Wednesday, July 15, 2015

Even with Billions of Dollars of Taxpayer Support, Elon Musk Is No Thomas Edison

Without an emoticon for bizarre or laughable, CNBC favorably compared Elon Musk, founder of Tesla Motors, to Thomas Edison. If nothing else, Musk should receive the chutzpah award for naming his company after Nikola Tesla, creator of modern alternating current (AC) electricity systems. But after 12 years of operations and $4.9 billion of taxpayer subsidies, as calculated by the Los Angeles Times, Tesla Motors will produce only 45,000 vehicles for all of 2015 compared to Ford and GM which will sell 225,000 and 246,000 vehicles, respectively, for July 2015 alone.

Matching Tesla's underachievement in sales, investors in Tesla stock will earn $1 every $80 of investor cash in 2015. Alternatively, investors can purchase $1 of earnings from Ford and GM for less than $8.

In other words, the rate-of-return for Ford and GM investors is approximately 15 times that of Tesla stockholders. Furthermore, the only reason Tesla is earning a rate-of-return less than 1% is taxpayer subsidies of almost $5 billion.

Think of what Thomas Edison could have done with billions of dollars of taxpayer subsidies. He would not produce fewer than 50,000 vehicles per year that have a range of less than 270 miles. Only Hollywood celebrities can afford a $125,000 vehicle that cannot transport them beyond their award ceremonies in Las Vegas. I did not know Thomas Edison - he grew up in New Jersey and I in Georgia - but I think I can confidently say that, "Elon Musk, you are no Thomas Edison."

Ernie Goss

Thursday, June 18, 2015

Kansas City, a Laboratory for Kansas Tax Cuts: Data Indicate Tax Reductions Stimulated Growth

The Kansas City Metropolitan area is divided into two portions, Kansas and Missouri. This makes KC a good laboratory to gauge the effectiveness of economic policy changes made on one side, but not the other. For example, what do metro growth numbers have to say about the wisdom of the 2012 and 2013 Kansas tax reductions?

Post Tax-Cut Earnings: From March 2012 to March 2015, the Kansas fraction of the metro grew its average weekly wages for private workers by 6.7%, which was higher than the Missouri side's growth of 5.6%.

Post Tax-Cut Job Performance: During this same time period, the Kansas side of the metro experienced private job growth of 7.5% compared to a much lower 4.4% for the Missouri segment of the metropolitan area. Both sides of the metro area reduced the number of government workers, but the Kansas side cut 4.8% of its government jobs, while the Missouri portion shrank 1.0% of its public jobs. Not surprisingly, Kansas public workers are raising a ruckus, claiming an economic calamity.

At the state level, 2012 to 2014 personal income growth for Kansas surpassed that of Missouri and Nebraska, but trailed Colorado and Oklahoma. But even after the tax cut, the Sunflower state's 2014 state taxes as a percent of personal income were still higher than all of its neighbors of Colorado, Missouri, Nebraska and Oklahoma.

Post tax-cut data from Kansas City, the state of Kansas, and its neighbors support the hypothesis that the tax reductions improved the state's relative economic performance. However critics of the reduction correctly argue that this data, as presented here, shows correlation, but does not prove causation. Too bad in 2015 Kansas politicians retreated, and once again boosted taxes before investigating the impact of the 2012 and 2013 cuts.

Ernie Goss

Thursday, May 21, 2015

Passage of Trans-Pacific Trade Pact Will Increase U.S. Exports and Economic Growth

Since the beginning of the U.S. economic recovery in July 2009, the nation's gross domestic product (GDP) has expanded at a puny pace even though employment growth has been fairly strong. Offsetting the job expansion, there has been lethargic capital spending and productivity growth. During this time, GDP per hour worked (productivity) expanded at a compound annual rate of 0.7%, which is one-third that in a typical recovery, and less than one-half of the annual pace since 1964.

Tom Duesterberg of the Aspen Institute argues that the collapse of U.S. export leadership has contributed to this decline. He finds the U.S. is party to just two of the more than 400 regional free trade agreements that have come into effect since 1995.

As a result, World Bank and Eurostat data show the U.S. share of global exports have sunk from 14% in 2000 to approximately 9% in 2013.

Have weaker exports contributed to differentials among productivity growth for the states? Since 2009, the top 25 productivity growing states increased exports at almost twice that of the remaining 25 states. Over this period of time, North Dakota came in at the top for productivity growth and expanded exports by 34.5%. Meanwhile, Florida, the bottom productivity growth state, grew exports by only 13.1%.

Additional statistical analysis show a strong positive association among export growth, capital spending and productivity gains at both state and national levels. The data provides solid support for Congress to boost the nation's capital spending, economic competitiveness and productivity growth by immediately providing President Obama with fast track trade authority so the Trans-Pacific Partnership trade pact could be implemented.
Ernie Goss

Thursday, April 16, 2015

Income Taxes, What's a Fair Share? Federal Government and Fed Actions Fail Low Income

In 2000, workers with incomes greater than $200,000 earned 33% of the nation's income, but paid 46% of income taxes. In 2012, well after the Bush tax cuts, the same high income group earned 41% of the nation's income, but paid a higher 55% of U.S. income taxes.

In 2000, workers with incomes less than $40,000 earned 14% of the country's income but paid 9% of U.S. income taxes. By 2012, this low income group earned 7% of U.S. income, but paid only 4% of U.S. income taxes.

That is, high income workers are paying an increasing share of the nation's income tax burden. Despite the rising share of federal income taxes paid by high income workers, income inequality continues to escalate. University of California at Berkeley economist Emmanuel Saez estimates that between 2009 and 2012, the top 1% captured 95% of total income growth.

What accounts for this? Certainly not income tax rates! It is arguably that the Federal Reserve (Fed) and federal government policies since the recession of 2008 have differentially aided high income, high wealth Americans.

The Feds bond buying programs (QE1, QE2 and QE3) pushed up asset prices including stock prices, bond prices, art, and other assets at an unprecedented rate. For example, between December 2008 and March 2015, prices of S&P 500 stocks collectively increased by 131%. Additionally, the 2008-09 bailouts of AIG, GM, Bear Stearns, Goldman-Sachs, Morgan Stanley, and the Obama Administration's $830 billion stimulus program mostly stimulated the incomes of the nation's wealthiest.

Federal government and Fed market intervention appear to have widened the gap between the high and low income groups. Tackling income inequality with income tax rates, as often advanced, has not and will not work.

Ernie Goss

Thursday, March 19, 2015

Presidential Budget Deficits, 1930-2014: Both Parties Big Spenders: Democrats Big Taxers

Since 1930, the federal government has spent a total of $71.5 trillion and collected $59.9 trillion in taxes, thus adding $11.6 trillion to the national debt, not including interest. As a share of gross domestic product (GDP), the deficit was 3.3% for the full 84-year period. In terms of party affiliation, Democrats expanded the debt by an average 3.1%, while Republicans boosted the debt by a higher 3.5% average.

As a share of GDP, both Democrats and Republicans spent an average of 20.3%, but Democrats levied higher taxes at 17.2% while Republicans imposed a lower 16.8% in taxes. In all cases, it was assumed that the incoming president does not own the deficit for his first year of service.

Among the 13 presidents serving during this period, the top deficit creating presidents were Roosevelt and Obama while the top surplus generating presidents were Clinton and Truman. Clinton and Carter collected the largest percentage of taxes while Roosevelt and Obama spent the most heavily among the 13 presidents.

With no budget surpluses in sight and 10,000 baby boomers retiring each day, the 2015 national debt of $18.1 trillion, or 103% of GDP, presents a real challenge for younger generations. With current federal tax collections below average, and federal spending above the 84-year average, the nation’s debt level will continue to grow as the share of the population bearing the burden declines.

Without tax reform and spending restraint, Gen-Xers and Millenniums will face higher taxes, elevated interest rates, rising inflation, or all three of these “bads.” Former Colorado governor Richard Lamm sums it up quite well saying “Deficits are when adults tell the government what they want-and the kids pay for it.”

Ernie Goss

Wednesday, February 18, 2015

High Wage Jobs Move to Right-to-Work States, Union-Shop States Lose Manufacturing Jobs

Just last month, Mercedes-Benz announced that, in order to become more cost-competitive, it was moving its U.S. headquarters from New Jersey, a union-shop state, to Georgia, a right-to-work state.

Right-to-work laws, as authorized by the 1947 Taft-Hartley Act and passed by Georgia, prohibit unions and employers from entering into agreements that require employees to join a union and pay union dues in order to get or keep a job. Twenty-four states have enacted right-to-work laws. The remaining 26 states and DC are union-shop states that require an employee to become a member of the union in order to retain a job.

Union leaders maintain the objective of right-to-work laws is to sow dissension among workers and weaken the labor movement. Proponents of right-to-work laws assert that as a matter of economic freedom, workers should not be required to join a union and that this freedom supports greater economic growth among right-to-work states. Economic data from 2000 to 2013 show right-to-work states did expand economic growth, as measured by non-inflation-adjusted GDP, by 70.7 percent compared to 59.3 percent for union-shop states.

During this same period of time, right-to-work states expanded manufacturing wages and salaries by a median 7.7 percent, while union-shop states experienced a median 3.0 percent decline in manufacturing wages and salaries. In fact, 16 of the 26 union-shop states suffered a decline in manufacturing wages and salaries, while only 6 of the 24 right-to-work states experienced a decrease. Furthermore, the share of manufacturing jobs held by union-shop states fell from 55.1 percent to 53.9 percent over the thirteen year period. But the union-shop states' share of the nation's high-wage heavy manufacturing jobs sank by an even larger three percentage points.

Data show high wage manufacturing industries, normally dominated by unions, such as steel and automobile, are moving to and expanding in right-to-work states. With manufacturing firms becoming increasingly mobile, the pressure to pass right-to-work laws will grow in the years ahead. I expect Missouri to be the next state to leave the union-shop coalition.

Ernie Goss

Tuesday, January 06, 2015

Taxing the Sick?

Yesterday’s online version of the New York Times includes an article by Robert Pear, “Health Care Fixes Backed By Harvard’s Experts Now Roil Its Faculty” (January 5, 2015), http://www.nytimes.com/2015/01/06/us/health-care-fixes-backed-by-harvards-experts-now-roil-its-faculty.html?_r=0 . It seems that Harvard faculty are miffed that the Affordable Care Act is starting to adversely affect them.  Like other employers, Harvard is passing costs on to its employees in the form of additional cost-sharing requirements for medical treatment.  Some of those employees think those extra costs are tantamount to a pay cut.  Indeed!  (And how do employers feel if they don't pass those costs along?  A profit cut!?!  I think they are starting to get it.) 

Jerry Green, a professor of economics and former provost, is quoted as saying that the higher out-of-pocket costs “[Are] equivalent to taxing the sick[.]”  Further, he opined, “I don’t think there’s any government in the world that would tax the sick.”  This takes me back to my law school days with the late Professor Francis Allen.  One of my really smart classmates said something like this once.  I cannot remember the content, but I remember the response.  Professor Allen smiled and said, “Oh, really, Mr. Fishman?  Now you don’t mean that.”  (I have lost track of Mr. Fishman, but he is probably an investment banker or ruling a small island somewhere.) 

One expects students, who are unlearned and inexperienced, to make rookie mistakes.  But an economics professor at Harvard?  I don’t think Professor Green has been paying attention to the content of the ACA.  Among other things, it includes an excise tax imposed on medical devices, which became effective in 2013.  If you make and sell a medical device (like a hip implant used to treat degenerative disease), you must pay 2.3 percent of the selling price to the federal government.  (If you don’t believe me, see  http://www.irs.gov/uac/Newsroom/Medical-Device-Excise-Tax ). Given the inelastic demand for such devices, it is highly likely that at least some of those taxes are passed on through higher costs to the sick people (perhaps indirectly through their insurers) who need those devices. Taxing the sick is indeed part of the ACA in other ways, too.  It makes it more difficult to deduct health care costs you incur (arguably another form of taxing the sick).  And try not buying insurance -- you will likely pay a penalty tax for not doing this, and this tax applies whether or not you are sick.

The excise tax on medical devices could be among the provisions targeted by the new Congress.  Even Democrats like Al Franken are not so sure about this tax, perhaps because some of the medical device manufacturers affected by the tax are located in Minnesota.  (For a mainstream editorial pointing out that ironic opposition, but persisting in supporting this tax purely for revenue reasons, see http://www.usatoday.com/story/opinion/2015/01/04/obamacare-medical-device-tax-repeal-congress-editorials-debates/21261737/ .)  Apparently, the industry may not be able to pass on all of those costs to the sick, but must bear some of them on its own.  (Innovation may be an unintended casualty of this kind of incremental cost burden - but that is a subject for another discussion.)

William F. Buckley once famously stated that he “would sooner be governed by the first two thousand names in the Boston telephone directory than by the two thousand members of the faculty of Harvard.”  And that probably goes for other faculties, too, including my own.  Idealism can cloud one’s judgment, though we should expect more from the learned souls entrusted to educating our young people.  It is puzzling why that expectation is so often unrealized from the academic world.  And sadly, even our elected officials are prone to make similar mistakes.  Only an informed citizenry can bring them back to reality.

Grand statements that healthcare is a human right or a free good sound utopian and so affirming, but the rest of us understand the harsh reality that it is another service for which payment is necessary.  Despite its many flaws, the Affordable Care Act was also not entirely wrong when it incentivized insurance products in which personal responsibility for costs bears an increasingly greater role.  For those who take that responsibility seriously and can afford to bear those costs, financial tools like HSAs can help.  I explore this (and other tax dimensions of the ACA) in my recent article, “Health Accounts/Arrangements:  An Expanding Role Under the Affordable Care Act?” (available at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2519268).  

Remember, if there is a cost incurred, someone will pay it, and it might even be you.  Bear that in mind as our new Congress and state legislatures get underway in 2015.  Happy 2015.