The US' net investment income has fallen into the red after five years of record-making in the black:
Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged.We did have a great deal. While foreign governments in Europe and Asia indulged in low-yielding US treasury bonds, US companies and American citizens reaped the benefits of strong foreign growth, especially in China. Rock-bottom interest rates, as low as 1%, made borrowing money a great way to make money.
Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.
Imagine today, with the prime rate sitting at 5.25%, the bank down the road is willing to lend to you at 2% APR. So you borrow as much as the bank allows you to, and on the same day take that money and stick it in Paypal's money market account, currently returning just over 5%. What a deal! On a national level, the US has basically been doing the same thing. Even though we've been borrowing more at 2% than we're sticking into the 5% investment, the benign disparity in returns have made up for the absolute shortfall. But with interest rates having risen steadily over the last several months and a deceleration in international equity returns, it's catching up with us.
The net investment number pales in comparison to the US national account balance (the actual payments that flow to and from countries), which was $218 billion in the red last year. Even if we manage to get marginally back in the black in terms of our net investment income, so long as we keep buying more than we sell, the US' net foreign debt (what we owe others versus what others owe us) will keep accreting. Continuing with the analogy, even if our $1,000 in investments return 5% a year, if we've borrowed $10,000 (and continue to borrow more each year than we put into new investments) at a lower rate, we're hardly in good shape.
This net investment deficit is symbolic even though it's not of great consequence. The NYSE and the NASDAQ together comprise about two-thirds of the world's total market capitalization of just over $43 trillion, most of it in American companies, yet we've still fallen into the red on returns. We gave up net exporting four decades ago. Now we're even giving up the benefits of the wealth we accrued in the past.
I can't pretend to know what debts, deficits, and net investment losses portend economically for the US or the rest of the world. The US' current national debt as a percentage of GDP is still only half of what it was following the conclusion of WWII and bests that of Israel, Japan, Italy, Greece, Singapore, Canada, France, Germany, and Austria. I hope the argument that expanding total economic activity will keep us out in front of ballooning debts and deficits holds true. It's a recondite science for sure.
I can, however, offer a few suggestions that might help:
- Scrap the federal income tax. It discourages economic activity by penalizing productivity. It costs over $400 billion in compliance, 10,000 relatively bright IRS employees who could be engaged in something more constructive (not to mention a good portion of the 450,000-plus college-educated bean counters working for the Big Four), and more odiously still causes businesses and individuals to make decisions based not on pure economic utility but instead on utility post tax-consequence.
I held off on purchasing a house for three months longer than I would have otherwise as I waited for the 366th day of ownership on a stock that had done well to roll around so that I'd only be subject to a 15% tax on the gain. On a macro leve, that's silly, even though it was in my best interest. The federal income tax sorely lacks 'goal congruence' in regards to invidual entities and the nation as a whole (note also that $11 trillion is held by wealthy Americans and businesses in offshore accounts for tax reasons).
Replace the federal income tax with a national sales tax (also referred to as a 'consumption tax') levied on new items and services. Tax us on what we spend instead of what we earn, and we might start earning more than we spend! This would instantly propel the US back into the top spot in global competitiveness as production costs would fall by 35% of profits (essentially the current corporate income tax rate) for companies operating stateside and make the US an even stronger magnet for entrepreneurs the world over. Plutocrats, stick your money here instead of in Bermuda!
It would make used items 23% (the estimated federal sales tax rate) cheaper relative to new items than they are today, rendering the cheap consumables dumped on our shores less attractive. The 50 million foreign visitors the US hosts each year would start contributing to our federal coffers. Illegal immigrants paid under the table wouldn't be able to mooch as much off the net taxpayer as they would pay in at the cash register instead of not at all (couple this with Charles Murray's idea of a monthly governmental stipend in place of the myriad of contemporary governmental welfare services, and illegals would really lose the economic advantage they enjoy over natives).
- Standard 401(k) and similar retirement plans should become opt-out programs rather than opt-in programs. Force workers to expend effort to increase immediate consumption instead of to increase savings.
- End unskilled immigration and institute a merit immigration system for legal immigrants to increase per capita wealth and productivity.
- Repeal Sarbox and disenegrate the LLC to encourage more companies, especially newer ones, to list publicly. In tandem with the 401(k) opting-in, this is a solid way to 'lift all boats'.
Wolfowitz to tackle corruption (September 22, 2006)
Paul Wolfowitz makes enemies everywhere he goes:
In his first 15 months as president of the World Bank, Paul D. Wolfowitz has made the fight against corruption in poor countries a hallmark issue, waging an aggressive campaign that has led to the suspension of hundreds of millions of dollars in loans and contracts to nations including India, Chad, Kenya, Congo, Ethiopia and Bangladesh. ...To be fair, the World Bank's President, always an American, comes from the only country that has the power to individually block institutional reforms (changes require an 85% majority, and the US represents just under 17% of the votes), so the guy at the helm is bound to be criticized, even as he publicly advocates the lessening of voting power for nations that pony up the most dough, like the US and Japan.
In recent months, however, his campaign has run into a host of critics, both at the bank and among financial officials outside the United States, who say that developing countries are being threatened with arbitrary punishment in a way that jeopardizes the banks longtime mission to reduce poverty.
Still, the World Bank is an antiquated institution struggling to find an area of 'expertise' to specialize in. The glut of massive private hedge funds and the piles of cash that multinational corporations are sitting on has rendered the World Bank unnecessary. There is hardly a shortage of capital for projects that promise decent returns. So the World Bank has had to shift from promoting broad economic growth to more targeted "poverty reduction"--bad loans, grants, and the assumption of bad debt--stuff that makes the institution appear profligate to Americans while angering the developing world by making demands of the countries receiving the loans. Wolfowitz wants to make that target more precise still, focusing specifically on transparency in business dealings and an ending of corruption.
I wish the WB and the IMF would disappear along with their UN parent. But if wealth creation in developing and underdeveloped countries is the purpose, and $23 billion is going to be loaned out annually, battling corruption appears to be the best way to go. The goal of eradicating global corruption smacks of quixotic interventionism, but the task of ending global poverty is even more unending and unachievable.
Corruption, as measured by Transparency International's Corruption Perceptions Index, correlates with a country's purchasing power parity at a statistically significant .822, higher than do economic freedom (.755), IQ (.598), average life expectancy (.575), or infant mortality (.560). And Wolfowitz is going after places that don't fare well on that index--India ranks 88th on the list of 159 countries, Chad and Bangladesh tied for the very most corrupt, Kenya and the Congo are both tied at 144th, and Ethiopia is 137th.
Skeptics will argue that the abolition of the developed world's definition of corruption is related to a developing nation's greater economic power because its elimination in a developing country makes it easier for the developed world to come in and run profitable business operations (the UAE, for example, has a higher PPP than the US, but most of that wealth isn't going to the Emirates' citizenry, who probably make up less than a fifth of the place's population). Instead of a kleptocrat running the third-world show, an American corporation comes in and strikes it rich.
There are lots of demographic factors that limit the potential for wealth in many developing countries. The lessening of corruption wouldn't be an azoth, but it strikes me as a noble, relatively effective way of going about bettering the developed world. If we're going to have an international entity doling out cash, it might as well at least attempt to be something more than a wealth transfer (in the form of low returns and bad debts) from the developed world to third world rulers.
Gladwell on dependency (August 27, 2006)
Malcolm Gladwell has an article in the New Yorker that already caught Steve Sailer's debunking eye. He discusses private pensions in the US, and rightly points out how inherently underfunded they are.
Less solidly, Gladwell's long piece also suggests that the key to economic productivity is a favorable (low) dependency ratio (the number of the young and old compared to those of working age). He specifically singles out Ireland, the Celtic Tiger which restricted contraception up until 1979 (he fails to mention how Ireland has altered its tax structure to allow huge technology companies to set up financial shop there for tax purposes, from which Microsoft dropped its global tax rate from 33% to 26% in large part by leaving profits in Ireland):
This relation between the number of people who aren’t of working age and the number of people who are is captured in the dependency ratio. In Ireland during the sixties, when contraception was illegal, there were ten people who were too old or too young to work for every fourteen people in a position to earn a paycheck. That meant that the country was spending a large percentage of its resources on caring for the young and the old. Last year, Ireland’s dependency ratio hit an all-time low: for every ten dependents, it had twenty-two people of working age. That change coincides precisely with the country’s extraordinary economic surge.Gladwell should refine the dependency ratio explanation to an urchin ratio explanation. Why? Because there exists a strong, stastically significant relationship (r = .71) between the percentage of a nation's population over the age of 65 and its purchasing power parity. That is, the more old age dependents a nation has, the wealthier it is.
Oops. So instead of all this doom and gloom about the coming entitlement crisis when the baby boomers retire, we should be celebrating the coming economic boom! Well, all those ancients I served at my part-time job in junior high and high school sure didn't seem to be contributing to the late nineties economic miracle by playing bingo and whining about the menu choices, but it looks they were. It provides a stronger explanation than does Gladwell's thesis (the percentage of a country's population between the ages of 15-65 correlates with ppp at a more modest .59).
The theory Gladwell puts forth with the Irish case study does hold when quantified, but it's likely a consequence of other more powerful indicators of economic prosperity. It really runs into trouble when the ex-Soviet states are considered. Russia, Slovakia, Slovenia, and the Czech Republic all have a more favorable dependency ratio than anywhere in Western Europe or North America, but they're hardly economically more fearsome.
Since it is actually the burden of children that Gladwell really suggests to be economically detrimental, that's what has to be considered. And developed countries, which offer an array of opportunities for women other than spending time barefoot and pregnant in the kitchen making dinner, have longer educational tracks, and enjoy ubiquitous birth control methods, create disincentives to having children. Further, the less developed a country is, the less costly a child becomes (helping on the farm or doing chores instead of running up costly sports fees and school tuitions, therefore calling into question the assumption that children are necessarily dependents). Also, developed countries have better medical and health care. Not surprisingly, the correlation between ppp and the median age (fewer children and longer lifespans) is .71. Causation seems to mostly run the other way around.
Tautologically, though, Gladwell isn't wrong, at least in the short-run. When an infant is born, he obviously costs more than he produces. And he diverts attention and resources away from other tasks (doctors, latex gloves). But that cost is relatively minor in comparison to his father's productivity. In Indonesia, he'll only be producing an eleventh of what he will be if he's an American. Of course, a contemporary birth dearth means less dependents now and a lot more a couple of decades down the road.
I thought the kids getting knocked up freshman year were shortsighted and condemning themselves to a life of poverty. Little did I know that having lots of kids was a prestidigious way to delay gratification and gain a big payoff in the future. Speaking of children, if you care about your grandkids you'll pull that money out of the 529s and put it into Niger--at 7.46 kids per woman, in twenty years the country's enormous workforce is sure to turn it into the next Hong Kong!
I suspect the reason Gladwell was hosted by the New Yorker for such an article is that he implies that birth control makes people better off and it vindicates the choices of so many of the magazine's single-child and childless readers. Like the abortion cut-crime theory, leftists will dig it because it purports benefits to lots of abortion. But like Steven Levitt's theory on crime, Gladwell's position begs for social engineering. Abort babies, euthanize old fogies, and knock out anyone else who is an economic dependent. Phrased in that way, would the New Yorker still dig it?
While I'm not at all convinced that having fewer scamps is what makes a country wealthy, I'll be happy to repackage his idea and take it to the UN. Kofi, African countries, especially the sub-Saharan ones, need to have much fewer children. Ditto the Arab world. Indeed, let's not let Muslims reproduce at all, since poverty causes terrorism and all. East Asia needs to have whelps, and so does the West. This'll make the third-world wealthier and the developed world poorer. International wealth transfer, Kofi. That is the UN's raison d'etre isn't it?
If we somehow instituted Gladwell's logic on a global scale, I'd feel infinitely better about the future. It'd be the realization of SENS for the moribund West!
Gov't to release more accurate numbers (August 15, 2006)
It's about time:
The Bureau of Labor Statistics is contemplating a change in the idely followed consumer-price index that could have a big impact on how markets and policy makers interpret the latest inflation data.Wall Street and the Fed both attentively follow the core inflation index (which excludes food and energy in addition to having other shortcomings) put out by the Bureau each month. The markets hit a springboard or a precipice depending on the number. Currently, the inflation rate is given as a percentage to the first decimal place. The change reported can be figured by looking at the actual index by month. The problem is, this number is rounded as well. So conceivably a change of .25% is reported as .3%, while a nearly equivalent shift of .249% is reported as .2%, a 50% difference in the magnitude of reported inflation.
The agency, part of the Department of Labor, is considering publishing the index and its subindexes to three decimal places instead of one, an agency official said. Doing so would greatly reduce the frequency with which rounding produces a misleading inflation rate.
Fortuitously, we live in the 21st Century, at a time when extending a number derived from the prices of over 80,000 items (before rounding its decimal extension competes with pi) is easily doable. It's inexplicable that the Bureau wouldn't make this painless and informative change that first-semester business school students would know to institute ASAP.
Hapless happiness map, index (August 6, 2006)
Recently Randall Parker reported on the work of Leicester PhD candidate Adrian White's who produced the 'World Map of Happiness', purporting to rank 178 countries worldwide by the respective happiness of their populations.
A couple of things make me skeptical. First off, it's impossible to tell how exactly the rankings were determined. The University's press release reads:
Adrian White, an analytic social psychologist at the University’s School of Psychology, analysed data published by UNESCO, the CIA, the New Economics Foundation, the WHO, the Veenhoven Database, the Latinbarometer, the Afrobarometer, and the UNHDR, to create a global projection of subjectiveApparently data was pulled from a motley mix of sources, a bunch of studies that putatively ask about happiness (any standardization?), and then the curious line about vaguely 'analysed data'. I emailed the author several days ago asking to be pointed in a direction that would expound on the methodology, but received no response.
well-being: the first world map of happiness.
The projection, which is to be published in a psychology journal this September, will be presented at a conference later in the year. Participants in the various studies were asked questions related to happiness and satisfaction with life. The meta-analysis is based on the findings of over 100 different studies around the world, which questioned 80,000 people worldwide. For this study data has also been analysed in relation to health, wealth and access to education.
A quick perusal (an oxymoron, incidentally!) of White's rankings seemed to show happiness being bolstered by economic stagnation (running a regression yields a moderate, but statistically significant, inverse correlation of .20 between economic growth and White's index) . Counterintuitive, especially to Americans, where politicians often live and die by economic numbers. Further, a link in Parapundit's comments section pointed to a blatantly green 'Happy planet index' that White used in his calculations.
And the two studies are definetly related. They both use the exact same 178 countries (Saint Lucia, population 168,000, and Seychelles, population 81,000, twice included; Micronesia, population 108,000, and Macau, population 453,000, twice not present). The two indices correlate with one another at a statistically significant .62. That's stronger than the relationship between national IQ (as estimated in IQ and the Wealth of Nations) and national wealth as measured by purchasing power parity (2005). It suggests that almost 40% of White's scoring comes directly from the 'Happy Planet' fellows.
Who would have thought Bhutan (ranked 8th happiest country on earth), with the 12th highest infant mortality rate in the world, suffering less than a 50% literacy rate, and poorer than much of Africa, would be more joyful than Canada, Norway, or the US?
Moreover, White's homepage accesses a survey entitled "National Environment and Personality Survey" that asks questions about personal water conservation, etc. Not that resource profligacy is good, nor to impugn the author's integrity, but with the happiness rankings being so muddled, the author so apparently green, and countries without economic growth or resource usage being so championed, it's tough not to be skeptical.
I agree with Randall's assertion that smaller, homogenuous societies tend to function better and have happier denizens than do gargantuan, balkanized ones, but am weary of anti-capitalist green zeal masquerading as social science.
More on taxes and economic growth (June 10, 2006)
Recently I found the inverse correlation between economic growth and tax misery (as defined by Forbes) to be a statistically significant .44, and .55 when the anomaly of China (okay, a country that comprises over 20% of the world's population is tough to label an anomaly) is removed from the analysis.
Itinerant commentator John S Bolton suggested the relationship might be meaningless and that it would be better if performed exclusively on developed nations:
This correlation needs to have almost all the low-income countries removed, in order to show significance; but what is wanted to be explained how growth can be predicted, with the full variation of factors whcih occur in the world, being allowed to weigh in.I wish the desired explanation would be revealed!
His contention is that the 'growth' in many destitute countries comes from foreign aid or fluctuations in commodity prices that less developed economies are tied to. But removing the lower income developing countries from the analysis is something I can do (although the poorest country Forbes used is India, and the average national PPP for the index is $22,743). And I'm glad John prodded me into do so.
I cutoff all countries poorer than Russia, judging it to occupy the lower limit of the developed world. With a sample size of only 33 wealthy countries, the inverse correlation jumped to .64 with virtually absolute significance at any confidence level. For something as broad and complicated as global economic growth, that's pretty powerful. Capital of all kinds (investment, human, technological) is becoming easier to shift around the world. Capital-affable places are going to get the most of it.
We should scrap the IRC and adopt a national sales tax. In addition to making the US an incredibly attractive place for investment, it would reduce spending on cheap consumables (which does little for long-term, sustainable economic growth) and encourage saving, and it would make illegal immigration less attractive by forcing migrants to pay based upon consumption rather than the US government's ability to track them and by a credit issued to valid US citizens equal to each person's poverty threshold.
Yes, the black market would be problematic. But it already is. The IRS estimates $290 billion each year in taxes owed are not collected (the 2006 deficit was $372 billion--eliminating the black market would theoretically eliminate more than three-fourths of the current shortfall). Also, collecting for ecommerce presents a challenge.
Taxes and economic growth (June 6, 2006)
Lower taxes mean more economic growth. That's the conclusion I come to in running 2005 real GDP growth rates by country against Forbes' Tax Misery and Reform Index for 2005. The inverse correlation between growth and tax misery is a statistically significant .44.
This isn't surprising, nor is it misleading--there is absolutely no correlation between a country's wealth (measured by purchasing power parity) and its tax misery. One might suspect that developing nations with greater growth opportunities, vying with others for foreign investment by pushing down tax rates, would skew the numbers to make it appear as though a more diminutive tax burden was leading to growth when it actuality the growth was coming from relatively greater room for it. But that's not the case.
Forbes analyzes 50 countries, mostly developed and a few that are developing, including China. Despite being under a tax burden lighter only than that of France, the PRC enjoys phenomenal and sustained growth of almost 10%. The Chinese aberration comes as little to surprise to human realists, although propositionists continue to incredulously predict a hard landing because of bank profligacy, governmental control of virtually every global industry within China, and free information flows on par with Libya and Cuba. China keeps beating the doomsayer's expecations. The following comparative sums it up:
Hong Kong IQ: 107 PPP: $32,900
Japan **** IQ: 105 PPP: 31,500
Taiwan *** IQ: 104 PPP: 27,600
UK ****** IQ: 100 PPP: 30,300
US ****** IQ: 98 PPP: 41,800
Colombia * IQ: 89 PPP: $7,900
China **** IQ: 100 [!] PPP: 6,800 [?]
Lebanon ** IQ: 86 PPP: 6,200
Peru ***** IQ: 90 PPP: 5,900
China's poor man status is unique, and it throws a wrench into the tax misery/economic growth inverse correlation. Removing China from the mix yields an inverse correlation of .54 (increases it almost 20%). National economies are obviously complex, so the single-variable relationship is substantial.
Why do higher taxes hurt growth? I hate to pick on France, but she illustrates so well:
In France, it takes work merely to be allowed to work. Just ask Louis Vuitton.Conceptually, higher taxes reduce the incentives for work, especially for specialization (which allows for the maximization of core competencies, as Randall Parker shows:
This week a court ruled against the iconic luxury goods maker for the crime of doing business on Sunday. Louis Vuitton had recently hired 70-odd new employees to keep its flagship store on Paris's Champs Elysées open on Sundays. The problem is that French labor laws put strict restrictions on such operations. Though the churches are mostly empty and France is a "secular" republic, the Sabbath is sacred. ...
France's trade unions won't have any of it. The French Confederation of Christian Workers, a union that doesn't actually have any members employed at the store, sued parent company LVMH Moet Hennessy Louis Vuitton to force it to close on Sundays. The union says the handbag purveyor is breaking the law -- and setting a worrying precedent -- with a "fake" museum designed to circumvent rules protecting workers. This week a judge agreed, deeming that the top-floor gallery was not, in fact, a "cultural space."
Why would higher taxes reduce economic growth? Taxes decrease the incentive
to engage in work for pay. For example (and this is a hypothetical just to illustrate a point), imagine you needed to get your house painted, a house painter would cost you $10 per hour, in your regular job you made $20 per hour, that your employer offers you overtime hours, and that you were just as productive at painting as the $10 per hour painter. Either you or the painter could paint your house in 100 hours. If you hire the painter then you would pay the painter $1000 to paint your house.
Does it make sense to hire the painter? On the surface it does. In a system where there are no taxes you could work 50 hours in your day job to make the money to pay the painter to work 100 hours. You save yourself 50 hours of time. If your tax rate was 25% you would still be better off paying the painter. You would have to work 66.7 hours to earn $1000 in after-tax income to pay the painter. But you would still save yourself 33.3 hours. So working to earn money to pay someone else would still make sense. But raise the tax rate to 60%. Suddenly even though your time is valued by the job market as twice as valuable as the time of the painter you'd have to work 125 hours in your day job to earn enough money to pay the painter to work 100 hours to save you 100 hours painting your house. With a high enough tax rate it becomes more sensible for you to work less in your day job and to paint your house yourself.
The accountant isn't finding ways to trim the fat from companies he's consulting with while he's painting his house. The individual serves as a microcosm for the nation in this regard. And corporations, less anchored to a particular geographic location than ever before, will move operations and people to places with favorable tax regimes that provide the MNC's favorable tax implications (Ireland, the UAE, and Hong Kong are good examples of this).
"I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it is possible." --Milton Friedman
If we'd figure out how to simultaneously cut governmental spending, I'd be hard-pressed to disagree.
Senescence soaks the private sector too (May 6, 2006)
FASB has begun the process of instituting an accounting rule change that will bring the true cost of company benefit plans (pensions, post-retirment healthcare plans, etc) from the labyrinthal footnotes to the easily observable balance sheet:
The FASB today issued a proposal that would improve financial reporting by requiring employers to recognize the overfunded or underfunded positions of defined benefit postretirement plans, including pension plans ("plans"), in their balance sheets. The proposal would also require that employers measure plan assets and obligations as of the date of their financial statements. The proposed changes would increase the transparency and completeness of financial statements for shareholders, creditors, employees, retirees, donors, and other users.Currently, companies report a number in the balance sheet that paints a misleadingly rosy picture of the firm's financial health with regards to its employee post-retirement healtcare and pension obligations. The net funded status of the plans is recorded in the footnotes, but the number reported in the balance sheet is increased by an accounting for "unrecognized actuarial losses and prior service costs". This adjustment is not substantative--it is purely a paper change. These unrecognized losses and service costs stem from large obligation increases (medical care and medicinal cost increases, longer life expectancies, etc) that are very real.
Rather than record these obligation increases as they become known, GAAP rules allow companies to amortize these losses over many years. But the funded status (the number reported in the notes but not on the balance sheet) is computed using the present value of future obligations and then comparing it to the present value of plan assets. That is, it already treats an employee twenty years from retirement as a lesser expense than an employee five years from retirement, even though the former is going to ultimately be more costly. There is no logical reason these companies should be able to defer costs even further out. Because obligations have tremendously outgrown predicted cost trends (most of the post-retirement cost is attributable to health care costs) while assets have remained steady or underperformed (especially earlier this decade), we have an accounting deferral of costs that are quite real in the present.
The balance sheet (from which most of the important financial ratios are calculated) gives an impression tantamount to one declaring that Social Security is a valuable financial asset for the federal government because in 2005 it took in more revenue than it paid in outlays. If you found out your wife had cancer in December and that half your net worth of $500,000 was going to go for treatment next year, would you conduct yourself as if you had $500,000 or $250,000 in savings? If you found out a week later that total treatment costs would actually come to $400,000, would you alter your financial plans again or pretend that you still had $250,000 to play with?
Below are DJIA companies, with the net funded status of each company's post-retirement/pension obligations (in millions), how it is recorded on the balance sheet (in millions), and how much total liabilities will increase by with the FASB proposal, respectively (all '05 except GM, ATT, and Delta, which are from '04):
Honeywell: (1,515), 2,057: 16.98%
GE: (1,700), 11,060: 2.3%
Kellogg's: (764.7), 583.3: 16.26%
3M: (1,990), 2,427: 42.42%
GM*: (65,075), 6,706: 15.55%
ATT*: (1,606), 1,125: 10.59%
Boeing: (9,675), 6,629: 33.27%
IBM: (8,863), 14,933: 32.75%
Delta*: (7,133), (3,183): 14.74%
Alcoa: (5,495), (2,266): 17.03%
Pfizer: (5,283), (619): 8.98%
Coke: (1,172), (461): 5.44%
P&G: (3,433), (1,388) : 4.64%
J&J: (3,746), (682): 14.94%
Disney: (2,452), (371): 7.72%
For some of these companies, the increase now recorded is several times more than the last fiscal's net income (Boeing's change is six times NI, Alcoa's and IBM's are both three times). The forward-looking assumptions used to present value future costs also raise an eyebrow (basically the same for all public-traded companies):
The assumed healthcare cost trend rate is assumed to decrease to 8.50% for 2006, then decline gradually to 5% by 2013 and remain level thereafter.Healthcare cost year-over-year growth has decreased since 2002, but the baby-boomers who are set to receive all of these benefits haven't yet hit seventy, when healthcare costs really start to skyrocket (p8). When the number of septuagenarians jumps in a decade, will 5% really be accurate (keep in mind that the difference between a long-term trend of 10% and of 5% is the difference between doubling every 7 versus every 14 years)?
The FASB proposal will not physically change anything but what shows up on paper (although this will include an unfavorable change in the debt/equity ratio that banks use to determine interest rates for lessees/debtors). Theoretically, the market should have already priced this stuff in. But big industry and unions are strongly opposed to it. It's no longer an obscure footnote--it's out in the open for the public to dwell on. Most Americans are cognizant of the fact that Social Security and Medicare are in trouble, but how many realize that the programs are underfunded (in present value terms) by an estimated $74 trillion? That is, to meet the obligations as they stand, we need each resident to cough up $246,700 today--the longer we wait, the more that will be required per capita.
What are companies doing to reign this in? The same thing President Bush tried unsuccessfully to do in 2004--replacing defined benefit plans with defined contribution plans. Microsoft and Walmart, for example, do not have material defined benefit plans at all. Newer companies are wisely avoiding this crippling burden altogether. As in politics, it is easier for management (especially of publicly-traded firms that face execrable short-term pressure) to offer things now and figure out how to pay for them later. Defined contribution plans, on the other hand, force companies to come up with the money right away and owe nothing more than what has thus far been contributed.
The developed world is ill-prepared for the effects of an aging population. We know the freight train is coming but we're not doing anything to avoid being hit, even as pessimistic forecasts about costs are revealed to have been overly optimistic. The Social Security reform debate is dead. The profligate prescription drug benefit plan that is so bemusing and ineffective that the government is having to take out paid advertisements just to get people to sign up (only government would take out ads instructing people on how to plunder it) has added another $8 trillion or so to the long-term cost of Medicare. On the bright side, at least it is helping lots of companies like Boeing:
"The Medicare Prescription Drug, Improvement and Modernization Act of 2003 reduced our APBO [accumulated postretirement benefit obligation] by $439 [million]..."... and IBM:
"In connection with the Medicared Prescription Drug Improvement and Modernization Act of 2003, the company is expected to receive a federal subsidy of approximately $400 million to subsidize the prescription drug coverage provided by the US nonpension postretirement benefit plan..."I'm worried about my ability to raise a family when all of these obligations catch up with us.
Alternative minimum tax (April 16, 2006)
With April 15, er, 17 upon us, the annual call for a simpler tax code is reverberating off the pages of many a media outlet. Adam Smith's four pillars of an effective tax code--equity, certainty, convenience, and economy (efficiency)--have crumbled. As if they ever existed, that is. The Revenue Act of 1913 that formed the basis of the IRC, which was codified officially for the first time in 1939, was several hundred pages long. The current tax code is a hodge-podge of amendments that have been added on sporadically over for ninety years (it now approximates infinity-billion pages). The old stuff isn't scrapped. Instead, new stuff is piled on.
As tedious as the code has become, with over half of all Americans now hiring preparers, the reviled AMT is as big a target for criticism. It too is generally described as being shrouded in mystery. But it's actually pretty simple.
The taxpayer (MFJ) gets an exemption on the first $58,000 ($40, 250 for single filers). After that, income is taxed at a 26%. At $175,000 it shifts to 28%. Most deductions and credits disappear--those for tax-exempt vehicles, exemptions (children, sick widows and orphans, senile mothers), real estate and state tax deductions, and child and dependent tax credits. Some notables that remain are charitable contributions, mortgage interest, and gambling losses (!). It's a quasi-flat tax.
The amount owed under AMT is compared with what is owed under regular tax computation and the greater amount must be paid. Because the thresholds are nominal, the AMT hits more people in places that are relatively expensive (nominally, not necessarily in real terms). This also means the tax disproportionately snares folks in blue states (the r-squared for per capita mean income by state and the percentage of the state voting for Kerry in '04 is a statistically significant .30). The AMT is often derided for this, although the regular tax code essentially works the same way.
I'm not an AMT apologist. Losing the exemptions particularly irks me because it, like progressive credits/deductions such as the child tax credit and the phasing out of personal exemptions, encourages poor people to have children (although if they're perspicacious enough to execute tax-planning strategies it might not be as bad as I fear!) and discourages wealthy ones from reproducing. This accentuates the wealth gap (think if Bill Gates had twenty kids to spread his $60 billion across while Joe Broke passed his meager savings on to his only son instead of splitting it up among ten urchins). It also lowers the nation's IQ.
But the AMT is not that complicated. If it's all we had, the tax code would be a lot less confusing.
Growth slows, gap widens (February 25 2006)
While the nation's economy zips along at a respectable 3.5% in 2005, personal economies are not doing as well:
After growing rapidly during the boom of the 1990s, the net worth of the typical American family rose only 1.5% after inflation between 2001 and 2004, the Federal Reserve said in an update of a survey it does once every three years.GDP grew a hair over 2.1% during the same period. The change was not felt equally, however, as the wealth gap was augmented:
The net worth of the [family at the 90%] rose to $831,600, a 6.5% increase from 2001, adjusted for inflation. In contrast, the net worth of the typical family [at the 25%] fell 1.5% to $13,300.This evidences further the prescience of Herrnstein and Murray, who argued that the new global economy will be one sorted by intelligence, where opportunities for the most endowed expand exponentially, while those with less cognitive firepower find themselves increasingly relegated to a penury existence.
Other recent economic news does not strike me as encouraging. Americans actually spent more than they made last year, and the poverty rate has been on the rise for half a decade. Much of the recent economic expansion has been driven by a surge in real estate prices (another factor in the widening of the wealth gap). The US trade deficit hit a record $726 billion in 2005. Warren Buffet is worried we're giving foreigners a stake in our country (government debt) for cheap consumables that allow us to keep the good times rolling today by selling away our future.
Here's an analogy that illustrates what's happening as my simple mind understands it. I make $30,000 a year working. I spend $40,000 a year buying consumables (stuff that doesn't represent a future monetary benefit). I've been doing this for five years. Fortunately, I own a house that was worth $100,000 five years ago. Every year over the last five its value has been increasing by $11,000. To feed my consumption habits, I've been taking out a home equity loan for $11,000 on an annual basis. Thus, my net worth has been up $1,000 ($30,000income-$40,000spent+$11,000equity) for five years running. But what happens if the value of my house crashes? Or just stops appreciating? My standard of living will have to be adjusted downward drastically. If not, I'll fall into debt and the whole miasma will be compounded by high interest rates. This is not a happy situation. Eventually something's going to give.
Immigration patterns do not help either. Total GDP is growing (recall 2.1% from 2001 to 2004) over 50% faster than the growth of GDP per capita (which grew less than 1.4% from 2001 to 2004). In other words, the economic output of the nation as a whole is increasing a lot faster than the economic output per American is. Much of the GDP growth over this period, then, does not translate into a better standard of living for the average resident.
To grasp this concept, consider what would happen if the US gobbled up Mexico tomorrow. Total GDP would grow by almost 10% in a single day, but GDP per capita would plummet by 20% just as fast. Life would get vastly better for Mexicans as they enjoyed the full benefits of US prosperity and economic might. But the situation would deteriorate drastically for most Americans, especially those in the lower class who would find themselves competing with tens of millions of mestizos more than happy to do dirty work for $5.15 an hour with no benefits.
"So what," the good libertarian would ask. "Labor will be cheaper and businesses will make bigger profits." Indeed they would, at least in the short run (necessity being the mother of invention, places like Japan that are mechanizing rather than chasing the cheapest serf are going to create robots that can work more effectively and cheaply than even the most diligent cacique). But the profits of big business would be subsidized by Joe American. The Mexican laboring for minimum wage is now entitled to the full buffet that is the US welfare system and the costs that accompany it--$8,000 or so per year for each child (another $3,000 annually if the whelp needs ESL services), infrastructure use, medical services, police and fire, pollution, increased population density, linguistic barrier costs, ad infinitum. Just looking at two kids with ESL brings the taxpayer a bill of more than $20,000. We're lucky if the hard working Mexican is paying $5,000 in taxes.
I use the extreme example of combining the US and Mexico into Amerixico to illustrate what is in effect already happening, albeit at a considerably slower pace than our hypothetical overnight shift. One-fifth of ethnic Mexicans now live in the United States, and the number is growing everyday. It's great for the average Mexican, who goes from making five bucks a day to five bucks an hour. If I was in his situation, I'd probably do the same. It's also great for the Mexican government, which exports its social problems north of the border and gets $17 billion a year in cash in return. It's great for agro-business and other heavily labor intensive industries that enjoy an increased labor supply and therefore less powerful unions and lower wages. But it's terrible for the US native who is footing the bill while jobs are going to immigrants who do not spend the money in the local community but instead send it back home.
We should create a merit immigration system that imports people who are going to be net benefits rather than public costs in tandem with a barrier along the southern border to stop low-value adding illegal immigration. Stop pouring money into the fruitless Middle East and invest it in alternative energy development. Energy independence would keep the $200 billion or so we'll spend on foreign oil this year in the country and starve the terrorism beast. Making the coal-to-gas process economically viable would allow us to actually become a net energy exporter because we have so much coal. Support federal and state vouchers to improve educational efficacy and cut costs brought on by ineffective teachers and bloated administrative bureaucracies. Legalize euthanasia to blunt the entitlement tidal wave that is the retiring baby boomer generation. Provide financial incentives (e.g., phase the child tax credit and the child dependency exemption in progressively rather than regressively) for wealthy people to have more children and for poor people to have fewer ones to close the wealth gap and raise the national IQ.