"Of all external changes, demographics - defined as changes in population, its size, age structure, composition, employment, educational status and income - are the clearest. They are unambiguous. They have the most predictable consequences."
So said the late business thinker and writer Peter Drucker. And when we take a closer look at China's demographic trends, things do not look all that bright.
As is familiar to us all, China has in modern times experienced a remarkable economic transformation, particularly during the period since 1995 when year-on-year compound growth, measured in nominal PPP (Purchasing Power Parity) dollars, has exceeded 11%, a feat unrivaled by any other nation over such an extended period of time. How was this possible?
By mobilizing a vast, under-employed and cheap labor force into becoming the workshop to the world's rich economies, and in the process attracting huge amounts of inward capital and technology investments from rich-world corporations. This economic expansion has been financed through an exceptionally high domestic savings rate, as a well as through positive foreign current account balances cumulatively exceeding 5.0 trillion dollars in the period since 1995.
How likely is it that this state of affairs will continue? Time for a look at China's demographics.
In PPP terms China is already the world's second largest national economy and is slated to overtake number one, the United States, some time during the current decade. But GDP per capita tells an entirely different story. Here we find China in 120th place, with its nearest neighbors on the world rankings being Cook Islands, Jamaica, Monserrat and the Maldives above, and just below we find Equador, Belize, Bosnia and Palau.
In other words, China is a large - but poor - country and is quite likely to remain that way. Here is why.
Thanks not the least to its "one child" policy, China has long suffered from an exceptionally low birth rate, and the trend points toward further deterioration. As a consequence of the same policy there is also a marked unbalance between the number of adult men and women. Some 40 million Chinese will never find a mate.
The country's total population is in the process of peaking, but more disturbing pictures emerge when we look at age group distribution trends.The productive 15-64 years age group has already peaked at 73.6% of total population and will have fallen to 64.5% by 2030 and to 56.6% by 2050. During this same time span the over-65 age group will have grown from a current 8,9% to respectively 22.2% and 33.2%. In other words, China will have grown old before it has had time to become rich.
The already diminishing 15-64 age group will have serious economic consequences, because China's labor force participation within this group is already an extraordinarily high 83%. In comparison we find Germany with 81%, Brazil with 77% and the United States with 73%.
The China-as-world-workshop policy, the linchpin of economic globalization, has been a main cause of the serious imbalances we are now experiencing both in world labor markets as well as world financial markets. These imbalances are currently mainly manifesting themselves in rich world countries, but they will impact China soon enough.
It has long been pointed out that China needs to change tack and steer its economic development towards local consumption rather than savings, investment and export of manufactured goods. The problem is that this is much easier said than done.
A fairly standard national GNP structure is somewhere around 80% consumption and 20% gross investment. In 2011 China we find 46% consumption and 54% investment. On the supply side of the equation, we find 47% of value creation coming from the manufacturing sector. In terms of the national economy, this represents a huge over-capacity which can never be absorbed locally.
An economic restructuring of this magnitude could only lead to massive unemployment and serious social disturbances, to which history has taught us that the Chinese society is prone. Another risk factor in this direction is the country's rapidly growing income inequality as measured by the Gini index. Over a period of just two recent years China's position on this index has deteriorated by 16 percentage points.
And there is a diminishing probability that China's excess industrial capacity will continue to be absorbed by the rich-world economies, in the short term because they will not have the money, and in the longer term because the world manufacturing labor market will have to be brought back into balance to avoid unacceptably high rich-world unemployment rates. We already see signs of this happening in the United States, as steeply rising labor rates and general logistics costs are beginning to erode China's low cost advantage in some industrial sectors.
While total population is peaking, the rate of urbanization will continue unabated. By 2030 China's urban population will have increased by some 50% to nearly one billion people. Imagine the infrastructure investment requirements this will lead to. Where will the money come from, as exports and inward investments dry up? And does China have land and water resources to adequately feed such a large urban population without massive imports of food and energy?
Finally, in China there is hardly any health care and social security net to deal with more than 300 million old people by 2030. Where will the money for that come from?
There seems to be current consensus that China will continue to grow at a blistering pace, no longer at 11% per year but maybe at 7%. I would not bet on it.
Sunday, June 10, 2012
Thursday, May 3, 2012
TRICKLE-DOWN ECONOMICS
The best definition of Trickle-Down Economics I can think of is the metaphor about the richest 1% up in the tree eating cherries while popping the pits down on the 99% percent down below.
Economic activity is not driven by supply but by demand. Demand will generate supply, while it should be fairly obvious to anyone that supply without purchasing power generates only bankrupt companies unable to sell what is on offer. And to generate demand it is the 99% that need to be employed at decent wages. The 1% may have tons of money, but as consumers and generators of demand and economic activity they are not worth beans.
In case you are unaware of this, out of every 100 dollars of U.S. Gross Domestic Product, 75 dollars are generated by household consumption, 15 dollars from consumption by government (federal, state and local), with only 15 dollars being channeled towards gross private and public investment. You will have noticed that this adds up to 105 rather than 100 dollars. That is because we consume 5% more than we produce by importing from other countries more than we sell to them.
The above should make it pretty obvious where the attention has to be: ON THE PURCHASING POWER OF THE CONSUMER, NOT ON THE INVESTOR .
Henry Ford understood the relationship between demand and ability to purchase when he invented assembly line mass production of automobiles in the early 1920s. He doubled wages to 5 dollars per day so that his workers could afford to buy all those cars he was now able to turn out. The lesson has obviously long been lost.
Some politicians and pundits talk and think as if we were in an ordinary garden-variety short term cyclical recession, and that all we need is some fiscal discipline and lower taxes on wealthy one-percenters and corporations for them to regain confidence enough to start creating jobs with their idle cash. Those politicians and pundits are barking up the wrong tree.
From the time globalization got under way in a big way in the early 1980s, median U.S. household income measured in constant 2010 dollars has increase by 0.2% per year. In other words, not grown at all. Between 1999 and 2010 household income actually fell by 12% in real terms. But with credit being abundantly available consumption continued unabated, coming to a screeching halt only after household debt had doubled to an unsustainable 200% of median income and home equity collateral had disappeared.
Why has household income stagnated and declined, instead of accompanying the annual 2.3% real growth in gross national product during the period? After all, that was the way it used to be. It is because globalization in short order doubled the world labor force, and that over-supply of labor drove down wages everywhere. This has caused a massive transfer of wealth from the consuming 85% of the economy to the investing (and gambling) 15%.
And where did all that abundant credit come from? Thanks to globalization (and increasing oil prices) the value of world trade grew faster than the world economy. While you'd think world trade by definition should be a zero sum game (world exports equaling world imports), unfortunately this does not quite hold true. Most of the main export-driven economies and oil producers have no ready use for all the money they are raking in and consequently run huge current account surpluses.
These surpluses in turn have left the world financial system awash in funds for which the bankers desperately needed to find profitable outlets. Too much cash chasing too few quality investment opportunities drives bankers to increasing financial ingenuity, skullduggery and risk-taking. The first installment of that saga blew up in the face of western taxpayers in 2008, and worse is yet to come from a probable implosion of the Euro monetary union.
Let us have no illusions. We have been digging ourselves a hole for some 25 years, and it is not going to be easy nor painless to dig out again. We have accumulated the mother of all world debt overhangs which have to be pared back to sustainable levels. Since one person's or nation's debt is another's asset, much of those assets are in fact smoke and mirrors.
And then there is the unbalanced pattern of trade created by the globalization of world labor and the hunt for the lowest common denominator, which is fundamentally how we got ourselves into this mess. Until we find ways to gainfully employ the 99% at home where consumption takes place, the hole we have dug will just continue to deepen.
Economic activity is not driven by supply but by demand. Demand will generate supply, while it should be fairly obvious to anyone that supply without purchasing power generates only bankrupt companies unable to sell what is on offer. And to generate demand it is the 99% that need to be employed at decent wages. The 1% may have tons of money, but as consumers and generators of demand and economic activity they are not worth beans.
In case you are unaware of this, out of every 100 dollars of U.S. Gross Domestic Product, 75 dollars are generated by household consumption, 15 dollars from consumption by government (federal, state and local), with only 15 dollars being channeled towards gross private and public investment. You will have noticed that this adds up to 105 rather than 100 dollars. That is because we consume 5% more than we produce by importing from other countries more than we sell to them.
The above should make it pretty obvious where the attention has to be: ON THE PURCHASING POWER OF THE CONSUMER, NOT ON THE INVESTOR .
Henry Ford understood the relationship between demand and ability to purchase when he invented assembly line mass production of automobiles in the early 1920s. He doubled wages to 5 dollars per day so that his workers could afford to buy all those cars he was now able to turn out. The lesson has obviously long been lost.
Some politicians and pundits talk and think as if we were in an ordinary garden-variety short term cyclical recession, and that all we need is some fiscal discipline and lower taxes on wealthy one-percenters and corporations for them to regain confidence enough to start creating jobs with their idle cash. Those politicians and pundits are barking up the wrong tree.
From the time globalization got under way in a big way in the early 1980s, median U.S. household income measured in constant 2010 dollars has increase by 0.2% per year. In other words, not grown at all. Between 1999 and 2010 household income actually fell by 12% in real terms. But with credit being abundantly available consumption continued unabated, coming to a screeching halt only after household debt had doubled to an unsustainable 200% of median income and home equity collateral had disappeared.
Why has household income stagnated and declined, instead of accompanying the annual 2.3% real growth in gross national product during the period? After all, that was the way it used to be. It is because globalization in short order doubled the world labor force, and that over-supply of labor drove down wages everywhere. This has caused a massive transfer of wealth from the consuming 85% of the economy to the investing (and gambling) 15%.
And where did all that abundant credit come from? Thanks to globalization (and increasing oil prices) the value of world trade grew faster than the world economy. While you'd think world trade by definition should be a zero sum game (world exports equaling world imports), unfortunately this does not quite hold true. Most of the main export-driven economies and oil producers have no ready use for all the money they are raking in and consequently run huge current account surpluses.
These surpluses in turn have left the world financial system awash in funds for which the bankers desperately needed to find profitable outlets. Too much cash chasing too few quality investment opportunities drives bankers to increasing financial ingenuity, skullduggery and risk-taking. The first installment of that saga blew up in the face of western taxpayers in 2008, and worse is yet to come from a probable implosion of the Euro monetary union.
Let us have no illusions. We have been digging ourselves a hole for some 25 years, and it is not going to be easy nor painless to dig out again. We have accumulated the mother of all world debt overhangs which have to be pared back to sustainable levels. Since one person's or nation's debt is another's asset, much of those assets are in fact smoke and mirrors.
And then there is the unbalanced pattern of trade created by the globalization of world labor and the hunt for the lowest common denominator, which is fundamentally how we got ourselves into this mess. Until we find ways to gainfully employ the 99% at home where consumption takes place, the hole we have dug will just continue to deepen.
Thursday, April 19, 2012
ANDERS BEHRING BREIVIK
As I am sure you already know, Anders Behring Breivik is the miserable lunatic who in my country of birth on June 22, 2011 detonated a car bomb at the government office quarters in central Oslo with the loss of 8 lives, and from where he proceeded by car and ferry to the traditional annual Labor Party youth summer camp at the Utøya island, mercilessly stalking and shooting to death 69 unarmed youth while fronting as a police officer there to protect them.
His stated motive? Hatred of government institutions for not doing anything to protect pristine Nordic ethnicity from the evils of encroachment by Muslims and immigrants. If it sounds like Hitler to you, you are on the right track.
Let us draw a parallel with Timothy McVeigh and his Oklahoma City car bomb which he detonated on April 19, 1995 killing 168 and injuring close to 700 people. McVeigh also hated his federal government and what he viewed as its liberal policies, confessed his crime and expressed no remorse. He was executed by lethal injection on June 11, 2001.
After lengthy jockeying back and forth among psychiatric commissions and other "experts" in the vagaries of the human mind, it was finally settled that Anders Behring Breivik is not mentally impaired to stand trial. It will however be up to the court to finally decide whether he shall be incarcerated as a criminal or parked in an asylum for the insane. It's going to be a tough call.
The trial began on April 15 and is scheduled to last for 10 weeks. A frenzied debate preceded the trial about whether the press should have free access to the proceedings. It was ruled that the press should indeed be there and the usual circus has ensued, giving Breivik wide latitude to publicly air his sick social theories, insult the judges, claiming to be victim rather than offender and declaring that his only remorse is not having had the opportunity to kill even more people. In return the mass murderer is not handcuffed, is received in court with cordial handshakes and is generally being treated respectfully as any lawful citizen. I am not certain whether he also is being treated to coffee with cream and sugar, but I would not be surprised.
Norway formally abolished the death penalty in 1979, the last execution having taken place in 1948. There is no provision for life imprisonment in Norway. The maximum sentence is 21 years, although there seems to be some leeway to extend this to 30 years in cases of Breivik's magnitude. Maximum security prisons in Norway are country clubs compared to U.S. standards -bright cells with large unbarred windows, modernistic IKEA furniture, flat screen TV and private bath.
Here is my dilemma. Have my fellow Norwegians gone totally bananas with their liberal ideas about polite decency under any and all circumstances? My gut feeling is that Anders Behring Breivik should be burnt at the stake, but my brain intercedes insidiously with the following:
Are those very same Norwegians on to something that is actually pretty clever? If we can agree on the concept of justice as a tool of prevention rather than a means of social revenge, what is then more likely to turn world opinion off on Anders Behring Breivik and his ilk - and we know they are out there and only too ready to perpetrate great harm. Letting Breivik expose himself in all his lunacy for the whole world to see while being treated as a gentleman, or keeping it all under close wraps and let imagination fester? Breivik has already complained bitterly that the prosecution is trying to make him look ridiculous.
You be the judge.
His stated motive? Hatred of government institutions for not doing anything to protect pristine Nordic ethnicity from the evils of encroachment by Muslims and immigrants. If it sounds like Hitler to you, you are on the right track.
Let us draw a parallel with Timothy McVeigh and his Oklahoma City car bomb which he detonated on April 19, 1995 killing 168 and injuring close to 700 people. McVeigh also hated his federal government and what he viewed as its liberal policies, confessed his crime and expressed no remorse. He was executed by lethal injection on June 11, 2001.
After lengthy jockeying back and forth among psychiatric commissions and other "experts" in the vagaries of the human mind, it was finally settled that Anders Behring Breivik is not mentally impaired to stand trial. It will however be up to the court to finally decide whether he shall be incarcerated as a criminal or parked in an asylum for the insane. It's going to be a tough call.
The trial began on April 15 and is scheduled to last for 10 weeks. A frenzied debate preceded the trial about whether the press should have free access to the proceedings. It was ruled that the press should indeed be there and the usual circus has ensued, giving Breivik wide latitude to publicly air his sick social theories, insult the judges, claiming to be victim rather than offender and declaring that his only remorse is not having had the opportunity to kill even more people. In return the mass murderer is not handcuffed, is received in court with cordial handshakes and is generally being treated respectfully as any lawful citizen. I am not certain whether he also is being treated to coffee with cream and sugar, but I would not be surprised.
Norway formally abolished the death penalty in 1979, the last execution having taken place in 1948. There is no provision for life imprisonment in Norway. The maximum sentence is 21 years, although there seems to be some leeway to extend this to 30 years in cases of Breivik's magnitude. Maximum security prisons in Norway are country clubs compared to U.S. standards -bright cells with large unbarred windows, modernistic IKEA furniture, flat screen TV and private bath.
Here is my dilemma. Have my fellow Norwegians gone totally bananas with their liberal ideas about polite decency under any and all circumstances? My gut feeling is that Anders Behring Breivik should be burnt at the stake, but my brain intercedes insidiously with the following:
Are those very same Norwegians on to something that is actually pretty clever? If we can agree on the concept of justice as a tool of prevention rather than a means of social revenge, what is then more likely to turn world opinion off on Anders Behring Breivik and his ilk - and we know they are out there and only too ready to perpetrate great harm. Letting Breivik expose himself in all his lunacy for the whole world to see while being treated as a gentleman, or keeping it all under close wraps and let imagination fester? Breivik has already complained bitterly that the prosecution is trying to make him look ridiculous.
You be the judge.
Friday, December 2, 2011
"GERMANY LOVES EUROPE, BUT NOT THE EURO"
Wolfgang Ishinger, ex-deputy foreign minister of Germany, published and op-ed article in the October 12, 2011 edition of The New York Times in which he argues that for prime minister Angela Merkel to convince her countrymen on saving the Euro, the arguments must be couched in the importance to Germany of preserving the European union, rather than placing emphasis on saving the Euro. Most Germans, according to Mr. Ishinger, never liked the Euro in the first place and wish they had the German Mark back.
They should be careful, lest their wish comes true.
The whole Euro project was built on flimsy foundations from the very beginning, and its current travails should come as no surprise. A common currency joining disparate nations, languages and cultures without common and enforceable fiscal policies cannot and will not work smoothly, neither in theory nor in practice.
Sure, there was at the outset a mutual undertaking of fiscal prudence, where any member state running budget deficits in excess of 3% of GDP would be subject to substantial fines. And who were the first ones to ditch this undertaking? You guessed it - Germany and France, the two largest members of the club which used their clout to avoid any further talk of the stiff penalties which they themselves originally insisted on.
And - say the Germans - why should we now, after having pinched and saved and made sacrifices to keep our wage levels competitive, have to pay for the indiscipline of others? Well, one answer which comes to mind is that Germany is conceivably the only European nation that has had any real benefit from the Euro.
Where do you think the German Mark exchange rate would have been these days, and what do you think it would have done to the competitive position of German exports, the main engine of the nation's prosperity?
Sure, a stable Euro and the possibility of borrowing cheaply unlimited amounts of money gave Greece, Spain, Portugal and Ireland a temporary high, until the financial markets woke up to the fact that - hey! - we may not get any of that money back. Now these and other Euro club members are stuck with the unenviable - not to say impossible - task of deflating their economies and living standards back to pre-Euro levels, and in the process hurting the German economy by their Euro-associates not being able to afford their products anymore. After all, Europe is by far Germany's main export market.
Germany, stop whining and start fixing. If or when the Euro falls apart, you will be the biggest loser.
They should be careful, lest their wish comes true.
The whole Euro project was built on flimsy foundations from the very beginning, and its current travails should come as no surprise. A common currency joining disparate nations, languages and cultures without common and enforceable fiscal policies cannot and will not work smoothly, neither in theory nor in practice.
Sure, there was at the outset a mutual undertaking of fiscal prudence, where any member state running budget deficits in excess of 3% of GDP would be subject to substantial fines. And who were the first ones to ditch this undertaking? You guessed it - Germany and France, the two largest members of the club which used their clout to avoid any further talk of the stiff penalties which they themselves originally insisted on.
And - say the Germans - why should we now, after having pinched and saved and made sacrifices to keep our wage levels competitive, have to pay for the indiscipline of others? Well, one answer which comes to mind is that Germany is conceivably the only European nation that has had any real benefit from the Euro.
Where do you think the German Mark exchange rate would have been these days, and what do you think it would have done to the competitive position of German exports, the main engine of the nation's prosperity?
Sure, a stable Euro and the possibility of borrowing cheaply unlimited amounts of money gave Greece, Spain, Portugal and Ireland a temporary high, until the financial markets woke up to the fact that - hey! - we may not get any of that money back. Now these and other Euro club members are stuck with the unenviable - not to say impossible - task of deflating their economies and living standards back to pre-Euro levels, and in the process hurting the German economy by their Euro-associates not being able to afford their products anymore. After all, Europe is by far Germany's main export market.
Germany, stop whining and start fixing. If or when the Euro falls apart, you will be the biggest loser.
FUNDING THE U.S. FEDERAL GOVERNMENT
The debates around the Federal budget deficit and what to do with it is a classical case of not seeing the forest for all the trees. Let us start with a broad structural framework and stop getting lost among all the single issues and opinions that are out there.
United States federal government expenditures currently amount to about 25% of GDP.
I would consider this a reasonable long term target level, but one not necessarily that easy to stay within given increasing health care cost and pension obligation trends. Nevertheless, by making necessary long term structural adjustments to the expenditures side of the equation, 25% should be a reasonable target to aim for and stick with.
In current 2011 dollars, we are thus talking about an annual funding requirement of approximately $4.0 trillion.
Here is how I would propose to raise the money.
FEDERAL PERSONAL INCOME TAX
Income tax should be payable on all personal income, whether on salaries, wages, interest or capital gains, levied at a rate of 30% on the nation's top 10% income group. In accordance with 2010 Internal Revenue Service data, the income split point for this group was $113,800, and the group reported income of $3.9 trillion. Thus, this tax rate would raise about $1.2 trillion.
Incidentally, the top 10% income group in 2010 already paid 70% of all federal income tax revenue under the current tax code, but at an average effective rate of only 18.7%.
Those below the income split point of $113,800, but above $33,100, would pay 15%, which would raise a further $0.5 trillion. Earners below $33,100 would pay no income tax.
There would be no exemptions or deductions, other than on capital gains from the sale of a primary residence. The income tax declaration form would be a one-page document.
PAYROLL TAXES
Federal payroll taxes would be abolished, stimulating job creation and diminishing the fiscal and bureaucratic burden on small businesses which overwhelmingly are the nation's main job creators, as well as reducing the need for federal control and enforcement bureaucracies.
CORPORATE FEDERAL INCOME TAX
Corporations would no longer pay federal income tax, under the philosophy that income should be taxed only as received by the individual shareholder in the form of dividends or capital gains on sale of their shares.
Although business lobbies carp about the 35% nominal federal corporate income tax rate being among the world's highest, the naked fact is that U.S. corporations - particularly the larger ones able to hire sophisticated and expensive tax accountants - actually pay little or no income tax to the federal government.
So let us stop this whole charade. I know the idea would not be welcome with the lobbying, legal and accounting professions, where dribbling the federal corporate tax code is an important source of income. On the other hand, and what is more important, it would presumably induce U.S. corporations to conduct their business at home rather than overseas.
FINANCIAL TRANSACTIONS TAX
The aggregate value of all annual financial transactions in the United States currently amount to some $750 trillion. A one third of one percent tax on these would raise close to $2.5 trillion.
This 0.33% levy would be collected on your behalf by financial institutions every time monies leave your account, being that personal or corporate, regardless purpose or destination of funds.
Such a levy would not be regressive, it would be easy to collect, administer and control, and to boot discourage a certain amount of entirely unproductive financial churning caused by the trends towards "financialization" of the economy.
IN CONCLUSION
So there we are: With a few simple and straight+forward strokes we have raised the $4 trillion needed by the federal government to do what it needs to do, with a bit to spare.
We also have in the process eliminated several thousand pages of tax code, reduced the work load on Congress so that they may hopefully find more constructive things to do and, admittedly, also robbed a comfortable livelihood from several thousand legal and tax specialists.
The economically better off among the citizenry would be paying a fair and affordable share of their incomes in taxes, and corporate America no longer would have an excuse for failing to invest at home because the federal government is in their way.
It's not that complicated, is it?
United States federal government expenditures currently amount to about 25% of GDP.
I would consider this a reasonable long term target level, but one not necessarily that easy to stay within given increasing health care cost and pension obligation trends. Nevertheless, by making necessary long term structural adjustments to the expenditures side of the equation, 25% should be a reasonable target to aim for and stick with.
In current 2011 dollars, we are thus talking about an annual funding requirement of approximately $4.0 trillion.
Here is how I would propose to raise the money.
FEDERAL PERSONAL INCOME TAX
Income tax should be payable on all personal income, whether on salaries, wages, interest or capital gains, levied at a rate of 30% on the nation's top 10% income group. In accordance with 2010 Internal Revenue Service data, the income split point for this group was $113,800, and the group reported income of $3.9 trillion. Thus, this tax rate would raise about $1.2 trillion.
Incidentally, the top 10% income group in 2010 already paid 70% of all federal income tax revenue under the current tax code, but at an average effective rate of only 18.7%.
Those below the income split point of $113,800, but above $33,100, would pay 15%, which would raise a further $0.5 trillion. Earners below $33,100 would pay no income tax.
There would be no exemptions or deductions, other than on capital gains from the sale of a primary residence. The income tax declaration form would be a one-page document.
PAYROLL TAXES
Federal payroll taxes would be abolished, stimulating job creation and diminishing the fiscal and bureaucratic burden on small businesses which overwhelmingly are the nation's main job creators, as well as reducing the need for federal control and enforcement bureaucracies.
CORPORATE FEDERAL INCOME TAX
Corporations would no longer pay federal income tax, under the philosophy that income should be taxed only as received by the individual shareholder in the form of dividends or capital gains on sale of their shares.
Although business lobbies carp about the 35% nominal federal corporate income tax rate being among the world's highest, the naked fact is that U.S. corporations - particularly the larger ones able to hire sophisticated and expensive tax accountants - actually pay little or no income tax to the federal government.
So let us stop this whole charade. I know the idea would not be welcome with the lobbying, legal and accounting professions, where dribbling the federal corporate tax code is an important source of income. On the other hand, and what is more important, it would presumably induce U.S. corporations to conduct their business at home rather than overseas.
FINANCIAL TRANSACTIONS TAX
The aggregate value of all annual financial transactions in the United States currently amount to some $750 trillion. A one third of one percent tax on these would raise close to $2.5 trillion.
This 0.33% levy would be collected on your behalf by financial institutions every time monies leave your account, being that personal or corporate, regardless purpose or destination of funds.
Such a levy would not be regressive, it would be easy to collect, administer and control, and to boot discourage a certain amount of entirely unproductive financial churning caused by the trends towards "financialization" of the economy.
IN CONCLUSION
So there we are: With a few simple and straight+forward strokes we have raised the $4 trillion needed by the federal government to do what it needs to do, with a bit to spare.
We also have in the process eliminated several thousand pages of tax code, reduced the work load on Congress so that they may hopefully find more constructive things to do and, admittedly, also robbed a comfortable livelihood from several thousand legal and tax specialists.
The economically better off among the citizenry would be paying a fair and affordable share of their incomes in taxes, and corporate America no longer would have an excuse for failing to invest at home because the federal government is in their way.
It's not that complicated, is it?
Friday, October 28, 2011
WORLD FINANCIALIZATION
What? Financialization?
Yes, apparently there is such a word, although I have been unable to trace it to any dictionary in my possession. Wikipedia, where I came across this literary monstrocity, defines it thus:
A term that describes an economic system or process that attempts to reduce all value that is exchanged (whether a tangible, intangible, future or present promises to pay) into a financial instrument, or a derivative of a financial instrument.
The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus to facilitate trade of such products or services among people.
Modern banking originated during the Middle Ages with merchants linked to the production and trade of grains on the Italian Lombard plains, a place name that has remained associated with banking to this day. The farmer could raise money to cover expenditures against a promise to deliver his crop at harvest time to a merchant banker against an agreed price. This was a risky business, calling for a high nominal interest on the monies thus lent. Since both the Catholic Church and Islam condemned usury, the business became dominated by Jews, who were under no such religious constraint. In time, merchant banking activities expanded to include both insurance against crop failure, as well as guarantee of future delivery to distant markets at a predetermined price.
The more successful of the merchant banking families became exceedingly wealthy, and went looking for profitable applications of surplus capital beyond their traditional metier, such as lending to kings, princes and their likes.
The main form of government deficit financing in those times was to cover war expenditures. These were not always repayable, and consequently bankrupt kings would in turn bankrupt their Jewish creditors by declining to honor their debt and banning them from their kingdom. End of problem.
Those were simpler times, if not necessarily happier ones. Now the the world, and particularly the developed western portion of it, is staring into an abyss of financial turmoil and accompanying economic hardships of unknown proportions and consequences.
Financialization - in other words, creation of money - was once a pretty straight forward concept. That is no longer so.
Traditionally, the most relevant and closely watched monetary index was that of M3, the widest aggregate definition of money in circulation. There used to be a fairly close correlation between M3 and the state and likely course of the economy. This correlation seemed to be slipping during the 1990s, and particularly so after the repeal of the Glass-Steagall Act of 1933 and the consequent deregulation of the financial markets in function of the Financial Services Modernization Act of 1999.
As a result of this apparent decoupling of M3-to-GDP relationship, the Federal Reserve decided in March 2006 to cease compiling and publishing M3 data. The justification was that M3 no longer told us anything about the economy that we could not just as easily surmise from M2 data. The additional work and expense involved in compiling M3 data was therefore no longer thought to be justified.
Here I have to ask myself: could the real reason be that the Federal Reserve had simply lost control of aggregate money supply as a consequence of financial deregulation and the creativity of the financial industry in coming up with ever more exotic financial instruments, many of which are traded privately, off balance sheet and out of sight, involving staggering amounts of money?
Here is one reason why I am asking: In 1970, world M3 was estimated at $2 trillion, at a time when world GDP was $3.7 trillion in nominal 1970 dollars. This gives a M3-to-GDP ratio of 54%. In 2008, world M3 was estimated at $62 trillion and nominal world GDP $59 trillion, a M3-to-GDP ratio of 105%.
Historical data indicate that the 1970 M3-to-GDP ratio was a fairly representative one for the world economic conditions at the time. If a a 54% ratio kept the world economy ticking over at a pretty healthy clip in the 1960s and 1970s, why should not a M3 of $32 trillion do the job in 2008? Where have those extra $30 trillion come from? Are they indeed real money, or just smoke and mirrors?
Since we are talking of values equivalent to half the entire world GDP, this is not pocket change.
The doubling of "money" during the last 40 years also finds a parallel in the United States, where financial industry profits went from 4 percent of GDP in 1970 to 8 percent on the eve of the 2008 financial crash.
So, let us return to the Wikipedia definition: "The original intent of financialization is to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus to facilitate trade of such products or services among people".
I can by this only conclude that there must be a lot of "money" in circulation these days that do not facilitate trade among people, but is just sloshing around the financial industry, to no common benefit but that of the financiers and their shareholders. That is, at least until the day when the smoke blows away and the mirrors break, and when the common taxpayer is called to the ramparts to save the day, once again.
If you are scared of what could happen, you are probably not scared enough.
Yes, apparently there is such a word, although I have been unable to trace it to any dictionary in my possession. Wikipedia, where I came across this literary monstrocity, defines it thus:
A term that describes an economic system or process that attempts to reduce all value that is exchanged (whether a tangible, intangible, future or present promises to pay) into a financial instrument, or a derivative of a financial instrument.
The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus to facilitate trade of such products or services among people.
Modern banking originated during the Middle Ages with merchants linked to the production and trade of grains on the Italian Lombard plains, a place name that has remained associated with banking to this day. The farmer could raise money to cover expenditures against a promise to deliver his crop at harvest time to a merchant banker against an agreed price. This was a risky business, calling for a high nominal interest on the monies thus lent. Since both the Catholic Church and Islam condemned usury, the business became dominated by Jews, who were under no such religious constraint. In time, merchant banking activities expanded to include both insurance against crop failure, as well as guarantee of future delivery to distant markets at a predetermined price.
The more successful of the merchant banking families became exceedingly wealthy, and went looking for profitable applications of surplus capital beyond their traditional metier, such as lending to kings, princes and their likes.
The main form of government deficit financing in those times was to cover war expenditures. These were not always repayable, and consequently bankrupt kings would in turn bankrupt their Jewish creditors by declining to honor their debt and banning them from their kingdom. End of problem.
Those were simpler times, if not necessarily happier ones. Now the the world, and particularly the developed western portion of it, is staring into an abyss of financial turmoil and accompanying economic hardships of unknown proportions and consequences.
Financialization - in other words, creation of money - was once a pretty straight forward concept. That is no longer so.
Traditionally, the most relevant and closely watched monetary index was that of M3, the widest aggregate definition of money in circulation. There used to be a fairly close correlation between M3 and the state and likely course of the economy. This correlation seemed to be slipping during the 1990s, and particularly so after the repeal of the Glass-Steagall Act of 1933 and the consequent deregulation of the financial markets in function of the Financial Services Modernization Act of 1999.
As a result of this apparent decoupling of M3-to-GDP relationship, the Federal Reserve decided in March 2006 to cease compiling and publishing M3 data. The justification was that M3 no longer told us anything about the economy that we could not just as easily surmise from M2 data. The additional work and expense involved in compiling M3 data was therefore no longer thought to be justified.
Here I have to ask myself: could the real reason be that the Federal Reserve had simply lost control of aggregate money supply as a consequence of financial deregulation and the creativity of the financial industry in coming up with ever more exotic financial instruments, many of which are traded privately, off balance sheet and out of sight, involving staggering amounts of money?
Here is one reason why I am asking: In 1970, world M3 was estimated at $2 trillion, at a time when world GDP was $3.7 trillion in nominal 1970 dollars. This gives a M3-to-GDP ratio of 54%. In 2008, world M3 was estimated at $62 trillion and nominal world GDP $59 trillion, a M3-to-GDP ratio of 105%.
Historical data indicate that the 1970 M3-to-GDP ratio was a fairly representative one for the world economic conditions at the time. If a a 54% ratio kept the world economy ticking over at a pretty healthy clip in the 1960s and 1970s, why should not a M3 of $32 trillion do the job in 2008? Where have those extra $30 trillion come from? Are they indeed real money, or just smoke and mirrors?
Since we are talking of values equivalent to half the entire world GDP, this is not pocket change.
The doubling of "money" during the last 40 years also finds a parallel in the United States, where financial industry profits went from 4 percent of GDP in 1970 to 8 percent on the eve of the 2008 financial crash.
So, let us return to the Wikipedia definition: "The original intent of financialization is to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus to facilitate trade of such products or services among people".
I can by this only conclude that there must be a lot of "money" in circulation these days that do not facilitate trade among people, but is just sloshing around the financial industry, to no common benefit but that of the financiers and their shareholders. That is, at least until the day when the smoke blows away and the mirrors break, and when the common taxpayer is called to the ramparts to save the day, once again.
If you are scared of what could happen, you are probably not scared enough.
Thursday, September 22, 2011
"READ MY LIPS - NO NEW TAXES!"
So said president George H. W. Bush during his election campaign. Elected, he did raise taxes and became a one-term president.
There are now even more dogmatic elected anti-tax representatives in Congress, playing Russian roulette with budgetary and debt ceiling issues at a time when the federal government of the United States is facing an in modern times unprecedented deficit, equal to 11% of Gross Domestic Product. This takes us somewhere north of annually missing 1,600 billion dollars to balance the books. While federal government revenues from taxes and other sources represent about 14% of GDP, expenditures amount to 25%. According to the dogmatists, mostly to be found within the Republican Tea Party movement, this gap is supposed to be closed without recourse to higher government revenues - in any shape or form.
This is total fantasy.
Even making some fairly heroic assumptions about the course of the economy over the next 10 years, government revenue as a percentage of GDP will, as far as I can surmise, have to be raised by some 10 percentage points on GDP over current levels to see the United States through to a balanced budget by 2020.
In trying to look objectively at this issue, a quick overview of the financial structure of U.S. governance will be helpful, since it is different from that of other countries one often compares it with.
While budget talks in Washington DC revolve around revenues and expenditures of the federal government, state and local governments generate their own expenditures and collect their own revenues (complemented by some 550 billion dollars of annual transfers from the federal government). With the exception of Vermont, state and local government budgets need to be balanced under a variety of rules, while that of the federal government is under no such restraint.
However, for the federal government to run a deficit it has to obtain the authorization of Congress to borrow money to fund it. Originally such authorization had to be sought on a case-by-case basis, but in 1917 Congress resolved to rationalize the process by stipulating debt ceilings within which the executive branch is at liberty to issue the required government debt instruments. The debt ceiling was raised annually during World War II and has been raised 74 times since 1962.
Note that any such borrowing will always be the result of a budget deficit a priori approved by Congress, so for Congress to procrastinate on raising debt ceilings to accommodate the deficit it has already approved seems to makes no procedural sense.
Currently, total federal, state and local revenues represent 30% of GDP, while total expenditures represent 41%. With state and local government budgets in balance, we end up with the same 11% federal deficit referred to above. As far as total national government expenditures go, this still leaves the United States fairly far down on the international totem pole. A representative cross section of other developed economies show an average of around 45% of GDP.
We can probably all agree that an 11% deficit is no way to manage the world's designated superpower. But when it comes to solving the problem, political courage and common sense tend to be left at the door. And the elephants in the china shop are called Health Care, Social Security and Unfunded Government Pension Entitlements, granted by law in bygone and happier times when the days of demographic reckoning were decades into the future. Mind, this is not a uniquely American problem. Most other developed nations are to varying degrees in a similar quandary about long term entitlement funding.
On the combined federal, state and local expenditures side, I cannot for the life of me see how they will drop below 40% of GNP in foreseeable future. Between now and 2020 the number of Medicare and Medicaid recipients will increase by some 20 million. Per capita health care costs have a history of increasing at twice the rate of GNP over the last 40 years, and there are powerful vested interests within the health care industry against any change to this trend. The industry is the second largest spender on lobbying Congress, neck-to-neck with Finance, Insurance & Real Estate.
By stint of demographic realities, Social Security and government pension obligations, the second biggest budgetary items, will have increased by 50% in 2020 measured in constant 2010 dollars.
Number three on the list, defense spending, can and most probably will see reductions from its current 6.5% of GDP, but within the big picture this will not make all that much difference, particularly since there are other issues such as public infrastructure and education that could do with additional long term funding.
The expenditures referred to above currently consume close to 70% of joint federal, state and local revenues, leaving little room for substantial and politically digestible cuts from other holds.
On the revenue side of things there is the level of economic activity to consider, as well as the level of taxation. Consumer spending is the main driver of the U.S. economy, and the immediate outlook on this front is not encouraging.
Average household income measured in constant 2010 dollars has fallen by 12% during the last 10 years. During the same time the debt-to-household income ratio has gone from 1.02 in 2000 to 1.92 in 2010, having peaked in 2008 at 2.14. It may well take until 2020 for the average U.S. household to repair its balance sheet, during which period one can only hope that the trend of steadily falling real household income levels will be reversed.
If we take 2020 as a target for reestablishing economic normality, some 12 million new jobs must have been created between now and then to reach full employment. This should not be all that hard, but would take some determined and creative action. During Clinton's two presidential terms 22.7 million jobs were created, and the federal budget generated a substantial surplus. There is talk of a national development bank. Brazil has operated such an institution for decades with considerable positive effect. To this I would add incentives for bringing back industrial jobs from abroad. For more on this, visit THE U.S. ECONOMY - A STRUCTURAL PROBLEM.
So, let us not be fooled. Government revenues will have to be raised, and not only from the super-wealthy few, while the tax code needs to be restructured and simplified. For example, while the nominal U.S. corporate income tax rate is a relatively high 35%, actual tax collected by the federal government amounts to only 10% of total corporate income, thanks to exemptions, loopholes and tax deferment opportunities allowed in the tax code. The New York Times recently referred to a study pointing out that some very profitable major U.S. corporations actually pay less federal income tax than the remuneration they pay their chief executive officer.
On the expenditures side, the restructuring task is gargantuan, particularly in the out-of-control health care sector. And the scary part is that political leadership and patriotic consensus-seeking among lawmakers to get the job done is nowhere to be seen.
The demographics and a resourceful populace of the United States leave me optimistic for the long term, but prospects for the next ten years or so look grim. We can only hope that the nation will recover its footing and legendary recuperative abilities soon.
There are now even more dogmatic elected anti-tax representatives in Congress, playing Russian roulette with budgetary and debt ceiling issues at a time when the federal government of the United States is facing an in modern times unprecedented deficit, equal to 11% of Gross Domestic Product. This takes us somewhere north of annually missing 1,600 billion dollars to balance the books. While federal government revenues from taxes and other sources represent about 14% of GDP, expenditures amount to 25%. According to the dogmatists, mostly to be found within the Republican Tea Party movement, this gap is supposed to be closed without recourse to higher government revenues - in any shape or form.
This is total fantasy.
Even making some fairly heroic assumptions about the course of the economy over the next 10 years, government revenue as a percentage of GDP will, as far as I can surmise, have to be raised by some 10 percentage points on GDP over current levels to see the United States through to a balanced budget by 2020.
In trying to look objectively at this issue, a quick overview of the financial structure of U.S. governance will be helpful, since it is different from that of other countries one often compares it with.
While budget talks in Washington DC revolve around revenues and expenditures of the federal government, state and local governments generate their own expenditures and collect their own revenues (complemented by some 550 billion dollars of annual transfers from the federal government). With the exception of Vermont, state and local government budgets need to be balanced under a variety of rules, while that of the federal government is under no such restraint.
However, for the federal government to run a deficit it has to obtain the authorization of Congress to borrow money to fund it. Originally such authorization had to be sought on a case-by-case basis, but in 1917 Congress resolved to rationalize the process by stipulating debt ceilings within which the executive branch is at liberty to issue the required government debt instruments. The debt ceiling was raised annually during World War II and has been raised 74 times since 1962.
Note that any such borrowing will always be the result of a budget deficit a priori approved by Congress, so for Congress to procrastinate on raising debt ceilings to accommodate the deficit it has already approved seems to makes no procedural sense.
Currently, total federal, state and local revenues represent 30% of GDP, while total expenditures represent 41%. With state and local government budgets in balance, we end up with the same 11% federal deficit referred to above. As far as total national government expenditures go, this still leaves the United States fairly far down on the international totem pole. A representative cross section of other developed economies show an average of around 45% of GDP.
We can probably all agree that an 11% deficit is no way to manage the world's designated superpower. But when it comes to solving the problem, political courage and common sense tend to be left at the door. And the elephants in the china shop are called Health Care, Social Security and Unfunded Government Pension Entitlements, granted by law in bygone and happier times when the days of demographic reckoning were decades into the future. Mind, this is not a uniquely American problem. Most other developed nations are to varying degrees in a similar quandary about long term entitlement funding.
On the combined federal, state and local expenditures side, I cannot for the life of me see how they will drop below 40% of GNP in foreseeable future. Between now and 2020 the number of Medicare and Medicaid recipients will increase by some 20 million. Per capita health care costs have a history of increasing at twice the rate of GNP over the last 40 years, and there are powerful vested interests within the health care industry against any change to this trend. The industry is the second largest spender on lobbying Congress, neck-to-neck with Finance, Insurance & Real Estate.
By stint of demographic realities, Social Security and government pension obligations, the second biggest budgetary items, will have increased by 50% in 2020 measured in constant 2010 dollars.
Number three on the list, defense spending, can and most probably will see reductions from its current 6.5% of GDP, but within the big picture this will not make all that much difference, particularly since there are other issues such as public infrastructure and education that could do with additional long term funding.
The expenditures referred to above currently consume close to 70% of joint federal, state and local revenues, leaving little room for substantial and politically digestible cuts from other holds.
On the revenue side of things there is the level of economic activity to consider, as well as the level of taxation. Consumer spending is the main driver of the U.S. economy, and the immediate outlook on this front is not encouraging.
Average household income measured in constant 2010 dollars has fallen by 12% during the last 10 years. During the same time the debt-to-household income ratio has gone from 1.02 in 2000 to 1.92 in 2010, having peaked in 2008 at 2.14. It may well take until 2020 for the average U.S. household to repair its balance sheet, during which period one can only hope that the trend of steadily falling real household income levels will be reversed.
If we take 2020 as a target for reestablishing economic normality, some 12 million new jobs must have been created between now and then to reach full employment. This should not be all that hard, but would take some determined and creative action. During Clinton's two presidential terms 22.7 million jobs were created, and the federal budget generated a substantial surplus. There is talk of a national development bank. Brazil has operated such an institution for decades with considerable positive effect. To this I would add incentives for bringing back industrial jobs from abroad. For more on this, visit THE U.S. ECONOMY - A STRUCTURAL PROBLEM.
So, let us not be fooled. Government revenues will have to be raised, and not only from the super-wealthy few, while the tax code needs to be restructured and simplified. For example, while the nominal U.S. corporate income tax rate is a relatively high 35%, actual tax collected by the federal government amounts to only 10% of total corporate income, thanks to exemptions, loopholes and tax deferment opportunities allowed in the tax code. The New York Times recently referred to a study pointing out that some very profitable major U.S. corporations actually pay less federal income tax than the remuneration they pay their chief executive officer.
On the expenditures side, the restructuring task is gargantuan, particularly in the out-of-control health care sector. And the scary part is that political leadership and patriotic consensus-seeking among lawmakers to get the job done is nowhere to be seen.
The demographics and a resourceful populace of the United States leave me optimistic for the long term, but prospects for the next ten years or so look grim. We can only hope that the nation will recover its footing and legendary recuperative abilities soon.
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