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Politicians will always try to have it both ways.

December 10, 2010 2 comments

“If we recklessly cut taxes for the wealthiest 2 percent, then Obamanomics will look an awful lot like Reaganomics,” Jackson said in a statement.

Jesse Jackson Jr. (D-Ill.) said this to appease his base. That should be obvious. So what happens when the tax extension starts to produce some growth, unsustainable but still some growth. Well he’ll just say it was because all that reckless spending of course, the good Keynesian answer.

This is the problem with economics in general. There is no controlled experiment. The Keynesian approach has been tried and failed to produce any significant results. The CBO’s most recent report says:

  • They raised real (inflation-adjusted) gross domestic product by between 1.4 percent and 4.1 percent,
  • Lowered the unemployment rate by between 0.8 percentage points and 2.0 percentage points,
  • Increased the number of people employed by between 1.4 million and 3.6 million, and
  • Increased the number of full-time-equivalent (FTE) jobs by 2.0 million to 5.2 million compared with what would have occurred otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers)

No doubt the Keynesians will say told ya so….of course they won’t read the rest of the post that tells the limitations.

Those reports, however, do not provide a comprehensive estimate of the law’s impact on U.S. employment, which could be higher or lower than the number of FTE jobs reported, for several reasons (in addition to any issues concerning the quality of the reports’ data):

  • Some of the jobs included in the reports might have existed even without the stimulus package, with employees working on the same activities or other activities.
  • The reports cover employers that received ARRA funding directly and those employers’ immediate subcontractors (the so-called primary and secondary recipients of ARRA funding) but not lower-level subcontractors.
  • The reports do not attempt to measure the number of jobs that were created or retained indirectly as a result of recipients’ increased income, and the increased income of their employees, which could boost demand for other products and services as they spent their paychecks.
  • The recipients’ reports cover only certain ARRA appropriations, which encompass about one-fifth of the total either spent by the government or conveyed through tax reductions in ARRA; the reports do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments (including unemployment insurance payments) to individual people.

Consequently, estimating the law’s overall effects on employment requires a more comprehensive analysis than the recipients’ reports provide.

Hmmm I wonder if they are using the same models that failed to keep unemployment under 9% with the Stimulus. You know the reason for the Stimulus in the first place?

So now, Obama is going to cave into a non-sustainable tax extension that will produce some growth. Companies will at least know what their tax rates for the next two years and they will plan accordingly. Showing that Higgs’ Regime Uncertainty has some merit. If the economy grows it will be because of investment not consumption.

All that won’t matter to politicians like Jackson Jr. They will pick and choose what ever explanation fits better to their a priori ideals. They want the stimulus to work, it gives them a reason to spend money on things that no sane person would spend money on like Trains to Nowhere. It gives them reason to give out pork to the people who fund their campaigns. Both parties do it, Jackson Jr.  and Bush both really want/wanted stimulus to work.

The reason politicians can get away with all these shenanigans is because economists will never be able to prove one theory over the other. The economy is far too complex for even the most sophisticated mathematical model. With modern economist obsession with math, which I don’t see changing anytime soon. The state of modern economics is much the same as the state of politics, they’ll all just pick and choose which explanation fits their priors better. A Liberal economist will choose the Keynesian answer, because it fits their ideology better. A Conservative will pick a supply-side or monetarist answer and hopefully Independents will pick more of an Austrian answer.

It will be interesting to see that when grow and unemployment start to pick up, as companies start to invest again, what stories differing ideological camps choose to tell.

Obama’s Tax Deal

December 9, 2010 3 comments

Democrats are in revolt over Obama cutting a deal on the Bush Tax Cuts.

First let’s head off the notion of that Bush’s Tax Cuts were stimulative. They weren’t. In order for tax cuts to be stimulative, they have to be permanent, which Bush never intended. The Tax cuts were designed to make it look like Bush and Congress were doing something, while in reality, they were just kicking the can to the next poor bastard in office, Obama in this case. The can in this case being the Deficit and long-term tax policy.

There are really two kinds of people, when it comes to taxes. Type I: Those that pay attention to their income and tax rates and try to maximize income and minimize taxes. These people care about deductions, employ accountants and financial advisers, etc. These people typically employ the use of trusts to by-pass the death tax. These people watch the Market and regularly change their asset allocations on their 401k or personal IRAs. From my experience these are mainly independents and Republicans, with some of the Ultra Wealthy Democrats thrown in (Kennedys, Kerry, etc)

Then there are those that don’t think about taxes until April, Type II. They only think about getting that refund check, and care little about taxes in general. They typically don’t save. If they do have a 401k, I doubt that they thought much about it since they initially started it. Since they don’t save, they rarely have much to leave their kids. These are by large Democrats or good little Keynesians that continuously consume and rarely save.

Bush’s tax cuts were mainly stimulative for the latter category. Since they don’t pay much attention to taxes or government spending in general, they see a short-term lowering of taxes as an excuse to spend that extra money on frivolous stuff. That leads to a greater GDP via consumption but it’s not a sustainable growth. Much like the Housing Bubble, it must come to an end, hence the sunset provision in the Bush Tax deal.

When taxes do go back to their previous rates, Type IIs, don’t have that extra cash to spend, but no doubt they still have some extra debt that they might not have had if the tax “cuts” hadn’t been implemented. Why? Because for the last 8 years they have been thinking the tax cuts were, for their purposes, permanent. They didn’t account for the long-term, because they never do. So TVs, cars, other durable goods, going out to eat, movie theaters, etc will all suffer from the lack of type II consumer spending. That is what the real danger of not extending the tax cuts. It will cause a double dip, but the negative growth will be relatively small, I think.

Type I’s knew about all this. They knew that the tax rates were going to go back up. They pulled back investment and spending 2 years ago, after the financial shock of 2008. It makes perfect sense if you think about it. The banks over extend themselves. You as a big company, see this and then see the massive amount of government intervention that goes along with it. You see the new regulations coming down the pipeline and start to wonder what’s going to happen. In short you pull back on investment, the real cause of this recession and do a wait and see approach. As Bush’s tax “cuts” sunset date comes closer, you might do a little early bird spending, to take advantage of the cheaper tax rates, giving the illusion of growth, ala Cash for Clunkers. Overall your hesitant. You don’t know what the Government is going to do, especially with Obama waffling on everything the last year.

This lays out a second case for extending the tax cuts. To give some certainty to companies again. It’s not just big multinationals that are hesitant, but also smaller companies as well.

This post is already too long for my liking but to end I just want to point out that, only through investment can we get sustained economic growth. Long term performance is based on saving not spending. We see the devastation in our economy based on the insane notion that spending is what makes an economy grow. It’s a myth that all Keynesian, including Bush (Yes, we was a Keynesian) employ.

The only way for tax cuts to cause a sustainable growth is if they are permanent, making Type II’s assumptions correct. It also makes Type Is continue their investment, instead of opting for a wait and see approach as sunset provisions start to come into effect. In short Keynesian’s get it all wrong, and Austrians don’t get enough credit.

Got to love the British, “Will someone please shut Krugman up!”

October 25, 2010 4 comments

It’s nice to see that even across the pond people realize that Krugman doesn’t know what he is talking about.

Sorry, a bit late on this one, but I see old Kruggers, Nobel prize winner and New York Times columnist, is at it again. Not content to lecture his own country’s administration about how they are not spending enough, Professor Krugman lambasts Britain’s coalition government in his latest column for its deficit reduction plan, which he reckons will condemn the UK to a depression.

Here’s a taste: “What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it”.

Good stuff, and who knows? Maybe he’s right. Yet the idea that you can more or less indefinitely keep putting off deficit reduction until the economy is firing on all cylinders again just looks like an excuse to me for continuing to spend at unaffordable levels. He accuses the Tories of being “ideological” in their single minded pursuit of deficit reduction, and of using the crisis to dismantle the welfare state, yet he conveniently skirts around the underlying issue, which is in essence that the country can no longer afford this expenditure.

This is the problem with the welfare state, it can’t afford itself. Hell even the Swedish figured that out.(This is from a far leftist writer)

There is virtually no opposition to this dismantling of the Swedish welfare state in the mainstream Swedish political system. One party in Sweden – The Left Party – has in the past rejected at least some of this path that Sweden is taking. But the Social Democrats have refused to even consider entering into a deal with them unless they water down their principles and accept that Sweden “has to” carry out even more more major public spending cuts – which the Left Party have more or less agreed to. Social Democrat leader Mona Sahlin calls this “responsible economics”. What she means however, is that perpetual large cuts to public spending are responsible to the needs of capital and big business in Sweden, not to the social and economic needs of Swedish people.

Now back to the Brits.

Professor Krugman suggests that Britain has nothing to fear from excessive public debt, which is still as things stand below its long run historical average. He’s technically right about this, but like a lot of statistics used to support a particular, ideological position, it’s completely meaningless. Looking at the path of UK public debt as a percentage of GDP, there have indeed been quite long periods when it has been much higher than it is now, but these periods mainly coincided with prolonged and all embracing war – first the Napoleonic wars, then later the Boer war and the first world war. Britain had barely recovered from the financial consequences of the first world war by the time the second world war hit.

The big point missed by those who think elevated public debt doesn’t matter is that these periods of excessive debt utterly crippled the UK economy. Indeed, Britain’s decline through the twentieth century as an economic superpower directly correlates with increased indebtedness. Fighting wars is not good for economic health

What’s keeping stocks up?

June 2, 2010 6 comments

I’m a pessimist when it comes to stocks. For the life of me I can’t figure out why the Dow is still going up.

I know the conventional wisdom says it’s because of green shots, fundamentals or that housing sales are going up. Yet, it’s imperative to remember this is the same conventional wisdom that said housing prices could never fall. That the bubble (before it popped) was sustainable and based on market fundamentals. Needless to say, I think they are wrong. I don’t think that the economy is anyway near being any better than it was before 2008.

The housing market is still over inflated, thanks to numerous government interventions that distort the real economic picture. The only reason that the housing number, for April, were any good is because of the rush to buy and still get the tax credit. Expect May, June and July’s numbers to be “unexpectedly” low. Of course there is nothing unexpected about it, the MSM had pretty much resigned itself to a propaganda machine for the administration.

So what is keeping the Market up?

I think a reasonable expectation, given Higg’s Regime Uncertainty theory, is that the Market is waiting for November.

If you think about it, it does make some sense. The Obama administration has, to a high correlation, played this recession the same way FDR did in the 30s. Obama has taken over some private firms, instituted numerous regulations and passed very business unfriendly laws. Business doesn’t know what’s next.

You have the FCC trying to take over the internet (Yes yes I’m being overly dramatic here, only because this hasn’t gotten nearly as much press as it needs, probably because the News media will hit the jackpot when this goes through.) You have new regulations, that pretty much no one has read, on the financial sector. Even though finance has taken a drubbing from the public, they still provide the cash that’s necessary for business to get off the ground. You have new health care laws that severely negatively impact hiring new workers. And who knows what’s next, which is the essence of regime uncertainty.

The only way to really tell is to wait till November. If the market has a huge rally, when Republicans win big, then we may know a little bit. Yet, it important to know that even then we won’t know the answer. Many people might wait to see if the Republicans do what they say they are going to do; cut spending, bring in the deficits and decrease government control of the economy. If they don’t do any of those things, I think a lot of people will continue to stand on the sidelines until we actually get someone in office that will cut down the government.

US Treasury Financial Report

April 15, 2010 3 comments

This is scary, just in time for Tax Day.

The Treasury Department recently issued the 2009 financial report of the United States government. Whereas there is lots of talk in Congress and in the press about the federal budget, the annual report was released to near silence. That’s too bad, not only because the annual report is untainted by creative accounting but also because its message is too important to ignore.

Read the whole thing, then check out the Federal balance sheet, here.

United States Government
Balance Sheets
as of September 30, 2009, and September 30, 2008 (in billions)

2009         2010

Total assets………………………………………………………………………. 2,667.9      1,974.7

Total liabilities …………………………………………………………………. 14,123.8     12,178.2

Yeah it’s that scary. And remember that’s not even counting the unfunded entitlement liabilities, Medicare, and Social Security.

Add in Social Security, this is just for 2009:

Present value of future expenditures in excess of future revenue …………………………………………………………………. -7,677 billion

Gives us 21,800 billion in the hole for 2009 (Not counting Medicare).

Tea anyone?

Are You Overtaxed?

April 11, 2010 3 comments

New Rasmussen poll says that 66% of Americans think they are overtaxed, with 33% disagree.

Eighty-one percent (81%) of Mainstream American voters believe the nation is overtaxed, while 74% of those in the Political Class disagree

Really? Who would have thunk it?

Eighty-one percent (81%) of Republicans believe the nation is overtaxed. So do 73% of voters not affiliated with either major party. Democrats are evenly divided on the question.

And finally, those evil  Tea Party types.

Among those who consider themselves part of the Tea Party movement, 96% believe the nation is overtaxed, and only one percent (1%) disagree.

Is this mind blowing news?

But it does explain why Obama’s number are going down fast.

Currently, only eight percent (8%) believe their taxes will be cut during the Obama presidency, while 46% expect a tax hike.

I disagree, I don’ think Obama will try to raise taxes anymore than he has already, this term. He can’t. He doesn’t have the political capital and after November, he won’t have enough votes in Congress.

He’ll have to wait till 2012. I think Obama will try to run on a platform of “fiscal honesty,” which is Orwellian speak for, “He spent a lot of money, and now is trying to say he can save us from the fiscal crisis.” There will of course be no mention of how much money Obama added to the deficit. Instead they will run against W., again.

The 96% of Tea Partiers won’t buy it, Republican won’t buy it, only Democrat will buy it. And only 50% of the Democrats are stupid enough to buy it, if the tax numbers above are any indication. But never underestimate Obama’s ability to spin, and Democrats willingness to believe anything they want to hear, regardless if it’s the truth.

It will all come down to three thing; cut Government spending, raise taxed or a combination of both. The Left doesn’t like the first choice. No wonder since they think we aren’t taxed enough already. The Right doesn’t like the second choice, they think we are taxed too much already. That only leave the third option. Remember taxes have to go up almost 40% to just reduce the deficit.

My biggest fear is that Congress in the future (after 2012), will institute a VAT tax and a Carbon Tax (even though I think by then AGW will be debunked, they’ll pass it because they need the revenue) in conjunction with a steep tax rate hike to the current income tax. Essentially, we will be paying over 50% of our income to the Federal Government, now add in the increase in State and Local taxes to pay for the bankrupt states.

If we have to have a VAT, I’d much rather it be with a complete elimination of the income tax. Even better, I’d rather see a Flat Tax at even 30% (which would make us one of the highest taxed countries with a Flat Tax). But that’s just wishful thinking. Knowing Congress and our POTUS, even if we gave 60% of our income to Government, it wouldn’t be enough. They are Leviathan, they are never satiated.

How much tax are you willing to pay before you go Tea? I’m already Tea, count me as one that thinks they pay too much already.

Categories: Deficit, Doom, Obama, Taxes, VAT

Never Fear The VAT is Here

April 8, 2010 2 comments

Not quite yet, but I’m sure if Obama get’s his way, it will be.

Paul Volcker, one of Obama’s economic advisers, has recently said that we might need a VAT tax to help pay for Government deficits and spending.

White House adviser Paul Volcker said the United States may need to consider raising taxes to control deficits.

He also said a European-style value-added tax could gain support.

The former chairman of the Federal Reserve who is an outside adviser to President Barack Obama, said the value-added tax “was not as toxic an idea” as it has been in the past, according to a Reuters report.

Volcker made the remarks at a New York Historical Society event Tuesday night. Volcker also suggested that a carbon or energy-related tax may become necessary to bring the budget back into check.

No talk about actually cutting Government spending of course. Just raising taxes, during a recession!

Expect more unexpectedly high unemployment numbers.

Categories: Deficit, Taxes, VAT