The war in Iraq already works against the Republicans. So I think a Republican victory unlikely if Hillary Clinton is the Democratic nominee even before we consider the economy. But the economy is the biggest factor in a Presidential election. Hillary Clinton will be able to beat John McCain (assuming they are our sorry choices) because the economy in a recession works against the incumbent party.
Economists forecasting the 2008 race have given a slight edge to the Democrats. Global Insight, a Massachusetts-based forecaster, was predicting that the Republican nominee will garner 49 percent of the vote in November, based on recent income growth, unemployment and the power of incumbency. With yesterday's jobs report, that forecast will slip to as low as 47 percent, said Nariman Behravesh, the firm's chief economist.
The GOP contenders "are far enough away from the Bush administration where they won't be completely tarred by the Bush brush," he said. "But, nevertheless, there will be a tendency to see Republicans as responsible for this mess."
Obama and Sen. Hillary Rodham Clinton (D-N.Y.) pounced on the jobs data. Clinton proclaimed "a second Bush recession," while Obama blamed the news on "seven years of George Bush's failed economic policies."
But of course Hillary lies by referring to the 2000-2002 period as a Bush recession. On whose watch did the dot com boom happen anyway?
The incumbent party always loses in a recession. Always.
If so, Republicans will have a hard time outrunning Bush's shadow, said Ray C. Fair, an economist at Yale University who has modeled the economy's impact on elections for decades. Because of slow economic growth, Fair had already predicted that the Republican nominee -- weighed down by voter demands for change after eight years of GOP control -- could hope for only 48 percent of the vote. If growth turns even barely negative, the share drops to 46 percent, he said.
"There's no case in history in which we've had a bad recession and the incumbent party has won," he said. "Never."
I see this as an perhaps a silver lining in this recession. If John McCain gets the Republican nomination we are going to have a nutcase in the White House who at least sounds as dangerous as George W. Bush. Will he govern as crazily on foreign policy as Bush has and as McCain sounds? In The American Conservative see The Madness of John McCain: A militarist suffering from acute narcissism and armed with the Bush Doctrine is not fit to be commander in chief. Also, see Pat Buchanan's The Great Betrayal
Offering more “straight talk” on the Sunday before the Florida primary, John McCain made an arresting prediction: “It’s a tough war we’re in. It’s not going to be over right away. There’s going to be other wars. I’m sorry to tell you, there’s going to be other wars. We will never surrender but there will be other wars.”
And then there's McCain's repeated attempts to pass an immigration amnesty:
On controlling America’s borders and halting the invasion through Mexico, McCain collaborated with Senate liberals in the McCain-Kennedy amnesty, which was rejected only after a national uprising.
When 190,000 Arizonans petitioned in 2004 to put Prop 200 on the ballot, requiring proof of citizenship before an individual could vote or receive welfare benefits, John McCain led the GOP congressional delegation in opposing it unanimously. Prop 200 passed with the support of 56 percent of all Arizona voters and 46 percent of Hispanics.
James Antle provides a much bigger litany of McCain's history of support for immigration amnesty:
No national Republican leader has a longer or more consistent record of advocating legal status for nearly all of the country’s 12 to 20 million illegal immigrants—not even George W. Bush. McCain’s nomination would push the politics of immigration to the left and potentially unravel the conservative consensus in favor of attrition through enforcement. “To build an immigration record that’s worse than Huckabee’s and even Giuliani’s takes some doing, but that’s what McCain has done,” immigration writer James Edwards argued. “McCain’s record is more in line with Democrat candidates.”
McCain wasn’t always so squeamish about the word “amnesty.” “Amnesty has to be an important part [of immigration reform] because there are people who have lived in this country for 20, 30 or 40 years, who have raised children here and pay taxes here and are not citizens,” he told the Tucson Citizen in May 2003. “I think we can set up a program where amnesty is extended to a certain number of people who are eligible…”
So here's my question: Are we better off if McCain or Romney loses to Hillary? I see it cutting both ways. If Romney runs against Hillary Romney will pull Hillary toward immigration law enforcement positions. If McCain runs against Hillary his defeat will tend to discredit his favored positions among Republicans.
Never mind that the state of California has both high state income taxes and sales taxes. Never mind that some states get by with no state income tax (e.g. Florida, Texas, Washington State, South Dakota, Wyoming). Never mind that some states get by with no sales tax. Politicians can spend beyond what they can get their hands on and cry for more. The economic downturn in California has boosted the state government deficit to about $400 per capita. The Governator is declaring a state fiscal emergency.
SACRAMENTO - Facing a projected $14 billion budget deficit, Gov. Arnold Schwarzenegger on Friday said he will declare a fiscal emergency, which will allow the governor and lawmakers to cut spending more quickly and also sets the stage for slashing state services and programs - perhaps by as much as 10 percent.
Legislative leaders said they will meet with Schwarzenegger next week to begin working on what the governor described as "across-the-board" cuts. His aides said departments have been told to prepare for a range of possible cuts, with 10 percent a central figure.
This crisis stretches back to 2001 and forced former governor Gray Davis out of office in 2003. Arnie won as his replacement and hasn't really fixed the problem. Now it has become too large to pretend it doesn't exist as the US economy slows down with high oil prices, a declining real estate market, and a banking crisis.
Dan Walters of the Sacramento Bee has an excellent succinct explanation of the California budget crisis: both the Democrats and Republicans can block each other's way to solve the crisis.
Just-the-facts rationality collides with the other two dimensions – legal and political. Some of that extra spending, particularly the $2 billion or so given to schools, is locked into constitutional law and could be reduced only by extraordinary votes in the Legislature. Likewise, restoring the taxes that had been reduced, such as the notorious "car tax," would require two-thirds legislative votes.
The legal thicket creates a political impasse since Democrats don't want to reduce the former and Republicans won't rescind the latter. For more than a half-decade, the two parties have tolerated the deficits because leaders of both believed that when the day of reckoning arrived, which may be now, the other side would surrender.
Will Arnie get his way with the spending cuts? I think my taxes are already high enough, thank you very much. If they decide to raise taxes they won't get money from poor Mexicans who cost far more than they pay in taxes. Oh no, the middle class (shrinking as it is) and the upper class will have to pay.
Jobs losses and declines in retail sales both are contributing to a projected decline in state tax revenues (see the chart at the bottom of the page which is from Cal state Dept. of Finance). The decline in housing prices will also cut revenue growth for local governments.
The deficit is about 10% of the total budget.
Privately, Schwarzenegger and his aides have told lawmakers and interest groups that his January budget will reflect a shortfall closer to $14 billion, but he has not yet publicly released any proposals. The state's current total budget is $145.5 billion for the fiscal year that began July 1. General fund spending for day-to-day operations is $102.3 billion.
But if past experience can be relied upon the deficit could get much bigger.
"It was about this time of year in the last fiscal crisis under Gov. Gray Davis that they started leaking word of a $10 billion gap," said David Hitchcock, a credit analyst with Standard and Poor's in New York, referring to the state's economic downturn in 2002. "The following May the gap had grown to $35 billion."
A deep recession will cause more people to claim welfare benefits while also slashing revenues even deeper.
In percentage terms the 1991 budget deficit was much larger.
And who could forget the sobering Budget Crisis of 1991, when the Golden State was confronted with a $14.3 billion hole in a $55.7 billion budget. Legislators and then-Gov. "Cranky Pete" Wilson handled that with $7.2 billion in tax increases, $5.1 billion in spending cuts and $2 billion in parlor tricks.
California's financial crisis is going to continue for years and even decades to come. Unfavorable national demographic trends are further along in California. When Hispanics take over control of enough of the California state legislature to force through big tax increases on the white and Asian middle and upper classes this will drive the goose out to other states and many fewer golden eggs will get laid in the Golden State. The Hispanic Democrats (and what will be left of their white Democrat allies) will enjoy a pretty pyrrhic victory.
The Democrats are getting back their nerve. The Democrats think they can win the 2008 election on a Robin Hood platform of higher taxes for the rich.
WASHINGTON -- More than two decades after presidential candidate Walter F. Mondale called for tax increases -- and lost the White House in a landslide -- the Democratic Party is on the verge of a major political gamble: Some of its leading members are proposing an array of tax hikes on wealthier Americans.
All of the major Democratic presidential candidates would allow President Bush's tax cuts for wealthier households to lapse. Most support raising the cap on income subject to Social Security taxes. Some want to raise taxes on capital gains and other investment income.
I have a hypothesis to present to you: Rising income inequality enables growth of government.
Why? As more and more income and assets go to a smaller and smaller portion of the population a government can tax fewer people in order to collect a lot of revenue. The smaller the fraction of the population that needs to be offended or violated the easier a government can raise taxes in a democracy.
Left-leaning politicians can argue to their base that some of the assets of the wealthy are ill-gotten gains. So the seizing of these assets via taxes can be morally justified to at least a portion of the electorate.
But the wealthy have ways to fight back. First off, they can afford to pay for think tanks, lobbyists, and other agents of influence. They can generate lots of opinion pieces in newspapers and talking heads on TV.
Also, the wealthy can afford legions of tax attorneys and accounts. These tax experts themselves cost a lot of money and therefore only a portion of the avoided taxes represent money saved.
The wealthy aren't united however. Some wealthy people make their money via capital gains which is a transaction tax. They can delay selling and therefore delay paying taxes on their gains. Warren Buffett and Bill Gates have paid proportionately very little in taxes for how much money they made. They aren't motivated to oppose higher taxes.
The growing lower class (thank you immigration) combined with the growing ranks of the elderly create conditions much more favorable to the higher tax agenda. Taxes are going to go up. The question is how high?
Megan McArdle expects the Democrat who wins the US Presidency in the November 2008 election will get saddled with the next recession.
The next term is going to be pretty interesting, in terms of watching what wonks say about presidential impacts on the economy. If Bush doesn't end up with a recession on his watch, the next person in office will almost certainly catch a nasty twofer: a deepening hole opening up in the budget due to entitlements, and a recession that will make any such problems desperately worse. I expect a neat (and amusing) flip between Democrats proclaiming that deficits don't matter, and anyway, the president has limited power over the economy; and Republicans righteously screaming about fiscal responsibility.
If oil prices keep going up then I expect the recession will happen sooner. But we could get lucky and avoid a recession until 2009.
The big budget crisis coming up due to exploding old age entitlements spending makes me expect higher taxes. But in the last 45 years US federal taxes as a percentage of total GDP have averaged 18.2% of the economy with a peak in the late 1990s of 20.5% of GDP. Tax revenues were only 16.5% of GDP in 2003 rising to 18.4% in 2006. That rise probably was due especially fast income growth among higher income people in higher tax brackets.
That historic range of tax revenues as a percentage of GDP suggests the people are pretty opposed to paying high taxes. So on one hand, we have the historical post-WWII limits on the federal government's slice of GDP. But on the other hand we have the huge unfunded old age entitlements and the demands that the Baby Boomers will make to have their old age entitlements paid in full. How is this going to pan out? Does the resolution of this conflict depend on who gets elected as the next President?
I'd rather raise retirement ages and cut old age entitlements than increase taxes and avoid big tax increases. For that reason I'm suspicious of all new forms of taxes even if those taxes are billed as ways to cut other taxes. Value Added Tax (VAT) seems like a bad idea because the European countries with VAT have governments that (and someone correct me if I'm wrong) take larger percentages of GDP than the US government does. My guess is that people are less opposed to VAT because VAT is less visible. Money taken out of one's paycheck is visible in every check you get and every time you fill out income tax forms. But taxes that just show up as higher prices for various products are more hidden and create less opposition. So oppose hidden taxes.
If the Democrats win the White House and Congress in the next election will we see enactment of a national VAT to pay for old age entitlements?
Nick Schulz wonders whether tax cuts are the best way to cut the size of government.
I want the government both to spend less money and cut taxes. But if in cutting taxes the government is prompted to spend more money, should I still be in favor of tax cuts?
I ask this question in response to recent opinions taken by a few influential writers, including Jonathan Chait, Sebastian Mallaby, and Jonathan Rauch. Each has pointed to research that claims cutting taxes leads to increased spending. One implication of the research, they aver, is that if conservatives and libertarians are truly interested in cutting spending, they should reconsider their support for tax cuts.
Parenthetically, this strikes me as an argument against privatizing trash collection and highways. If we pay for more stuff directly governments will probably just grow in other areas as it becomes possible for it to spend more in other areas without raising taxes.
One of the proponents of the theory that tax cuts increase spending is William Niskanennnn, chairman of the very libertarian limited government Cato Institute. Will Wilkinson, also of the Cato Institute, summarizes Niskanen's argument.
Tax hawks like Grover Norquist, of Americans for Tax Reform, maintain that we should "starve the beast": create pressure on Congress to reduce spending by cutting the government's intake of taxes and running up deficits. This is the approach prescribed last year by Milton Friedman and Gary Becker, both Nobel Prize-winning free-market economists, in separate Wall Street Journal op-eds. Friedman predicts that "deficits will be an effective... restraint on the spending propensities of the executive branch and the legislature. The public reaction will make that restraint effective."
However, economist William Niskanen, chairman of the Cato Institute (also my employer), has presented econometric evidence that federal spending tends to increase when tax revenues decline, flatly contradicting the starve-the-beast theory. Furthermore, according to William Gale and Brennan Kelly of the Brookings Institution, members of Congress who signed the President's "No New Taxes" pledge were more, not less, likely to vote for spending increases, which is hard to square with the starve-the-beast theory.
"Starve The Beast" didn't work during the Reagan Administration. I suspect a better approach would be to make all taxes more visible to tax payers. Hidden taxes that only show up in the prices of goods and services without separate line items on the prices of goods (because, say, a tax is levied on businesses and is only seen by business owners) allow governments to collect more revenue without letting most of the public know what is happening.
Why do "Starve The Beast" tax cuts fail to rein in government spending? In a nutshell: When people think future generations will pay for the spending of today they are more eager for spending today.
Niskanen's analysis suggests that when current spending is financed by current taxes, voters see it as their money being spent, and so are more motivated to be frugal. But when current spending is financed by debt, voters see it as future voters' money being spent. If voters prefer to benefit now and have some one else pay later, there is no good reason to think legislators will see deficits as a reason to restrain themselves.
Starve-the-beast advocates might retort that the theory has yet to be tried. Sure, we're running record deficits. Sure, we've had tax cuts. Sure, most Republicans in Congress nevertheless voted for plush increases in education, defense, Medicare and more. And sure, President Bush has never seen a spending bill he wouldn't sign. The reason "starve the beast" has yet to kick in, they say, is that things aren't bad enough yet.
But if the deficit reaches crisis proportions - and it will, quickly, if it continues to grow at the current rate - we should not imagine that the government will rush to contain the crisis by rapidly cutting the fat from government. As George Mason University economist Alex Tabarrok recently argued, "The combination of changing demographics and current tax cuts is seeding our economy for a fiscal 'perfect storm.' When the storm hits, there will be a crisis, and... small government rarely does well in a crisis."
Tha "perfect storm" is going to start hitting as the baby boomers start to retire. The 2010s are going to be a battle royale over tax increases and spending cuts as old age entitlements programs create massive US government deficits. A similar clash will play out in other Western nations.
Miskanen argues his position against tax cuts as a way to cut spending:
First, this position is not consistent with the evidence, at least beginning in 1981. In a professional paper published in 2002, I presented evidence that the relative level of federal spending over the period 1981 through 2000 was coincident with the relative level of the federal tax burden in the opposite direction; in other words, there was a strong negative relation between the relative level of federal spending and tax revenues. Controlling for the unemployment rate, federal spending increased by about one-half percent of GDP for each one percentage point decline in the relative level of federal tax revenues. Although not included in the sample for this test, the first three years of the current Bush administration were wholly consistent with this relation.
What is going on? The most direct interpretation of this relation is that it represents a demand curve—that the demand for federal spending by current voters declines with the amount of this spending that is financed by current taxes. Future voters will bear the burden of any resulting deficit but are not effectively represented by those making the current fiscal choices. One implication of this relation is that a tax increase may be the most effective policy to reduce the relative level of federal spending. On this issue, I would be pleased to be proven wrong.
Second, acceptance of the “starve the beast” position has led too many conservatives and libertarians to be casual about the sustained political discipline necessary to control federal spending directly and to succumb to the fantasy that tax cuts will solve this problem. President George W. Bush, for example, has proposed and won the approval of most congressional Republicans for large increases in federal spending for agriculture, defense, education, homeland security, and Medicare, and he has yet to veto a single spending bill. As a consequence, real federal spending during the Bush administration is now growing at the fastest rate since the Johnson administration. And Congress has yet to act on the expensive energy and transportation bills or Bush’s proposal for a base on the moon and manned exploration of Mars!
This all is an argument for a balanced budget amendment. If the budget can't get too far out of balance without super majorities in Congress then spending and taxes will be more restrained.
After calling Social Security a big Ponzi Scheme 92 year old Nobel Laureate Milton Friedman says limited government is being threatened by the idea that the United States has a mission to promote democracy.
Progress in his goal of rolling back the role of government, he said, is "being greatly threatened, unfortunately, by this notion that the U.S. has a mission to promote democracy around the world," a big Bush objective.
"War is a friend of the state," Friedman said. It is always expensive, requiring higher taxes, and, "In time of war, government will take powers and do things that it would not ordinarily do."
He also said it was no coincidence that budget surpluses appeared during the Clinton administration, when a Democratic president faced a Republican Congress.
"There were no big spending programs during the Clinton administration," he said. "As a result, government spending tended to stay down, the economy grew like mad, taxes went up, spending did not, and lo and behold, the deficit was turned into a surplus."
The problem now, he said, is that Republicans control both ends of Washington.
"There's no question if we're holding down spending, a Democratic president and a Republican House and Senate is the proper combination."
We'd have been better off overall if Al Gore had won in 2000. The Iraq Debacle would have been avoided and government spending would be much lower.
Wages are not keeping up with inflation in spite of a strong economic recovery.
After adjusting for inflation, average weekly wages for production and non-managerial workers fell o.4 percent last month, and dropped 0.8 percent over the 12 months that ended in February, the department said. Those employees account for about 80 percent of the labor force.
...
In addition to energy prices, another reason for rising inflation pressures is that the economy has been growing rapidly so far this year, at about a 4.5 percent annual rate, according to some estimates, fueled by strong consumer spending and business investment.
The economy is growing rapidly and yet wages are not keeping up with inflation. Why? Rising oil prices are one reason for this. But Morgan Stanley chief economist Stephen Roach says this recovery is different because foreign workers are competing more directly with American white colllar workers and keeping down white collar wages.
This development stands in sharp contrast with real wage patterns in earlier periods. This can best be seen by looking at cyclical patterns in average hourly earnings, a series that has a longer history than the ECI. In contrast with the real wage stagnation 39 months into the current recovery, real wages have normally risen 1-2% by this point in the past four business cycles. While that doesn’t sound like a huge bonanza for the American worker, it underscores one of the time-honored axioms of economics: Over the broad sweep of time, real wages are closely aligned with underlying productivity growth. Ironically, there was a tighter linkage in past cycles, when US productivity growth was running at only a 1.6% average pace over the 1970-95 period, than there has been in the current cycle, when productivity trends have accelerated to a more robust 3.1% annual pace in the post-1995 period. Obviously, something very unusual has gone on in the current cycle -- first a jobless recovery of record proportions and now an unprecedented degree of real wage stagnation.
The most likely explanation, in my view, is a new strain of globalization. The global labor arbitrage has a rich and long history, but for some time I have argued that it has entered an entirely different realm in the Internet age (see my 5 October 2003 essay, “The Global Labor Arbitrage”). Courtesy of e-based connectivity, both tradable goods and an increasingly broad array of once non-tradable services can now be sourced anywhere around the world. That has turned low-labor-cost platforms in places such as China (goods) and India (services) into both wage- and price-setters at the margin. During the early stages of the current recovery, I argued these offshore employment options played an important role in crimping domestic hiring. Now, I suspect these same forces are having an important impact on the US real wage cycle. Put yourself in the position of an American corporate decision maker: Why pay up for a software programmer at home when you can get the same functionality at a fraction of the cost from Bangalore?
The acceleration of inflation is pressuring the US Federal Reserve to raise interest rates.
The reading on the Consumer Price index, the government's main inflation gauge, came in higher than most economists had forecast. The Labor Department said CPI rose 0.4 percent in February after a 0.1 percent increase in January. It was the biggest increase since October.
The "core" CPI, which excludes often volatile food and energy prices, rose 0.3 percent after a 0.2 percent January increase, the department said.
The Fed is continuing to slowly tighten the money supply.
The Fed nudged up short-term interest rates for the seventh time in the last year, raising the federal funds rate on overnight loans between banks to 2.75 percent from 2.5 percent. It restated its intention to keep raising them at a "measured" pace in the months ahead.
While high oil prices and foreign competition are keeping down real wages America is running a huge and unsustainable trade deficit. We could hit a point where the dollar starts declining against East Asian currencies causing inflation in imported goods prices while interest rates rise as East Asian central banks stop heavy buying of US Treasuries. The US could be pushed into a recession by all these pressures.
"Prime Minister Koizumi of Japan said his country 'in general' needed to consider diversifying its foreign currency reserves, the world's largest. 'I think it's necessary to diversify the investment destinations' of foreign reserves, Koizumi said. 'At the same time, we have to make a judgment in general, considering what's profitable and what's stable.' This is a big step for Japan, as they have generally always talked about their reserves as a monetary policy tool, rather than a financial investment. With $820 billion now at stake it is clear that the government is concerned about their returns, and the returns of dollar assets to a global investor have recently been ugly. If Japan is going to start moving $820 billion dollars around, it is inevitable that others will try to get ahead of them." (Bridgewater)
Immediately, Japanese Ministry of Finance officials began to either outright deny Koizumi's statement or suggest that the press did not understand the clear intentions of his words. But understand this, if the dollar were to drop 15% against other Asian currencies, while Japan fought to maintain their dollar yen ratio above Y100 to the dollar, Japan would lose over $100 billion in purchasing power. That is not small potatoes. Koizumi recognizes this and also recognizes the serious strain that their government deficits and huge debts have on their economy. Koizumi was clearly stating that losing $100 billion is not going to be politically acceptable.
As I said a few weeks ago, the dollar is going to become the Old Maid. It is going to start being passed around from country to country in an effort to lessen the impact of a falling dollar in the local economy.
At some point East Asian policy makers are going to accept that they can't keep propping up their currencies against the dollar.
Morgan Stanley chief economist Stephen Roach also thinks the US trade deficit and the East Asian holdings of US debt have both gotten so large that East Asian central banks are going to start looking for ways to minimize their losses when the dollar inevitably declines against their currencies.
And so the US must then run massive and ever-widening current account deficits to attract that foreign capital. And ever-widening it is: America’s broadest measure of its external shortfall was just reported to have hit an all-time record of 6.3% of GDP in 4Q04 -- an astonishing 1.8 percentage point deterioration from the 4.5% deficit a year-earlier in 4Q03. Not only is this a record current-account deficit for the US, but it is also a record financing burden for the rest of the world. Based on the annualized current account deficit of slightly more than $750 billion in the final period of 2004, America now requires an average of $2.9 billion of capital inflows each and every business day to keep the magic going.
Roach says the foreign buyers of US Treasuries are on the verge of deciding that adding ever larger quantities of US Treasuries to their portfolios is too bad of an investment to continue buying much longer.
The Washington spin is that foreigners can’t get enough of dollar-denominated assets and the returns they offer in an otherwise return-starved world. Don’t kid yourself. This rush of foreign capital is not about private investors plunging back into US assets. It is a conscious policy move on the part of foreign central banks. The US Treasury data do not accurately reflect the obvious -- an extraordinary build-up of dollar-denominated official foreign exchange reserves held by the world’s monetary authorities. By our estimates (based on IMF data), total reserves increased by about $700 billion from year-end 2003 to year-end 2004. Assuming that the dollar share of such holdings held steady at around 70% (an official BIS estimate as of late 2003), that implies an increase of nearly $500 billion in dollar-denominated holdings of the world’s central banks -- confirming that foreign central banks financed about 75% of America’s current account deficit last year. That policy-driven financing is a bold effort on the part of foreign central banks to keep their currencies from rising and defer what could be an otherwise painfully classic US current account adjustment -- complete with a further decline in the dollar and sharply higher US interest rates. The resulting subsidy to US interest rates -- and the asset-driven consumption that engenders -- goes a long way in cushioning the blows of stagnant real wages and surging oil prices that might have otherwise clobbered the American consumer.
But the message from overseas is that this game is just about over. One by one, Asian central banks -- America’s financiers at the margin -- have dropped the not-so-subtle hint that they are saturated with dollar-denominated assets. From Korea and Japan to China and India -- not to dismiss Malaysia, Hong Kong, and Singapore -- there is a growing protest to massive dollar overweights in official reserve portfolios.
Andy Xie, also of Morgan Stanley but stationed in Hong Kong, says property bubbles in the United States and China can not go on indefinitely.
What may occur soon is another scare, in my view. Property bubbles support demand in the US and China. Until property prices begin to decline in New York and Shanghai, the game is not over.
Household real estate values in the US increased by $2 trillion or 13.4% in 2004 compared to $1.4 trillion or 10.5% in 2003. US personal consumption rose by $505 billion in 2004. On the surface, the balance sheet of the US household sector is much stronger than one year ago due to asset inflation. As long as property prices keep appreciating at the current pace, why should the US consumer stop spending and start saving?
Strong US consumption has kept China’s exports strong. Hot money continues to pour into China. China is not investing all the money that it has. The surplus liquidity in the banking system is very high. China’s property sector continues to expand rapidly. Over the past three years, property prices have doubled in major cities in the Yangtze Delta region and increased by 60% in most provincial capital cities. The sales of new properties reached 7.4% of GDP from 4.7% three years ago and 2.1% in 1997. New property projects have been growing at 15% per annum in square meters in the past three years. The properties under construction, when completed, are worth more than one-third of GDP at current prices. As most developers expect double-digit price increases, the inventory-carrying profit is expected to exceed 3% of GDP per annum. The profits of S&P 500 companies are only 3.5% of the US’s GDP. This is why the investment desire is so strong in China.
The problem with the US property bubble is that it is making people think they are worth more and therefore they are more eager to spend money than they ought to be. By purchasing such large quantities of US Treasuries East Asian central bankers have created large distortions in American market's demand for capital, housing, and consumer goods. When East Asian central banks slow or stop their US Treasury bond buying spree interest rates in the US will rise and that will put a big crimp into US housing prices. Prices of imports will rise while at the same time foreign demand for US products combined with a shift of US demand from foreign to local goods will create additional inflationary pressures. The coming decline of the East Asian demand for US debt will therefore likely trigger an inflationary recession.
I agree with Warren Buffett that the size of the US trade deficit is injurious and an urgent matter.
"Americans end up owning a reduced portion of our country while non-Americans own a greater part," he writes. "This force-feeding of American wealth to the rest of the world is now proceeding at the rate of $1.8bn daily."
"Consequently, other countries and their citizens now own a net of about $3 trillion of the US. A decade ago their net ownership was negligible."
I do not buy the arguments that we shouldn't be worried and that the market will work it all out. No, this can not possibly be a net benefit or a neutral development for the United States.
“A country that is now aspiring to an “Ownership Society” will not find happiness in – and I’ll use hyperbole here for emphasis – a “Sharecropper’s Society,” added Mr Buffett. “But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us.”
"Without policy changes, currency markets could even become disorderly and generate spillover effects, both political and financial," Mr Buffett warned. "Such a scenario is a far from remote possibility that policymakers should be considering now," the billionaire said, though he conceded policymakers' "bent, however, is to lean towards not so benign neglect".
Should we worry? I think so.
At the time I'm typing this Buffett's letter for 2005 hasn't shown up on the Berkshire Hathaway web site. I'll try to update this post when it does.
Buffett previously wrote an essay about Squanderville and Thriftville where he proposed a system of Import Certificates to bring the US trade deficit under control.
The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.
We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties -- either exporters abroad or importers here -- wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.
Because our exports total about $80 billion a month, ICs would be issued in huge, equivalent quantities -- that is, 80 billion certificates a month -- and would surely trade in an exceptionally liquid market. Competition would then determine who among those parties wanting to sell to us would buy the certificates and how much they would pay. (I visualize that the certificates would be issued with a short life, possibly of six months, so that speculators would be discouraged from accumulating them.)
By putting forward this proposal Buffett is basically saying he doesn't trust the currency market to set currency values at levels that will balance trade. Well, he is right after all. Otherwise the US wouldn't be moving to bigger and bigger record trade deficits. The US achieved a record $617.7 billion trade deficit for 2004 which was 24.4% above the previous 2003 record of $496.5 billon. This is insane. We also have a large government deficit and unfunded old age liabilities calculated to be in the neighborhood of $70 trillion by one accounting.
James Brooke and Keith Bradsher of the New York Times have written a good article on the enormous US bond holdings of China, Japan, Taiwan, and South Korea and on whether the East Asian nations will continue to prop up the US dollar.
As in Japan and China, small groups of civil servants in Taiwan and South Korea are struggling to invest sizable foreign currency reserves of $235 billion and $193 billion, respectively. For years, all four countries have held the bulk of their reserves in the Treasury bills, notes, and bonds that finance the federal budget deficit, leaving American consumers and companies free to spend more on other things and invest their spare cash in more promising ventures. Together, these Asian institutions are responsible for holding roughly 40 percent of the American government's public debt. In contrast to Japan, China's money managers, while selling little of their existing Treasury holding, have not been buying much more. China's foreign currency reserves rose by $111.3 billion in the first three quarters of the year, according to official Chinese data. But its Treasury holdings, American filings show, climbed by only $16.4 billion.
Japan holds $720 billion in US Treasuries.
The Japanese are in an especially difficult place. They have to keep buying to protect the value of the dollar in order to protect their dollar holdings. But that costs large amounts of money every year with no way to stop it short of letting the dollar decline against the Yen.
The Chinese and Japanese governments are whispering loudly that the US government should act more fiscally responsible. But that is like a drug dealer telling a junkie that the junkie ought to quit so that the dealer can stop feeding his habit. Except this relationship is more like addicts on both sides feeding each others' addictions. The Japanese and Chinese have addicted themselves to the strong dollar while the US government has addicted itself to deficit spending. The Chinese and Japanese fed the US addiction by allowing the US addict to behave in a fiscally wreckless manner without paying the price of higher interest rates.
In a funny line uttered at the Republican National Convention California Governor Arnold Schwarzenegger accused pessimists of being economic girlie men.
To those critics who are so pessimistic about our economy, I say: Don’t be economic girlie men! The U.S. economy remains the envy of the world. We have the highest economic growth of any of the world’s major industrialized nations.
Of course we have a much lower economic growth rate than China. But the Chinese are playing catch-up and that is easier to do than it is to develop new technology that raises maximum possible productivity even higher.
Morgan Stanley chief economist Stephen Roach defends the pessimistic views of the "economic girlie men".
By depicting those of us who worry about the state of the US economy as “economic girlie-men,” the Governor offered new meaning to the debate that is currently raging in financial markets. Far be it for me to take this characterization personally. But in the interest of fair play, it deserves a response.
Forget about politics -- at least for the moment -- and consider the facts: This economic recovery, by most conventional measures, has been amazingly lousy. Annualized growth in real GDP has averaged 3.4% over the first ten quarters of this upturn, far below the 5% norm of the previous six business cycles. Nonfarm payroll employment is up only 0.1%, on average, over the past ten quarters -- hugely deficient when compared with the 2.7% record of the past six recoveries. Real wage and salary disbursements -- the essence of the economy’s organic, or internal, income-generating capacity -- is up at only a 0.8% average annual rate over the past ten quarters versus the 3.9% norm of the previous six upturns. The federal government budget is out of control, having swung from surplus to deficit by six percentage points of GDP from 2000 to 2003. This was key in pushing the net national saving rate down to its all time low of 0.4% of GNP in early 2003. Lacking in domestic saving, the US has had to import foreign saving in order to keep the economy growing; that has given rise to a record current account deficit of 5.1% of GDP. All this speaks of a vulnerable and exceedingly low-quality recovery in the US. If that makes me an economic girlie boy, so be it.
Roach makes a convincing argument that the US economy has structural problems (e.g. a large trade deficit, a low domestic savings rate, and unfunded retirement liabilities) of long standing that are not the cause of any one politician's or party's policies. He thinks the blame game in Washington DC prevents the underlying problems from being rationally discussed and addressed.
Motley Fool editor Bill Mann bravely claims that he too is an economic girlie man.
I am concerned that low interest rates have been used to entice the American consumer to clean up a recession borne by an irresponsible corporate spending binge by going on one of his own. I'm afraid that the $200 billion-plus that Americans have cashed out of their houses has been spent, and the next drop in interest rates won't be concomitant with a rise in prices; rather, it will be because of a full-fledged financial emergency
Washington Post columnist Robert Samuelson cites Brookings Institution economist Charles Schultze to argue that the biggest reason for slow jobs growth during the economic recovery is higher than typical productivity growth.
From late 1995 to late 2000, productivity (output per hour worked) grew 2.6 percent annually. During the next three years, annual growth averaged 4.1 percent. If it had stayed at the lower level, there'd be 2 million more jobs, Schultze estimates. Unemployment would be about 5 percent.
Rapid productivity growth would be a better cause of high unemployment than other possible causes. Though if that is a major cause it brings with it the possibility that the economy is going to become so productive that an growing fraction of the population will beome permanently unemployed.
Another less frequently mentioned cause of the current unemployment rate is immigration. Count on leading figures in both political parties to avoid mentioning that in the election debates.
The economy is not in George W. Bush's favor for reelection. But he's not running on its economic record. He is running on attacks on Kerry's character and ability. Plus, he's wrapping the war in Iraq together with the war against terrorists to argue that the Iraq war was necessary in spite of the aftermath. His argument doesn't sound reasonable to me.
But I'm guessing at this point that Bush's argument is going to convince a majority of voters. One reason for this is that John Kerry is a weak candidate. Bush only has to seem better than Kerry to a lot of voters who do not understand the fallacies at the base of in Bush's foreign policy. Kerry is not going to try to argue against those fallacies (e.g. the supposedly universal desire for liberal democracy) because some of those fallacies are part of liberal mythology as well.
The August 19, 2004 oil price peak of $48.70 per barrel may be cheap compared to even higher prices which may be in store.
No market goes up forever. But Philip Verleger, a respected energy economist, warns that over the next several years, the price pressure will probably get worse. "Prices may rise to $50 per barrel, or $60 per barrel, or even $70 per barrel," he writes in a recent report to clients. "They will likely remain there until growth in petroleum demand slows down enough to match available refining, logistical and productive capacity."
Note that in inflation-adjusted terms during the Iranian hostage crisis the price of oil hit $75 per barrel in 2004 dollars.
Higher oil prices cut economic growth.
High Frequency Economics says that every $10 increase in the price of a barrel of oil lowers its GDP growth expectations by six tenths of a percentage point. All of which feeds back into increased nervousness on Wall Street--and perhaps at 1600 Pennsylvania Avenue.
Not all economists agree on how much smaller the GDP will be for each additional $10 per barrel increase in oil prices. David Wyss, chief economist for Standard & Poor's, sees the economic threat to the economy from high oil prices as being exaggerated by others.
Every $10-per-barrel hike in oil prices reduces economic growth for the next year by about 0.25% to 0.35%, largely by reducing real consumer disposable income. At S&P, we have lowered our consumer disposable income forecast for 2005 to 3.6% from the 3.9% we projected last month, largely because of costlier oil.
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Even if oil rose to $75, it wouldn't cause a recession. It would merely lower growth, to 2.4%, from the 3.6% expected in our baseline projection.
But Stephen Roach thinks just $50 per barrel oil may be sufficient to cause a recession.
"The oil price is firmly in the danger zone," Stephen Roach, chief economist at Morgan Stanley in New York, wrote in a note to clients. Should prices reach $50 and stay there for several months, this would be "in the ballpark with full-blown oil shocks of the past" that have caused recessions, he said.
Roach doesn't see this economic recovery as being particularly strong and in his writings he repeatedly points to jobs figures, consumer debt, the trade deficit, and the federal deficit as factors that weigh against a robust recovery. So part of his pessimism on the potential effects of higher oil prices may be a consequence of his view of the weakness of the current economic recovery.
China is now the world's second-largest oil consumer, and its imports are up 40 percent year-on-year to the end of July, according to recent data.
Before the latest round of violence in Najaf, Iraq had been exporting roughly 1.7 million barrels of oil per day, although volumes have fallen recently to about 900,000 barrels per day, according to a source within the Organization of Petroleum Exporting Countries who spoke on condition of anonymity.
One of the arguments for the war in Iraq was that it would allow Iraqi oil field production to be scaled up tremendously. Well, even before the latest intensification of fighting in Iraq the Iraqi oil fields were still poducing less than they were in Saddam Hussein's final days. The political stability needed to enable substantial investment in Iraqi oil fields remains a distant prospect.
Energy ecnomist Philip Verleger mentioned above has an article on his web site making his argument that current US energy policy undermines US attempts to stop terrorists. (PDF format)
However, the United States and other countries have taken a different approach to the problem. In lieu of adopting energy policies that support the war on terrorism, they have fallen back on other plans that have been tried before and failed. One of these programs involves attacking terrorist financing. This approach echoes the unsuccessful attempt to cut off funding for Colombian drug lords, where international cash flows were scrutinized, bank deposits seized, and organizations closed down. This kind of effort disrupts but clearly does not stop the flow of funds. In the end, Americans, Europeans, and Asians are as vulnerable as ever to attack.
Meanwhile, the energy policy pursued by the United States has contributed to an increase in world oil prices, likely boosting the cash flow to the terrorists. A policy of aggressive ly acquiring crude for the Strategic Petroleum Reserve, directed by the Department of Energy, has raised oil prices by between $3 and $6 per barrel, thus augmenting Saudi Arabia’s income. At the same time, policies that provide tax subsid ies to anyone who buys an SUV weighing more than 6,000 pounds have contributed to the 1.8 percent per annum increase in gasoline consumption. Lastly, in considering the energy bill now awaiting final passage, Congress has refused to adopt any measures that would encourage greater fuel economy in automobiles or SUVs. This situation sends a very clear message to the world : US Energy Policy Supports Terrorists and Opposes the War on Terrorism.
Verleger makes arguments very similar to arguments I've made here repeatedly. For my own arguments on energy policy and terrorism see my previous posts Saudi Arabia, Terrorism, Democracy Promotion, And Energy Policy, China Energy Consumption Growth Complicates Anti-Terrorist Efforts, Energy Policy, Islamic Terrorism, And Grand Strategy, and Luft And Korin On China's Rising Demand For Oil And Saudi Arabia.
The National Association of Business Economists (NABE) Economic Policy Survey polled 172 members to rank their views on the most important issues for the US President to address in the next presidential term. The business economists see terrorism as the biggest short term threat to the economy.
Terrorism remains the biggest short-term problem facing the U.S. economy this year, according to 40% of respondents, up from 19% in March. The deficit was chosen by 23% of respondents.
We separated long-term from short-term concerns for this survey. In the longer run, the rising elderly population and related health care costs are the primary problems. The rising elderly population and the concomitant rise in the dependency ratio were the prime long-term worries for 23% of panelists (down from 27%), while 22% focused on health care costs (up from 19%). The federal deficit was chosen by 17% (down from 24%) as a significant long-term problem.
The Bush Administration has failed in their handling of the terrorist threat in an important way: weak border control policy. Far better border control policies must be part of a complete response aimed at reducing the threat to terrorism. If policies make it harder for terrorists to enter the country on visas then the terrorists will just come over land borders from Mexico and Canada illegally or jump off of ships in ports. The border with Mexico is the biggest threat on this score. But Bush's pandering for Hispanic votes prevents him from closing the border. A barrier on the US-Mexico border is affordable and would pay for itself every year just for reduced costs for health care provided by US taxpayers.
Another way of looking at the concerns of the economists is a look at how they think the next US President should spend his time.
The new president should concentrate one-quarter of his time on terrorism. We asked what percentage of his time and energy should be spent on different issues. The panel recommended that 25% of his time be spent on the Middle East and terrorism. He should spend 17% on reducing the deficit, 16% on health-care reform, and 14% on social security reform. Energy policy should account for 11% of his attention, trade 8%, and education 6%. No other problem should account for more than 1% of his time.
I would reduce the amount of time allocated to reducing the immediate deficit and on social security reform to shift more attention to old age health care. The unfunded liabilities for Medicare are in the range of tens of trillions of dollars. In particular, I would look at formulating policies to achieve the following goals:
Science policy could play a much more productive role in reducing unfunded future liabilities. Better science policy and higher research funding would also increase our life expectancies and allow us to enjoy better health for longer periods of time. So it is an especially appealing tool to use in tackling the financial problems posed by an aging population.
In a stunningly weak performance, the American economy effectively ceased creating jobs last month, the government reported Friday, saying just 32,000 positions were added in July.
Put that in perspective. Imagine that the economy added 12 times that number of jobs in a year. That would be 384,000 jobs. With the econoy employing about 139 million workers that number would lower the unemployment rate by less than three tenths of a percentage point if that growth rate in employment was sustained for a whole year.
Wall Street economists were forecasting much larger jobs growth for July.
Mr Bush's treasury secretary, John Snow, reflected the administration's disappointment that the gain in jobs last month had failed to match Wall Street's 228,000 forecast.
Using the payroll survey measure there are still fewer people working now than at the beginning of Bush's term of office.
Payroll jobs remain 1.5 million short of where last winter the White House said they would be by now. To avoid being the first president since Herbert Hoover to preside over a net job loss, Bush must hope for 372,000 new jobs a month in August, September and October.
Analysts with the Economic Policy Institute, a liberal Washington think tank, said that the economy has lost 1.1million jobs since Bush took office in January 2001 and that job growth has not kept pace with the 150,000 new jobs that are needed each month to keep up with growth in the workforce population.
Note, however, that the payroll survey is only one of two major methods used to measure employment. The household survey provides a separate independent way to measure employment and the household survey is also the source of the unemployment rate.
The unemployment rate, based on the household survey paints a rosier picture of declining unemployment rates.
The unemployment rate, however, dipped to 5.5 per cent last month, from 5.6 per cent in June. The new rate was the lowest since October 2001.
The household survey paints a rosier picture.
The Labor Department said its survey of households — which includes agriculture workers and the self-employed — again showed a picture vastly different from the employers' payroll survey, with a whopping 629,000 jobs being added in July, to 139.7 million.
From the standpoint of the Presidential election what is very important is who is getting the new jobs. Are the new jobs going to voters or non-voters? Here the news looks worse for Bush's reelection prospects. See my previous posts Black Male Labor Market Participation Declines In Face Of Immigrant Influx, Non-Citizens And Illegals Getting Over A Quarter Of New Jobs, and Foreign Employment Rises In US As Native Employment Declines.
For reasons that make no sense to me Tyler Cowen thinks China's demand for oil is not a net cost to the United States. (correct me if I'm wrong in my interpretation Tyler)
Oil just hit $40 a barrel. Many analysts, such as Paul Krugman have noted the Chinese role in pushing up commodity and natural resource prices:
Lately we've been hearing a lot about competition from Chinese manufacturing and Indian call centers. But a different kind of competition — the scramble for oil and other resources — poses a much bigger threat to our prosperity.I am surprised to see Krugman so qualifying his former belief in the virtues of free trade. Keep in mind that the core theory of international theory is a barter theory. "The Chinese buying oil" and "the Chinese selling bicycles" are just two sides of the same coin. If you don't think one can harm the U.S., you shouldn't, in general, think the other will harm the U.S. either. (Of course if your vision of free trade is we get the bicycles but give up nothing in return, we are worse off relative to that state of affairs!)
Here is another way to think of the logic. If the Chinese are bidding up the price of oil, they have found good uses for that resource. If they have a comparative advantage in buying oil, that benefits the rest of the world. Comparative advantage in production also will mean comparative advantage in buying certain inputs. The U.S. still has access to its previous production possibilities frontier. It must now decide whether it would rather spend its money on oil, or on something else, perhaps the outputs of the Chinese.
Tyler is surprised by Paul Krugman? Well, I'm surprised by Tyler. Or wait, no, I take that back. This is the sort of argument I expect Tyler to make. I also disagree with it.
Okay, what is wrong with Tyler's argument? The higher price for oil reduces the amount of oil the US will buy. The oil that the US will buy will cost more. The rising Chinese demand for oil makes us worse off. The Saudis and other oil producing nations will get more money for producing the same stuff and therefore can buy more stuff with the same amount of oil sold. The Saudis will not need to work harder or more efficiently. They didn't even have to do anything to get the oil in the first place. They just got lucky to have oil under their deserts. They didn't even have to develop the technology to extract, process, and ship it. Yet they make the bulk of the money from its sale.
Rising demand for natural resources as a result of the industrialization of more of the world is going to shift more wealth from manufacturers to the possessors of natural resources. The United States will have to lower the prices at which it sells goods in order to generate more sales to get the revenue to pay for the higher price for oil imports. It is hard to see how this is a gain for the USA. The same holds for other existing big buyers of natural resources. They will pay more for inputs and at the same time will have to sell a larger fraction of their outputs abroad to earn the revenue to pay for the inputs.
Tyler mentions the environmental cost to the US and other countries from the increased energy consumption of China. Yes, Chinese air pollution does cross the Pacific to reach the United States.
The contributions to Western US air pollution are sometimes substantial.
Based on air quality measurements at Cheeka Peak at the westernmost tip of Washington state and later airplane-based measurements, Jaffe's research group has shown that a steady trickle of air pollution comes across the Pacific from Asia -- at least in the spring -- punctuated by a surge of pollutants once or twice a month.
These surges are presumably due to the wholesale movement of air from Asian urban areas across the Pacific. This prevents the pollutants from being diluted by mixing with cleaner air. During these surges, the air entering the West Coast can have pollution concentrations as high as 75 percent of federal air quality standards, Jaffe said.
China is going to surpass the United States in carbon dioxide emissions.
China will surpass the United States in annual emissions of CO2 within a decade and, in a few decades, in total cumulative emissions of CO2 since the beginning of the Industrial Revolution.
Chinese sulfur dioxide emissions have skyrocketed.
Between 1990 and 2000, annual releases of sulfur dioxide into the atmosphere in the United States dropped from about 20 million tons to 13 million tons, but in China they have climbed to about 45 million tons.
But pollution is not the biggest cost to the rest of the world coming from increased Chinese oil purchases and increased Chinese coal burning. Nor is the biggest cost the higher price the US has to pay for oil (though, contra Tyler, that really is a net loss for the United States). The biggest cost for the United States from Chinese economic growth is in the realm of national security. The rising demand for oil from China and other industrializing countries is going to make the Middle East even more problematic.
To the extent that China becomes a military rival they will of course also cost us a lot more in increased military spending. How that plays out remains to be seen. But we certainly are faced with both higher energy prices and a more intractable Middle East as a result of China's economic growth.
Update As Nobel Laureate Richard Smalley argues, the US government ought to spend an additional $10 billion per year on energy research. Energy research is a much cheaper way to avoid with the potential costs (assuming there really are net costs) of climate warming too.
The Punjab government says it stopped traders in 18 out of 34 districts from selling wheat in a bid to prevent hoarding and ensure prices were not inflated, but the move has angered officials of Balochistan, the North West Frontier Province (NWFP) and Sindh. The government imposed a similar ban last year but lifted it after protests from the other provinces. Punjab Food Secretary Shahid Hassan Raja explains, "The other provinces should support Punjab's decision because it is in their best interests. Otherwise, they will have to buy wheat for US $206.9 to US $241 per metric ton, but now the Punjab government will be able to provide them wheat for around $151 per metric ton."
A recent decision by Pakistan's central government to prevent the import of Australian wheat may have been motivated by a desire to make profits from the resulting price run-up.
KARACHI: The rejection of 15 lakh tonnes of Australian wheat by the Ministry of Food, Agriculture and Livestock (MINFAL) — a decision that skyrocketed the flour prices in Sindh to Rs 20 per kg and earned at least Rs three billion profit to wheat black marketers in late February — is now shaping into a major scandal for the Jamali government, according to interviews with related officials, informed sources and documents available with this correspondent.
PESHAWAR, May 1: The Jamiat Ulema-i-Islam (F) has held Punjab responsible for wheat crisis in the country and asked the Centre to meet the NWFP flour requirement on propriety basis.
Nearly half of the NWFP flour mills have stopped operating due to lack of wheat.
NWFP also grows wheat but its total produce can hardly meet even 25 percent of its requirement. It is therefore showing signs of extreme nervousness over Punjab’s policy of not allowing its wheat to be exported out of the province. One NWFP minister is so angry at this that he has threatened to stop the supply of hydel power to the Punjab if the latter does not lift the ban. Out of a total of 260 flourmills in the NWFP, 100 have closed down because of insufficient inflows of wheat. The NWFP government has tried to assure Punjab that it will not allow the smuggling or hoarding of wheat if Punjab allows it to buy wheat. Balochistan, too, is up in arms. Nawab Akbar Bugti has also threatened to cut off gas supply to the Punjab if it persists in its refusal to supply wheat to Balochistan.
Note that the Punjab government is afraid that if it allows unrestricted selling of wheat to NWFP then at least some of that wheat will be exported to Afghanistan. Of course if that happened it would generate more money for Pakistani farmers giving them an incentive to invest to increase production. Well, can't have that. At the same time the federal government is trying to block import of foreign wheat. In the minds of central planners both imports and exports can be bad at the same time.
Some commentators in Pakistan claim that the central goverment needs to tame those pesky market forces.
Analysts say that a harvest of 20 million tonnes is sufficient for the country’s requirement provided the government can plug smuggling through porous borders with Afghanistan and central Asia. It is also required to evolve a strategy aimed at countering the moves of ‘market forces’ in an effective and meaningful way.
How many other countries mess up their agricultural markets in this fashion so routinely and so drastically? It sounds like the farmers of Pakistan can grow enough wheat to satisfy their markets. But the government intervention surely must be holding back the modernization of Pakistani agriculture. The uncertainty and price fiddling caused by government intervention has to serve as a disincentive for investment in agricultural modernization.
The United States has an assortment of agricultural barriers that seem pretty mild by comparison. For instance,milk products regional markets are structured around subsidies. But it is my understanding that shortages in one region can be met by shipments from another region. There are not barriers to trade so much as barriers to production and subsidies for production. Ditto for the US and peanut growers.
When very left-leaning Bernie Sanders and the most consistently libertarian Republican in the House of Representatives Ron Paul co-sponsor legislation havng to do with exporting of jobs abroad we are not in Kansas any more Toto.
About 50 U.S. House members plan to introduce a bill Wednesday that would deny U.S. companies federal financing and loan guarantees if they shift U.S. jobs overseas.
The proposed Defending American Jobs Act was written by Rep. Bernard Sanders, Independent of Vermont, and will be co-sponsored by about 50 other representatives, including Republicans Ron Paul of Texas and Virgil Goode of Virginia.
Likely Ron Paul saw this as an opportunity to reduce government loan hand-outs and he'd probably be as equally willing to vote for a bill that denied government loans to companies on for any other reason that presented itself as a politically viable reason to restrict some government hand-out. Paul supports free trade so much that he favors the reimportation of price-controlled drugs from Canada (though Sanders may support this as well for different reasons). By contrast, Sanders links to an article on the decline in popular support for free trade.
The Treasurer of the federal government of Australia, Peter Costello, is proposing to encourage Australians to work more years in order to avoid large tax increases to pay for a larger elderly population.
The Australian Treasurer, Peter Costello, will warn today that Australia faces higher taxes, deep Government spending cuts or massive budget deficits unless more mothers and older people stay in the workforce.
Mr Costello will use a speech in Sydney to unveil far-reaching measures to tackle the challenges of Australia's ageing population.
The reforms include changes to make the superannuation system more flexible and encouraging older workers to extend their working lives.
Among Costello's proposals is one to to allow more flexible access to the Australian tax-free savings accounts in order to discourage complete retirement in order to get access to it.
Federal Treasurer Peter Costello today unveiled plans to keep older people in the workforce longer and encourage retirees to take their superannuation savings as a pension rather than as a lump sum.
Australian Prime Minister John Howard agrees.
The Government wanted to cut the eligibility test back so anyone who could work at least 15 hours a week would no longer qualify but the Senate blocked the move.
Yesterday, Mr Howard described the discussion paper's subject as among the most critical facing Australia.
He said Australians should be encouraged to stay in the workforce instead of assuming they had to retire at a certain time of life.
Costello wants a finer granularity test of when retired people are retired or working.
Additional work rules apply to people aged 65 and over. The work test is consistent with superannuation’s intended role as a retirement income vehicle. The rules apply to when a person can make superannuation contributions and when a superannuation fund must pay out benefits. People aged 65 to 74 must work at least 10 hours in each week to be eligible to make contributions; a superannuation fund must also pay out a member’s benefits if they fail this test.
Work opportunities for people over 65 are likely to increase as the population ages. However, the current weekly work test is too stringent and does not accommodate more flexible working arrangements, such as seasonal and irregular part-time work. It also imposes an administrative burden on individuals and superannuation funds.
From 1 July 2004 the Government will change the contribution and cashing rules for people aged 65 to 74 to an annual work test so these rules are consistent with current and future work trends. The Government will consult with the industry and community on an appropriate work test.
One doesn't have to understand the details of Australian retirement tax laws to see the thrust of what Costello is trying to do. He wants people to have more incentives to keep working and paying taxes in order to delay the date when retirees become net burdens to the government. He also wants to reduce the size of the burden by allowing retirees to more advantageously to work in a partially retired status and to switch back and forth between being completely retired and working.
Costello is also proposing changes in the rules for eligibility for complete disability so that some who are currently categorized as totally disabled will instead for part time and provide for some of their support.
Costello says longer work lives are necessary in order to avoid higher taxes.
Keeping taxes at low levels is not only a personal imperative but a national economic imperative as well. Citizens rightly demand that taxes be restrained so that their own financial freedom and prosperity can be improved.
But it is also vital for the economy that taxes are kept as low as possible. High personal taxes stifle incentive and enterprise and high corporate taxes will drive businesses offshore.
We need a tax system that will raise the required revenue to pay for our national defence, our health, our education, our aged.
The United States faces the same problem. The United States also needs to change tax laws, labor laws, and the rules of eligibility for entitlements programs to encourage people to spend more time in the workforce. Currently American politicians are ignoring the problem. By contrast, Australia's top leaders are discussing the problem publically and making substantial proposals to address it.
Update: US Federal Reserve Chairman Allan Greenspan says the retirement age must be raised.
"It's a problem for the U.S. budget," said John Shoven, director of the Stanford Institute for Economic Policy Research. "Economists of all political stripes are worried about this." To Greenspan, the response is inescapable. "We will eventually have no choice but to make significant structural adjustments in the major retirement programs," he said in a statement delivered before the House Budget Committee. He urged several actions to reduce payouts, including raising the age of eligibility for full benefits, now scheduled to rise to 67.
Greenspan says we can not afford to pay for all the commitments we have to retirees.
"We have been making commitments without focusing on our capability of meeting them," Greenspan said. "And I think it is terribly important to make certain that we communicate to the people who are about to retire what it is they are going to have to live with. And if we promise more than we can actually physically deliver, I think it will be a major blot on our whole fiscal process." Greenspan did not buy into Democratic plans to repeal some of Bush's tax cuts. Instead, he urged reducing the deficit mainly through spending cuts.
Read the links and you will see that John Kerry, John Edwards, and other Democrats reacted far more harshly to the proposal than the Republicans did.
Dana Milbank of the Washington Post examines why the Bush Admnistration has repeatedly overestimated both jobs growth and government tax collection revenue.
Figures released by the White House show that its overestimate of job creation in 2003 was the largest forecast error made in at least 15 years, and its 2002 underestimate of the deficit was the largest in at least 21 years. But the statistics show that forecast errors began to increase considerably around 1997, under the Clinton administration. By contrast, the Bush administration's GDP forecasts have been relatively accurate, indicating job growth and tax receipts have shed their historical correlation to GDP growth.
If the economists she is quoting are correct then many people and/or companies are finding new ways to shelter their income from the tax man. I haven't seen this written about anywhere. Does anyone have any idea how and why this is happening? Are more people self-employed and hence in a position to write off more expenses against taxes? Or is a larger fraction of all stock and other assets being held in tax free retirement accounts and hence out of the reach of the tax man?
If anyone can find some relevant links please post them in the comments.
Robert Samuelson points out that 70% of the projected fiscal 2004 budget deficit is not due to Bush's tax cut of 2001.
Democrats commit the same sin. They're gleefully denouncing Bush's tax cuts for the super-rich as creating reckless deficits. This is not exactly true. For fiscal 2004, the Congressional Budget Office has estimated the causes of the swing from a once-predicted surplus to today's deficit as follows: 40 percent, a weaker economy and "technical re-estimates" of spending and taxes; 30 percent, higher spending (mostly for defense and homeland security); and 30 percent, tax cuts. Even without tax cuts -- which also benefit the middle class -- there'd be big deficits.
Samuelson argues that both parties are failing to deal with the long term financial problem that the US government faces. The biggest cause of the financial problem is the growth of the entitlements programs for old age.
In a Business Week article Christopher Farrell say the long-term gap between obligations and tax revenue is in the tens of trillions of dollars.
Taking into account the funds that need to be spent on this demographic time bomb lifts the long-term fiscal gap to $44 trillion. That's the "optimistic" calculation made by sober economists and green-eyeshade budget experts drawn from the U.S. Treasury, the Federal Reserve, the Office of Management & Budget, and the Congressional Budget Office during the tenure of former Treasury Secretary Paul O'Neill.
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The leaders of the study, Jagadeesh Gokhale and Kent Smetters, estimate that restoring fiscal sanity requires either hiking federal income tax collections by 69% or raising payroll taxes by 95%. Don't want to raise taxes? Well, Social Security and Medicare benefits could be slashed by 56%. Another alternative is to cut federal discretionary spending by more than 100% (although that's impossible).
I am skeptical of Farrell's claim that the Bush Administration's restrictions on education spending are going to make matters worse. The whole education industry is incredibly inefficient. It cries out for automation and great reforms to accelerate the rate of education. In fact, one of my favorite policy suggestions to help deal with the declining ratio of net taxpaying workers to retirees and other recipients of government benefits is to acclerate education of the young to put them into the labor market at earlier ages. People who go to college and graduate school and do not enter the labor market until their mid to late 20s are a source of costs rather than sources of tax revenue and production. If children went to school all year around and went to college sooner they'd get into the labor market sooner and become net assets to the economy sooner. This would lower the cost of raising children while simultaneously increasing tax revenues and the proportion of the population that is working.
The CBO projected last summer that the growth in the number of Medicare beneficiaries will rise from about 1 1/2 percent a year between 2005 and 2008. Between 2009 and 2013 that growth doubles to 3 percent. In the years thereafter we see the steady retirement of the baby boom generation.
Medicare and Social Security spending will double by the year 2030.
In his written testimony, he noted that increased demand for Medicare, Medicaid and Social Security will rise significantly as a percentage of GDP. Social Security and Medicare cost $745 billion in 2003, about one-third of government spending and 6.9 percent of GDP.
By 2014, Social Security and Medicare spending is expected to rise to $1.5 trillion, or 42 percent of federal spending and 8.4 percent of GDP. The CBO estimates that this number could rise to more than 14 percent of GDP by 2030.
A Winter 2003 paper from the National Bureau of Economic Research (NBER) examines the effects of existing retirement programs in incentivizing late middle aged people into retiring early in a publication entitled Social Security and Retirement Around the World.
The United States and many other developed countries around the world face looming financial crises in their social security programs. For example, member countries in the Organization for Economic Cooperation and Development are projected to experience a roughly 50% increase in the share of GDP devoted to old age pension expenditures over the next fifty years, from 7.4% of GDP to 10.8% of GDP. (1) The aging of the population is widely recognized as one important cause of these financial crises - most countries' programs are financed on a "pay as you go" basis, and a rising fraction of the population will be retired and collecting benefits as the population ages, causing program expenditures to swell. Less attention has been paid, however, to the fact that the provisions of social security programs often penalize work beyond the first age of benefit eligibility. If workers are induced to retire earlier as a result of these incentives, this will magnify the financial burden caused by population aging.
We need changes in public policy to give people greater incentives to work more years into their early old age. The longer people work the longer they will pay taxes and the less they will receive in benefits from all the other taxpayers. At the same time, the point of entry into the labor force needs to happen sooner in life so that people become taxpayers sooner. But neither political party wants to be the first to tell the public news they are going to be unhappy to hear. Do not expect leadership on this issue to come from elected officials.
Update: In a December 2002 Tech Central Station article Arnold Kling focuses in on the expected growth in Medicare spending and the need to gradually raise the age for Medicare eligibility.
As large as Social Security looms when the Baby Boom retires, it will be smaller as a proportion of GDP than Medicare. An analysis for the Concord Coalition reports that starting from a current ratio of 2.2 percent of GDP and making some conservative assumptions "just the increase in Medicare spending over the next forty years - 4.5 percent of GDP - would be greater than everything we spend today on Social Security."
Arnold is correct. People are going to have to continue under private medical insurance and stay in the workforce longer or the United States is going to become like Europe wi