security to real estate. The FED kept interest rates way down and this spurred demand for housing. With government programs like the Community Reinvestment Act, banks were encouraged to loan to potential buyers who normally could not qualify. Historically it was very difficult for buyers to get a loan with a FICO score of less than 660. But the standards were lowered. In 2003 Only 8% of loans were sub-prime. But by 2007 it had jumped to almost 25%. Nonetheless, the sub-prime mortgages were not scams. The intent was to eventually convert them into conventional mortgages once equity was built.
Lowering the standards for loans enabled home ownership to climb from 64% in 1994 to 69%. Freddy and Fanny were major players in creating the housing bubble. They would buy mortgages from banks and repackage them into mortgage backed securities. The banks would then have more money to lend.
In the Fall of 2003 the Bush Administration raised concerns about GSEs like Freddy and Fanny. They sent Treasury Secretary John Snow to Congress in an attempt to create a new regulatory agency to reign in the GSEs. But they got serious pushback from Congress, and the legislation was blocked. In 2005 the FED Chairman Alan Greenspan added his voice before Congress about a systemic problem with GSEs and the need to reign them in and strengthen the regulations over them. But the two mortgage giants had staunch defenders in Congress, and Greenspan's pleas were ignored. Our fate was now sealed.
Lowering the standards for loans enabled home ownership to climb from 64% in 1994 to 69%. Freddy and Fanny were major players in creating the housing bubble. They would buy mortgages from banks and repackage them into mortgage backed securities. The banks would then have more money to lend.
In the Fall of 2003 the Bush Administration raised concerns about GSEs like Freddy and Fanny. They sent Treasury Secretary John Snow to Congress in an attempt to create a new regulatory agency to reign in the GSEs. But they got serious pushback from Congress, and the legislation was blocked. In 2005 the FED Chairman Alan Greenspan added his voice before Congress about a systemic problem with GSEs and the need to reign them in and strengthen the regulations over them. But the two mortgage giants had staunch defenders in Congress, and Greenspan's pleas were ignored. Our fate was now sealed.
Thursday, December 19, 2013
GREED!!!
Playwright Tony Kushner at a commencement speech to graduating college seniors had this to say:
"The people and not the oil plutocrats, the multivarious multicultural people and not the pale, pale, cranky, grim greedy people, the hard working people and not the people whose only real exertion ever in their parasite lives has been the effort it takes to get politicians to slash a trillion dollars in tax revenue and then stuff it in their already overfull pockets."
Then there is Bill Moyers who stated:
"We must guard against true believers in the god of the market who would leave us to the ruthless forces of unfettered monopolistic capital where even the laws of the jungle break down....And these idolators wrap themselves in the flag and rely on your patriotism to distract you from their plunder. While your standing at attention with your hand over your heart pledging allegiance to the flag, they're picking your pocket."
This attack on the free market system, while just a faint echo in the past, has been growing in volume in recent years. But in spite of the protestations, free markets have resulted in mankind stepping out of abject poverty to a steady improvement in standards of living. Before the Industrial Revolution which took hold around 1800, life was poor, brutish, and short for the masses. It brought about a new concept...economic growth, which spawned a growing middle class, and ultimately many in the middle class becoming truly wealthy. Alan Greenspan said, "It is precisely the 'greed' of the profit-seeker which is the unexcelled protection of the consumer." Then John Maynard Keynes stated, "Avarice and usury must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight."
Author Ayn Rand had this insight: "America's abundance was not created by public sacrifices to 'the common good', but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America's industrialization. They gave the people better jobs, higher wages, and cheaper goods."
Then there is Henry Hazlitt who writes, "Contrary to the age-old prejudices, the wealth of the rich is not the cause of the poverty of the poor. Almost anything that the rich can legally do tends to help the poor. The spending of the rich gives employment to the poor. But the savings of the rich, and their investment of these savings in the means of production , gives just as much employment, and in addition, makes that employment constantly more productive and more highly paid."
All of the above documents the wide gulf between two opinions. Which opinion represents the truth? The important thing is to question everything rather than blindly accept what is being handed to you. If we objectively seek truth, eventually it will come gently to us.
"The people and not the oil plutocrats, the multivarious multicultural people and not the pale, pale, cranky, grim greedy people, the hard working people and not the people whose only real exertion ever in their parasite lives has been the effort it takes to get politicians to slash a trillion dollars in tax revenue and then stuff it in their already overfull pockets."
Then there is Bill Moyers who stated:
"We must guard against true believers in the god of the market who would leave us to the ruthless forces of unfettered monopolistic capital where even the laws of the jungle break down....And these idolators wrap themselves in the flag and rely on your patriotism to distract you from their plunder. While your standing at attention with your hand over your heart pledging allegiance to the flag, they're picking your pocket."
This attack on the free market system, while just a faint echo in the past, has been growing in volume in recent years. But in spite of the protestations, free markets have resulted in mankind stepping out of abject poverty to a steady improvement in standards of living. Before the Industrial Revolution which took hold around 1800, life was poor, brutish, and short for the masses. It brought about a new concept...economic growth, which spawned a growing middle class, and ultimately many in the middle class becoming truly wealthy. Alan Greenspan said, "It is precisely the 'greed' of the profit-seeker which is the unexcelled protection of the consumer." Then John Maynard Keynes stated, "Avarice and usury must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight."
Author Ayn Rand had this insight: "America's abundance was not created by public sacrifices to 'the common good', but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America's industrialization. They gave the people better jobs, higher wages, and cheaper goods."
Then there is Henry Hazlitt who writes, "Contrary to the age-old prejudices, the wealth of the rich is not the cause of the poverty of the poor. Almost anything that the rich can legally do tends to help the poor. The spending of the rich gives employment to the poor. But the savings of the rich, and their investment of these savings in the means of production , gives just as much employment, and in addition, makes that employment constantly more productive and more highly paid."
All of the above documents the wide gulf between two opinions. Which opinion represents the truth? The important thing is to question everything rather than blindly accept what is being handed to you. If we objectively seek truth, eventually it will come gently to us.
Monday, December 9, 2013
Policy Errors Of The Great Depression
Imagine a policy maker whose policies don't work. He resembles Euclidean Geometers in a non-Euclidean world who discovers that straight lines, apparently parallel often meet. He then rebukes the lines for not keeping straight only to soon witness more collisions. This is precisely what the government policy makers do when their solutions fail. Faced with failure, government then tends to blame the market rather than itself, and intervenes more! Feeling that they just haven't intervened enough, they try more...followed by more failure. If this process is not interrupted, the price and profit system will break down and government control ensues.
This is clearly demonstrated in the serious policy mistakes by government in attempting to bring an end to the Great Depression. Here is a list:
1. Wagner Act -- This basically kept wages from falling for union labor. In fact it went up 24% during the depression. But non-union workers were basically cast to the wolves. Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices. Since the primary function of markets is to bring prices into balance, it makes no sense that markets cannot correct unemployment.
2. High Taxes On The Rich -- The rich are primarily the investors. They risk their capital in new ventures. If the risk pays off, it means jobs. If you heavily tax the risk takers, they will not change their consumption, but they will reduce their investing. We should be encouraging saving and investing, not discouraging it.
3. Excise Taxes on Everyone -- This took money out of workers pockets.
4. Social Security Tax -- This was implemented in 1935....right in the middle of the Great Depression! Withholding funds from the workers during a crisis was a clear policy error.
5. Corporate taxes raised -- To take money away from the very ones who could potentially hire workers was another policy blunder.
6. Deficit spending went on too long. John Maynard Keynes advocated deficit spending. His view was that in periods of high unemployment, it would not be inflationary, and it would stimulate overall demand in the economy. To some extent he was correct. But he never implied that it should go on indefinitely. He was a deflation hawk, and by 1937 deflation had been quelled, and he told policy makers to return to the classical economic model of budget balancing. He was, of course, ignored, and the depression continued.
7. Trade Protectionism -- The Smoot - Hawley Tariff changed a recession into a depression. Today, even left leaning economist Paul Krugman stated, "Opponents of global trade, whatever their intentions, are doing their best to make the poor even poorer." -- NY Times; April 22, 2001
This is clearly demonstrated in the serious policy mistakes by government in attempting to bring an end to the Great Depression. Here is a list:
1. Wagner Act -- This basically kept wages from falling for union labor. In fact it went up 24% during the depression. But non-union workers were basically cast to the wolves. Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices. Since the primary function of markets is to bring prices into balance, it makes no sense that markets cannot correct unemployment.
2. High Taxes On The Rich -- The rich are primarily the investors. They risk their capital in new ventures. If the risk pays off, it means jobs. If you heavily tax the risk takers, they will not change their consumption, but they will reduce their investing. We should be encouraging saving and investing, not discouraging it.
3. Excise Taxes on Everyone -- This took money out of workers pockets.
4. Social Security Tax -- This was implemented in 1935....right in the middle of the Great Depression! Withholding funds from the workers during a crisis was a clear policy error.
5. Corporate taxes raised -- To take money away from the very ones who could potentially hire workers was another policy blunder.
6. Deficit spending went on too long. John Maynard Keynes advocated deficit spending. His view was that in periods of high unemployment, it would not be inflationary, and it would stimulate overall demand in the economy. To some extent he was correct. But he never implied that it should go on indefinitely. He was a deflation hawk, and by 1937 deflation had been quelled, and he told policy makers to return to the classical economic model of budget balancing. He was, of course, ignored, and the depression continued.
7. Trade Protectionism -- The Smoot - Hawley Tariff changed a recession into a depression. Today, even left leaning economist Paul Krugman stated, "Opponents of global trade, whatever their intentions, are doing their best to make the poor even poorer." -- NY Times; April 22, 2001
Monday, October 21, 2013
Should We Go Back To The Gold Standard?
Richard Nixon ended the gold standard in 1971. At the time gold was pegged at $35 per ounce. Countries who sold goods to the United States would continually run trade surpluses. They would end up holding large supplies of dollars as a result. Eventually it became obvious that the US could not redeem all the dollars with gold, so country after country started converting their dollars into gold, thus drawing down the US gold stock. It was then that Nixon shut the gold window. The US would no longer exchange its dollars for gold. The world entered a period of generally floating exchange rates.
There are some that would love to return to some kind of gold standard. Very few professional economists would go along with this. The reason is because economists subscribe to the Quantity Theory of Money. This gets down in the weeds a bit, but let me explain this concept with the following formula:
MV = PY
where M = money supply
V = velocity of money
P = price level
Y = real GDP
Real GDP is growing globally. As a historical norm, V is relatively constant. If M is gold, we have a variable which is hardly growing at all. The fact that it has a high value is because of its scarcity. Now looking at the formula, if Y is globally increasing, P (prices) must be forced down. This would result in deflation which is an economy killer.
At the time of this writing, the spot gold price is $1314 oz.
There are some that would love to return to some kind of gold standard. Very few professional economists would go along with this. The reason is because economists subscribe to the Quantity Theory of Money. This gets down in the weeds a bit, but let me explain this concept with the following formula:
MV = PY
where M = money supply
V = velocity of money
P = price level
Y = real GDP
Real GDP is growing globally. As a historical norm, V is relatively constant. If M is gold, we have a variable which is hardly growing at all. The fact that it has a high value is because of its scarcity. Now looking at the formula, if Y is globally increasing, P (prices) must be forced down. This would result in deflation which is an economy killer.
At the time of this writing, the spot gold price is $1314 oz.
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