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American and Latin American Politics, Society, and Culture

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Telling business to drop dead

As you already know, I am very pessimistic on the Obama administration’s economic policies. We (all of us) will be subject to more and higher taxes, the amount of government debt and money being printed will lead to inflation, and the debt will lead to higher interest rates that will significantly slow down economic growth.

It has happened before, here and elsewhere in the world. It will happen is happening again, and the current administration’s policies will bring it soon, and for a long time.

All of these will cause businesses to leave the country, particularly now that the administration proposes to end the deferral of multinational taxation. Kevin Hassett looks at the effect that will have on businesses:
Obama Tells American Businesses to Drop Dead

The U.S. now has about the highest combined corporate tax rate, second only to Japan among industrialized countries. That rate is so high that U.S. firms have an enormous disadvantage versus competitors. The average corporate tax rate for the major developed countries in the Organization for Economic Cooperation and Development in 2008 was about 27 percent, more than 10 percentage points lower than the U.S. rate.

Tax Burden

U.S. firms have nonetheless prospered because our tax code allows a business to set up a subsidiary in a low-tax country. When that subsidiary earns profits, they are taxed at the rate of that country, and don’t face U.S. tax until the money is mailed home.

The economically illiterate partisan Democratic view is that this practice is unpatriotic and bleeds jobs from the U.S. The economic reality is that American companies use this approach to acquire market share overseas. The alternative is losing the business to foreign competitors.

Don’t just take my word for it. A recent paper by Harvard economists Mihir Desai and C. Fritz Foley and Berkeley economist James Hines and published in the distinguished American Economic Review, gathered data on American multinationals to explore the impact of foreign investments on domestic U.S. activity.

Encourage Overseas Sales

Their conclusion was striking. The authors found that “10 percent greater foreign capital investment is associated with 2.2 percent greater domestic investment, and that 10 percent greater foreign employee compensation is associated with 4 percent greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending.”

So when firms expand their operations abroad, taking advantage of the lower foreign tax rates, it helps their workers in the U.S. Higher sales abroad (surprise, surprise) are good for domestic workers.

It is worth noting that this study, which is confirmed by a boatload of evidence elsewhere, was coauthored by the same James Hines who recently wrote a sweeping review of international tax policy with Obama’s top economist, Larry Summers. Summers has to know what the literature says.

Inexplicable Stance

So the question is, why does Obama advocate a policy that so flies in the face of everything that economists have learned? How could Obama possibly say, as he did last month, that he wants “to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens?” Further, how could Treasury Secretary Tim Geithner call a practice that top scholarship has shown increases wages and employment in the U.S. “indefensible?”

I have to admit I am at a loss. Maybe it is good politics to bash American corporations, and Obama isn’t really serious about making this change happen. But if the change is enacted, and domestic corporate taxes aren’t reduced to offset the big tax hike, the result will be a flight from the U.S. that rivals in scale the greatest avian arctic migrations.

If that occurs, the firms that stay in the U.S. will be at such a huge tax disadvantage that they will absolutely need a “rescue.”

In other business news, James Pethokoukis looks at Elizabeth Warren’s recommendation for more bank “stress tests” (Warren chairs the TARP oversight panel)

Yes, rising joblessness will mean more bad loans to individuals. And commercial mortgages don’t look so hot either. But the super-steep yield curve is great for bank earnings, as is the relaxation of mark-to-market rules. Moreover, the case for new stress tests is no less dodgy than the case for the original ones. Remember that when Treasury Secretary Timothy Geithner announced the tests back on Feb. 10, the Dow Jones industrials fell nearly 400 points as investors interpreted the move as a prelude to bank nationalization. Instead, they turned out to be a poorly executed exercise in investor relations to show Uncle Sam proactive in dealing with Wall Street. Pass-pass instead of pass-fail with many key financial details unavailable to the public. (”Show us the spreadsheets!,” said banking analyst Bert Ely of the lack of data granularity.) The market didn’t fully recoup its losses until early May.

Speaking of TARP, Barry Ritholtz asks, Was TARP a Ruse?, and concludes,

The hurry to repay this cheap cash confirms that the fix was in. If this banks were really in the basd shape Paulson suggested, they would hold onto this cheap source of credit. Instead, they want to throw the yoke of government monies off as soon as possible.

At least I’m not alone in believing we’re being taken for a ride.

Oh, and in case you haven’t noticed yet, Citigroup and GM are now officially worthless.

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The Treasury bond market in cardiac arrest

In case you are not worrying yet, here’s that arm of the vast right wing conspiracy, the LA Times: Interest rates soar on jobs data, putting housing at risk Housing, and everything else:

The Treasury bond market is in cardiac arrest today over the May employment report: Yields are soaring, dealing another blow to investors who’ve been hiding out in government bonds — and threatening another big jump in mortgage rates.

If rising home loan rates price more buyers out of the market, sellers will have to respond by cutting asking prices. Anyone have a better idea?

The 10-year T-note yield has surged to 3.84% from 3.71% on Thursday. The 2-year T-note has rocketed to 1.25% from 0.96%. Yields now are the highest since mid-November.

Older bonds issued at lower rates lose value with every tick higher in market yields.

By the way, we’re talking about the worst unemployment rate in a quarter century.

And the media’s looking at a bright side?

Ace:

The media understands, I think, that it has bet the ranch on Obama. Their fates are now intertwined. Obama is, far more than GM, too big to fail.

And they will continue with the bailouts and emergency political capital infusions for as long as their credit — their credibility — allows.

And the result? Let’s look at the Obamanomics Graph of the Day:

unemploymentrealityvsstimulus0509

For hard-of-comprehension lefties, the three lines are:

* “With Recovery Plan” — What the Obama administration claimed would happen to the unemployment rate if the so-called, misnamed economic “stimulus package,” the one that nobody had the time to read, passed.
* “Without Recovery Plan” — What the Obama administration claimed would happen to the unemployment rate if the so-called, misnamed economic “stimulus package,” the one that nobody had the time to read, didn’t pass.
* March ‘09, April ‘09, and May ‘09 dots — What has really happened to the unemployment rate since the so-called, misnamed economic “stimulus package,” the one that nobody had the time to read, passed.

The three dots mean that things are not only worse than Obama predicted if the plan passed, but they are worse than Obama predicted if the plan didn’t pass. Three months in, it has become pretty close to conclusively clear that we would have been better off if we had done nothing.

To put it in plain English, this is a disaster. And it’s going to get worse: Taxes Send Jobs Offshore.

But look at the bright side, at least you’re not a GM stockholder. Or are you?

How’s that hope and change going for you?

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Soak the rich, lose the rich: Maryland edition

Millionaires Go Missing
Maryland’s fleeced taxpayers fight back.

Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”

One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.

Soak the rich, lose the rich.

Soak the middle class, next.

UPDATE
Moe:

The refusal of fans of progressive taxation to understand that there’s a direct correlation between how much people hate progressive taxes and how much they suffer from them – and that people reserve the right to either stop being so productive, or just simply go somewhere else – would be sad, except that too many of said fans have a say in crafting fiscal policy. This is really kitchen economics: if there’s not enough money, stop spending it until there is. Even if it’d be really, really great if [Insert Feel-Good Initiative Here] was done.

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US having trouble trying to sell new bonds


US bonds sale faces market resistance
The US Treasury is facing an ordeal by fire this week as it tries to sell $100bn (£62bn) of bonds to a deeply sceptical market amid growing fears of a sovereign bond crisis in the Anglo-Saxon world.

Never mind the “Anglo-Saxon world”; the problem the US has in trying to sell these new issues is that the US is spending more money than at any point in its history, and the buyers aren’t willing to chance it.

The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September.

“The dynamic is just getting overwhelming,” said RBC Capital Markets.

The US Treasury is selling $40bn of two-year notes on Tuesday, $35bn of five-year bonds on Wednesday, and $25bn of seven-year debt on Thursday. While the US has not yet suffered the indignity of a failed auction – unlike Britain and Germany – traders are watching closely to see what share is being purchased by US government itself in pure “monetisation” of the deficit.

“There just isn’t enough money out there:”

“There isn’t enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there,” he said. “If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation.

“The bottom line is that there is no global ‘get out of jail free’ card for anyone”, he said.

The US is acutely vulnerable because it relies heavily on foreign goodwill. China and Japan alone hold 23pc of America’s $6,369bn federal debt. Suspicions that Washington is trying to engineer a stealth default by letting the dollar slide could cause patience to snap, even if Asian exporters would themselves suffer if they harmed their chief market.

The dollar has fallen 11pc against a basket of currencies since early March. Mutterings of a “dollar crisis” may now constrain the Fed as it tries to shore up the bond market. It has so far bought $116bn of Treasuries as part of its “credit easing” blitz, out of a $300bn pool.

When the Fed first said it was going to buy Treasuries in March the 10-year yield to dropped instantly from 3pc to near 2.5pc, but shock effect has since worn off. Any effort to step up purchases might backfire in the current jittery mood.

Via Instapundit, who comments,

“I’ve bankrupted the nation, so now your only hope is to pass my healthcare plan.” That goes beyond chutzpah to the edge of pathological dishonesty. Except, I guess, that it’s not pathological if you get away with it. And so far, he has.

Prior post here.

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“We are out of money.”

Via Drudge:

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: “We are out of money.”

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now.

The good news is that the President is finally realizing what millions of others had already noticed. As Naked Capitalism explains,

Obama openly says what anyone with common sense has known for quite some time: the US is broke, and will not be able to honor in full its financial and fiduciary obligations.

The question remains how the US restructures that debt and how big a haircut the debt holders will take as a part of it.

20%? 30%? More like upwards of 50% at least in real terms.

And who are these debt holders?

Anyone who has Treasury debt obligations and financial assets, from the Long Bond to the US Dollar, and financial assets guaranteed by the Federal Reserve and the Treasury.

Technically the debt will be serviced and the interest paid according to the terms of the agreements, with devalued US dollars.

The process will continue until the debt is restructured and the dollar is replaced with a new dollar. This may take some years.

Oh, don’t worry too much. There will be spin and qualifications piled upon this admission, most likely before the markets open in Asia on Monday. But this trial balloon of admission is how you start breaking the bad news to people unwilling and ill prepared to receive it.

But regardless of what is said, we are now in the endgame for a credit bubble of historic proportion.

The really bad news is that the President thinks we’re out of money due to

our failure to make some good decisions on health care over the last several decades.

Health care?

Helloooo??

What the hell healthcare? What about the bailout? The spendulus? The budget? The $12.8 trillion that the U.S. government and the Federal Reserve have spent, lent or guaranteed in the past 10 months?

Take a look at that $12.8 trillion: It’s equal to

  • 14 times the $899.8 billion of currency in circulation
  • $42,105 for every man, woman and child in the U.S.
  • an amount that approaches the value of everything produced in the country last year.
  • It is debt equal to 90% of GDP

How about some visuals, here?

wapoobamabudget1

Obama quadruples the national deficit in one year and now he realizes we’re out of money?

No. Deep down he doesn’t realize we’re out of money. Here’s the video:

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades.

So we’ve got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it’s putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don’t reduce long-term health care inflation substantially, we can’t get control of the deficit.

I fully agree with Michael Laprarie

There you have it. We have to save money on health care or else we’ll be financially ruined by the cost of Medicare and Medicaid. And only the government — presumably by forcing helping doctors to make “cost efficient” health care choices — can turn our rising health care costs around and eventually make health care less expensive (presumably while also making it equally available to everyone and miraculously innovative, via stem cells, etc).
…
The way Obama and the Democrats see things, none of the trillions and trillions of dollars they have committed to bailouts, buyouts, and pork during the last four months have contributed one bit to our current credit and debt crisis.

Prepare to have “free healthcare” shoved down our throats in the name of “saving Medicare and Medicaid.” Expect medical care rationing, and a quadrupling of current federal spending on it at the same time.

Yes, we’re out of money: But we’re not out of money because Medicaid and Medicare (their proposed budget is $737 billion, a mere 5% of the $13 trillion); we’re out of money because of exhorbitant, out-of-control government spending.

That the President doesn’t recognize that fact is the worst news of all.

UPDATE
Jennifer Rubin

We’re not in this fix because of any healthcare decisions he’s made — “so far,” mind you. But what is remarkable is the lack of personal responsibility for our current sea of red ink. No mention of the trillion dollar stimulus or the $3.5 trillion budget. And in the same breath in which he denies running up the deficit he mentions the car bailouts which he “had” to deal with. Actually, it wasn’t necessary; it was a policy choice which now has the ailing car companies permanently affixed to the public dole.

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The Dems own the budget

At the WaPo Congress Approves Budget
$3.5 Trillion Spending Plan Paves Way for Obama Goals

Congressional Democrats overwhelmingly embraced President Obama’s ambitious and expensive agenda for the nation yesterday, endorsing a $3.5 trillion spending plan that sets the stage for the president to pursue his most far-reaching priorities.

Voting along party lines, the House and Senate approved budget blueprints that would trim Obama’s spending proposals for the fiscal year that begins in October and curtail his plans to cut taxes. The blueprints, however, would permit work to begin on the central goals of Obama’s presidency: an expansion of health-care coverage for the uninsured, more money for college loans and a cap-and-trade system to reduce gases that contribute to global warming.

Twenty Democrats voted against the budget.

The Bush tax cuts are gone. The energy taxes will affect everyone. The amount of debt incurred is exorbitant:

wapoobamabudget1

May I also remind you, “the U.S. government and the Federal Reserve have spent, lent or guaranteed $12.8 trillion, an amount that approaches the value of everything produced in the country last year,” an amount that is 14 times the $899.8 billion of currency in circulation.

As I said, the Dems have full ownership of this budget.

Larwyn’s budget roundup:
Doug has the Democrat Fist Bump
Gateway Pundit
Dan on Politics And The Tea Party Movement
GM Roper on what goes around, with this graphic:

a year by year comparison of the annual deficit expendatures for Bush II (actual) and the projected expendatures for Obama (projected)

bush-obama-expendatures

UPDATE
Welcome Real Clear Politics readers. Please visit often.

Obama’s $163,000 Tax Bomb
Families well below the president’s ‘no-tax’ threshold will get a six-figure bill.

ed-aj277b_boski_ns_20090402230148

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Rep. Mario Diaz-Balart on the budget, easing restrictions with Cuba, and the US joining the UNHRC

mario_diaz-balart_official_photo_portrait_colorThis morning I had the opportunity to Rep. Mario Diaz-Balart (Rep., 25th Dist. FL). Since I have family living in his district, it really was a pleasure talking to Mr. Diaz-Balart.

My first question was on the mixed signals we’re getting from the Obama administration when it comes to Cuba policy. In February the Lugar Report on Changing Cuba Policy recommended, among other things, easing the embargo. Then in March the omnibus spending bill eased restrictions for Americans who want to travel to Cuba to cut agricultural and medical sales deals with the communist government while Treasury Secretary Timothy Geithner assured Senators Menendez, Nelson and Martinez that the new law will be interpreted so strictly as to be ineffective. Then last Saturday Joe Biden, speaking at Viña del Mar, Chile, insisted that the embargo stays.

Rep. Diaz-Balart explained that back in the 1990s his brother, Rep. Lincoln Diaz-Balart codified into law the embargo, and now only Congress can eliminate the embargo. “The President can’t lift the embargo, only Congress can.

“If the Cuban government were to release all political prisoners, allow freedom of expression, and allow a true electoral process, then we could see lifting the embargo.” However, the administration is trying to ease unilaterally, which involves sending billions of dollars to Cuba. There is support from members of both parties in Congress to make the easing conditional. The President can’t end the embargo on his own.

“Senator Menendez stood up to some of the changes” [see my RCW post] “and got a commitment from Geithner; then the next day the White House came up with easing other restrictions. They [the White House] have the ability to tweak around the edges. That’s not surprising.”

I then asked about his thoughts on the US joining the UN Human Rights Council.

Rep. Diaz-Balart considers it “an embarrassment, and an insult to all people around the world, particularly to people who love freedom. It’s a charade of a council.”

“For the US to join, shows a level of naivete of the administration regarding some of the worst players in the world. Just as when Iran insists that we abandon Israel and unfreeze their assets, and the US still wants to talk to state sponsors of terrorism, to believe and pretend that smiles and “reset” buttons and nice speeches will make it good.”

“We are at an interesting crossroads in our history. Right now we’re voting on the budget. It’s not a regular budget: this budget will change fundamentally the future of our country. Either we continue to be prosperous and innovative, or we will pile on debt and become another Europe.”

Kevin Holtsberry talked to Mike Pence, and Pamela talked to Michele Bachman.

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