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.
Friday, December 2, 2011
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.
Sunday, August 7, 2011
YES, THEY CAN
Manufacturing profitably in the United States seems to be a problem for American management. Why is it not so for Brazilians?
I wonder whether, rather than an actual lack of profitable investment opportunities, a major cause for the decline of well-paying manufacturing jobs in this country is due to American hubris, combined with a decline in business management capabilities, substituted by rapacious focus on personal reward through outrageous levels of top management financial rewards.
The following is one of many examples of how foreign management resources can reignite the candles of hope for decent-paying American manufacturing employment, an ability the locals seem to have lost.
CNN Money's Manitowoc plant gets second chance to make cookware tells the story of how Tramontina, a company located in the southern Brazilian state of Rio Grande do Sul, in 2005 was able to acquire vacant cookware production facilities in Manitowoc, Wisconsin after its U.S. owners had abandoned it for cheaper labor costs in Mexico. According to the Cookware Manufacturing Association, 63% of all cookware and bake ware goods sold in the United States are manufactured abroad, a fact which the Brazilians saw as an opportunity rather than a threat.
How did this come about? Tramontina was looking for a way to get a "Made in America" label on high volume product offerings to retailers like Wal-Mart, Sears, Costco and others. Pots and pans now manufactured at the Manitowoc plant are shipped to another U.S. production facility operated by Tramontina in Houston, where final product assembly, packaging and shipping to U.S. customers take place.
The Manitowoc plant even came with its own aluminum production facilities, which enables Tramontina to recycle process waste on site without added transportation costs. As a matter of fact, the plant is even shipping aluminum raw materials to facilities in other countries, including to Tramontina's main plant is Southern Brazil.
Manitowoc mayor Kevin Crawford was quoted as saying that he is delighted to have Tramontina in town. "Antonio Galafassi - the local Brazilian CEO - is an amazing individual," Crawford said. "He treats all the people right. The employment was very important and the plant opening helped the esprit de corps of the whole city." Crawford said the Tramontina operation shows that a company can produce this product at a competitive cost at U.S. wage rates.
Why is it that U.S. management no longer seem to be able to do the same?
I wonder whether, rather than an actual lack of profitable investment opportunities, a major cause for the decline of well-paying manufacturing jobs in this country is due to American hubris, combined with a decline in business management capabilities, substituted by rapacious focus on personal reward through outrageous levels of top management financial rewards.
The following is one of many examples of how foreign management resources can reignite the candles of hope for decent-paying American manufacturing employment, an ability the locals seem to have lost.
CNN Money's Manitowoc plant gets second chance to make cookware tells the story of how Tramontina, a company located in the southern Brazilian state of Rio Grande do Sul, in 2005 was able to acquire vacant cookware production facilities in Manitowoc, Wisconsin after its U.S. owners had abandoned it for cheaper labor costs in Mexico. According to the Cookware Manufacturing Association, 63% of all cookware and bake ware goods sold in the United States are manufactured abroad, a fact which the Brazilians saw as an opportunity rather than a threat.
How did this come about? Tramontina was looking for a way to get a "Made in America" label on high volume product offerings to retailers like Wal-Mart, Sears, Costco and others. Pots and pans now manufactured at the Manitowoc plant are shipped to another U.S. production facility operated by Tramontina in Houston, where final product assembly, packaging and shipping to U.S. customers take place.
The Manitowoc plant even came with its own aluminum production facilities, which enables Tramontina to recycle process waste on site without added transportation costs. As a matter of fact, the plant is even shipping aluminum raw materials to facilities in other countries, including to Tramontina's main plant is Southern Brazil.
Manitowoc mayor Kevin Crawford was quoted as saying that he is delighted to have Tramontina in town. "Antonio Galafassi - the local Brazilian CEO - is an amazing individual," Crawford said. "He treats all the people right. The employment was very important and the plant opening helped the esprit de corps of the whole city." Crawford said the Tramontina operation shows that a company can produce this product at a competitive cost at U.S. wage rates.
Why is it that U.S. management no longer seem to be able to do the same?
Monday, July 18, 2011
THE U.S. DEBT CEILING SAGA
That there should be a discussion in the nation's Congress about whether to adjust the debt ceiling so that the United States government may honor financial obligations to its own citizens and foreign creditors - obligations such as previously authorized by the very same Congress - is beyond my comprehension.
While not being an expert in law, on the United States Constitution or otherwise, I nevertheless wonder whether there is a legal basis for the current political carnival.
The United States Constitution, in its Section 8 which deals with Powers of Congress, reads as follows:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
Section 8 empowers Congress further:
To borrow money on the credit of the United States.
The Constitution's Section 9 deals with the Limits of Congress and states in part:
No Bill of Attainder or ex post facto law shall be passed.
When the Constitution grants Congress a power, I find it reasonable to assume that there is also an implied duty associated with this power. The section about "... to pay the Debts and provide for the common Defense and general Welfare of the United States; .....", taken in context with "no ex post facto law shall be passed." would - at least to me - imply that Congress has no business even thinking about defaulting on obligations that, after all, have previously been authorized and passed into law by that very same venerable institution.
The Constitution's empowerment of Congress to "borrow money on the credit of the United States" to me sounds an awful lot like that the nation's founders did not consider the nation's credit as something to be trifled with.
Take note, all ye conservatives who proclaim a wish to return the nation to the purity of its origins of principle.
While not being an expert in law, on the United States Constitution or otherwise, I nevertheless wonder whether there is a legal basis for the current political carnival.
The United States Constitution, in its Section 8 which deals with Powers of Congress, reads as follows:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
Section 8 empowers Congress further:
To borrow money on the credit of the United States.
The Constitution's Section 9 deals with the Limits of Congress and states in part:
No Bill of Attainder or ex post facto law shall be passed.
When the Constitution grants Congress a power, I find it reasonable to assume that there is also an implied duty associated with this power. The section about "... to pay the Debts and provide for the common Defense and general Welfare of the United States; .....", taken in context with "no ex post facto law shall be passed." would - at least to me - imply that Congress has no business even thinking about defaulting on obligations that, after all, have previously been authorized and passed into law by that very same venerable institution.
The Constitution's empowerment of Congress to "borrow money on the credit of the United States" to me sounds an awful lot like that the nation's founders did not consider the nation's credit as something to be trifled with.
Take note, all ye conservatives who proclaim a wish to return the nation to the purity of its origins of principle.
Saturday, July 16, 2011
WHAT IS THE MATTER WITH U.S. HEALTH CARE?
All developed economies struggle with keeping their health care systems good, as well as affordable. The United States struggle more than most. Much more.
I have been looking at the situation in the United States and comparing it with a representative group of other countries, the citizens of which, to my knowledge, are reasonably satisfied with their health care systems (Canada, Denmark, Finland, France, Germany, Israel, Italy, Japan, New Zealand, Norway, Sweden, Switzerland and the United Kingdom). This is what emerges:
Additionally, in the United States there are 156.4 million individuals covered by private insurance companies through employer sponsored programs (6.9 million fewer than 10 years ago), and 27.9 million covered through individual private policies, all for an additional total annual cost of $1,500 billion.
During the last 45 years U.S. health care costs have consistently been growing twice as fast as the the nation's Gross Domestic Product. A 2005 report published by the Congressional Budget Office generally attributes this cost inflation to a relentless growth in the use of ever more sophisticated and expensive medical equipment and procedures. The tendency of U.S. physicians to order a battery of costly medical tests to guard against frivolous malpractice lawsuits was also highlighted in said report. Were this trend to continue unchecked, health care expenditures would in the next 45 years have surpassed 50% of GNP and have reached 100% before the end of the current century, an obvious fiscal impossibility. Something will have to give long before that.
But what?
The truth is that nobody has the slightest clue of how to get health care cost growth under control, with the added problem in the United States that the starting point already is absurdly high in comparison with other advanced economies around the world, which face health care cost escalations of their own.
The U.S. health care system is basically a for-profit environment where hospitals, pharmaceutical companies, doctors and insurance providers strive to maximize revenue and earnings. Who isn't sick and tired of relentless prime-time television ads for costly prescription drugs that we ought to consider taking for this, that or the other potential illness or physical malfunction? Like the case of alcohol and tobacco, such advertising should be banned, as it indeed is in most other countries around the world.
On the other side of the equation, the "health care customer" has no direct notion of the costs of the services he is induced to or feels entitled to seek, whether that is because the person is uninsured and is treated "for free" at taxpayers' expense in hospital emergency wards, is covered by Medicaid or Medicare with substantial built-in taxpayer subsidies which the beneficiary does not see, or by miscellaneous employer-provided insurance plans, the true cost of which is not apparent to the beneficiary.
It does not take a doctorate in economics to spot the perverse incentives for run-away cost development in the U.S. health care environment. It may, however, take a magician to do something about it, particularly as long as one declines the option to deal with health care in the same manner as the rest of the world does, while also refusing to provide for the necessary funding through adequate taxation.
The whole concept of a separate health insurance scheme for those over 65 - while wonderful for those enjoying its subsidized benefits - is ludicrous from a conceptual insurance point of view. Insurance works best when premiums and risks are spread as widely as possible, which in practice means shared equitably across the entire working population. And for that to make sense, sharing the costs in this manner would mean that the corresponding benefits would also have to be universal. This is exactly how all those "socialist" foreign countries have dealt with the problem, and the statistical highlights referred to above show that the loser here is the United States, not the "socialists".
No society can afford to spend nearly 20% of its Gross Domestic Product on health care. Universal cradle-to-grave coverage through general taxation would go some way towards solving the problem, in as much as it is cheaper to administer, is not for-profit based, and gives increased possibilities for cost control. But this being - at least for now - political anathema in the United States, health care rationing in one form or other is the only option. This possibility was met by cries of "Death Panels!" and "Pulling the Plug on Granny!" during the health care legislation debates of 2010. Some of the very same politicians now want to eliminate Medicare all together.
You may not have noticed, but the American health care rationing option of choice is to make coverage too expensive for 52.6 million of its citizens. The per capita cost of treating those through hospital emergency wards is only 30% of the average cost of the Medicare patient. That is certainly a market-driven way of solving the problem, but is it the right one?
Medicare is, logically enough, per beneficiary the most expensive portion of the U.S. health care system. Old people generally require more, and more expensive, care. 5% of Medicare fee-for-services beneficiaries account for close to 50% of total Medicare spending. Another estimate indicates that end-of-life treatment costs represent 10% of total U.S. health care expenditures, which in turn would be equal to 55% of current total Medicare costs. Both statistics tell the same story: it is extremely expensive to prolong lives of the terminally ill.
Chronic conditions are closely linked to high expenditure levels: more than 75% of high-cost beneficiaries have one or more of seven major chronic conditions for which there is no glimmer of hope for a permanent cure on the horizon.
David Brooks' New York Times column Death and Budgets is a good read on this issue. Says David Brooks in part: "This (current) fiscal crisis is about many things, but one of them is our inability to face death - our willingness to spend our nation into bankruptcy to extend life for a few more sickly months." Dear I add that this is also an extremely lucrative practice to the health care industry?
In order to significantly roll back out-of-control health care costs I cannot see any other realistic solution than to have less of it, at least in the manner practiced today. But it will be a cold day in hell when we see a politician willing to step forward and grab this nettle.
I have been looking at the situation in the United States and comparing it with a representative group of other countries, the citizens of which, to my knowledge, are reasonably satisfied with their health care systems (Canada, Denmark, Finland, France, Germany, Israel, Italy, Japan, New Zealand, Norway, Sweden, Switzerland and the United Kingdom). This is what emerges:
- In the United States current annual health care costs per capita have reached $11,700. The average among the above mentioned nations is $4,300.
- The United States spend 17.0% of its Gross Domestic Product on health care, the other nations average 9.1%.
- Average life expectancy from birth is 78.4 years in the United States, against an average of 80.6 years in the sample countries.
- There are 2.3 physicians per 1,000 inhabitants in the United States, but an average of 3.0 in the above mentioned nations.
- The United States have 3.3 hospital beds per 1,000 inhabitants, while the other countries have an average of 6.2 beds.
Additionally, in the United States there are 156.4 million individuals covered by private insurance companies through employer sponsored programs (6.9 million fewer than 10 years ago), and 27.9 million covered through individual private policies, all for an additional total annual cost of $1,500 billion.
During the last 45 years U.S. health care costs have consistently been growing twice as fast as the the nation's Gross Domestic Product. A 2005 report published by the Congressional Budget Office generally attributes this cost inflation to a relentless growth in the use of ever more sophisticated and expensive medical equipment and procedures. The tendency of U.S. physicians to order a battery of costly medical tests to guard against frivolous malpractice lawsuits was also highlighted in said report. Were this trend to continue unchecked, health care expenditures would in the next 45 years have surpassed 50% of GNP and have reached 100% before the end of the current century, an obvious fiscal impossibility. Something will have to give long before that.
But what?
The truth is that nobody has the slightest clue of how to get health care cost growth under control, with the added problem in the United States that the starting point already is absurdly high in comparison with other advanced economies around the world, which face health care cost escalations of their own.
The U.S. health care system is basically a for-profit environment where hospitals, pharmaceutical companies, doctors and insurance providers strive to maximize revenue and earnings. Who isn't sick and tired of relentless prime-time television ads for costly prescription drugs that we ought to consider taking for this, that or the other potential illness or physical malfunction? Like the case of alcohol and tobacco, such advertising should be banned, as it indeed is in most other countries around the world.
On the other side of the equation, the "health care customer" has no direct notion of the costs of the services he is induced to or feels entitled to seek, whether that is because the person is uninsured and is treated "for free" at taxpayers' expense in hospital emergency wards, is covered by Medicaid or Medicare with substantial built-in taxpayer subsidies which the beneficiary does not see, or by miscellaneous employer-provided insurance plans, the true cost of which is not apparent to the beneficiary.
It does not take a doctorate in economics to spot the perverse incentives for run-away cost development in the U.S. health care environment. It may, however, take a magician to do something about it, particularly as long as one declines the option to deal with health care in the same manner as the rest of the world does, while also refusing to provide for the necessary funding through adequate taxation.
The whole concept of a separate health insurance scheme for those over 65 - while wonderful for those enjoying its subsidized benefits - is ludicrous from a conceptual insurance point of view. Insurance works best when premiums and risks are spread as widely as possible, which in practice means shared equitably across the entire working population. And for that to make sense, sharing the costs in this manner would mean that the corresponding benefits would also have to be universal. This is exactly how all those "socialist" foreign countries have dealt with the problem, and the statistical highlights referred to above show that the loser here is the United States, not the "socialists".
No society can afford to spend nearly 20% of its Gross Domestic Product on health care. Universal cradle-to-grave coverage through general taxation would go some way towards solving the problem, in as much as it is cheaper to administer, is not for-profit based, and gives increased possibilities for cost control. But this being - at least for now - political anathema in the United States, health care rationing in one form or other is the only option. This possibility was met by cries of "Death Panels!" and "Pulling the Plug on Granny!" during the health care legislation debates of 2010. Some of the very same politicians now want to eliminate Medicare all together.
You may not have noticed, but the American health care rationing option of choice is to make coverage too expensive for 52.6 million of its citizens. The per capita cost of treating those through hospital emergency wards is only 30% of the average cost of the Medicare patient. That is certainly a market-driven way of solving the problem, but is it the right one?
Medicare is, logically enough, per beneficiary the most expensive portion of the U.S. health care system. Old people generally require more, and more expensive, care. 5% of Medicare fee-for-services beneficiaries account for close to 50% of total Medicare spending. Another estimate indicates that end-of-life treatment costs represent 10% of total U.S. health care expenditures, which in turn would be equal to 55% of current total Medicare costs. Both statistics tell the same story: it is extremely expensive to prolong lives of the terminally ill.
Chronic conditions are closely linked to high expenditure levels: more than 75% of high-cost beneficiaries have one or more of seven major chronic conditions for which there is no glimmer of hope for a permanent cure on the horizon.
David Brooks' New York Times column Death and Budgets is a good read on this issue. Says David Brooks in part: "This (current) fiscal crisis is about many things, but one of them is our inability to face death - our willingness to spend our nation into bankruptcy to extend life for a few more sickly months." Dear I add that this is also an extremely lucrative practice to the health care industry?
In order to significantly roll back out-of-control health care costs I cannot see any other realistic solution than to have less of it, at least in the manner practiced today. But it will be a cold day in hell when we see a politician willing to step forward and grab this nettle.
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