Activists have called for a nation-wide job “walk off” on Monday in order to pressure Congress and the Administration to legalize those who have crossed US borders illegally to find jobs. I do not believe this will help their cause in any way.
There is no question that the US economy is helped by the presence of a massive number of workers who have entered the US illegally. These illegal workers contribute to the strength of the economy, providing it with some of the work force necessary for continued growth. For that very reason, President Bush is right when he calls for a guest worker program that would permit the US to legalize the over ten million currently illegal workers employed in the economy.
House Republicans are also right to insist that these individuals not be credited with even a second on the clock toward citizenship. What we need is a guest worker program, not a citizenship program. Judging by the Mexican and Latin American flags in the streets during recent protests, it would appear that most of those working illegally in the US economy are not interested in US citizenship. Rather, they are interested in jobs. In that sense, they are not immigrants. So, it seems that we have a happy convergence of interests on these issues.
However, the compromise necessary to get a rational guest worker program that does not radically increase the voting population by linking a job to potential citizenship is not likely to be encouraged by this Monday’s action. It is more likely to anger a very large portion of Americans, particularly in the heartland. The presence of illegal workers is particularly felt in our coastal areas located largely in “blue states.” These states are a good deal more economically and politically sensitized to the need for these workers. While the protests will likely resonate in the “blue states,” citizens in “red states” are more likely to see this as an attempt at economic (and political) blackmail. That will only harden opposition to compromise at a time when compromise is what is needed.
It is hard to imagine that the protest organizers are not aware of this. Hence, it would appear that they do not want compromise. They want confrontation. Secure jobs may be what most of the illegal population seeks, but that is not the goal of the organizers of this action. They would seem to have other aims in mind. Unfortunately, they are willing to use both the illegal workers and the legitimate issue they represent as pawns in their own political game.
Sunday, April 30, 2006
Saturday, April 29, 2006
The Case of Mary McCarthy and the Limits of Political Opposition
Mary McCarthy, a CIA officer who served in the Clinton White House, recently was fired within days of her planned retirement for surreptitiously divulging classified information to the press. Speaking on condition of anonymity, law enforcement officers have linked her to press reports on the existence of a covert prison system for holding terrorist suspects, leaks that the administration says have done irreparable damage to U.S. foreign policy. Ms. McCarthy, whose lawyer denies that she leaked any classified information, is contesting her release from the CIA, which carries with it the loss of a retirement pension.
Several organizations and individuals have rushed to Ms. McCarthy's defense arguing that she engaged in an act of conscience against Bush administration policies that she found morally repugnant. Others have argued that she is a “whistle blower,” laying bare the illegal acts of the government in its prosecution of the war on terror. Both of these claims fail to hold up under scrutiny.
Whistle blowers are those who reveal the illegal acts of government. The covert prison system (assuming this is the information that she divulged) is not a violation of U.S. law. Therefore, her opposition is not based on the legality of the CIA operation, but rather on her personal opposition to it. Stated bluntly, she engaged in a transparent effort to undermine U.S. foreign policy.
The defense that she did so based on her moral opposition to the prison system flies in the face of other moral responsibilities that Ms. McCarthy has. In addition to her oath not to divulge classified information, Ms. McCarthy has violated the public trust. CIA officers are not elected. In a democracy that means they do not have the right to make policy. They are government employees hired for their professional competence and expected to carry out their responsibilities in a politically neutral manner. If Ms. McCarthy disagrees with policy, then she has the moral responsibility to resign in protest. Instead, she chose to provide information to the press under the table with the intent of undermining policy she opposed. Her subsequent attempts to save her CIA pension lay bare the extent to which she is willing to sacrifice for the sake of her values. All of this suggests that she was moved by crude political opposition to a democratically elected administration, not moral impulse. If the charges against her are true, Ms. McCarthy has used her position of access to classified information in the CIA to further the partisan priorities and interests of those not elected to office. Further, she has done so by breaking her oath to protect classified information, and she has violated (shall I dare say it?) the sacred public trust granted her. And that is morally repugnant.
What is even more troubling however is that some are willing to defend Ms. McCarthy's supposed right to interject herself into the policy process by divulging classified information. Their eagerness to do so raises the question of just how far these same groups will go to impose their private policy preferences by undemocratic means. Democrats, Republicans, and independents are justly outraged.
Several organizations and individuals have rushed to Ms. McCarthy's defense arguing that she engaged in an act of conscience against Bush administration policies that she found morally repugnant. Others have argued that she is a “whistle blower,” laying bare the illegal acts of the government in its prosecution of the war on terror. Both of these claims fail to hold up under scrutiny.
Whistle blowers are those who reveal the illegal acts of government. The covert prison system (assuming this is the information that she divulged) is not a violation of U.S. law. Therefore, her opposition is not based on the legality of the CIA operation, but rather on her personal opposition to it. Stated bluntly, she engaged in a transparent effort to undermine U.S. foreign policy.
The defense that she did so based on her moral opposition to the prison system flies in the face of other moral responsibilities that Ms. McCarthy has. In addition to her oath not to divulge classified information, Ms. McCarthy has violated the public trust. CIA officers are not elected. In a democracy that means they do not have the right to make policy. They are government employees hired for their professional competence and expected to carry out their responsibilities in a politically neutral manner. If Ms. McCarthy disagrees with policy, then she has the moral responsibility to resign in protest. Instead, she chose to provide information to the press under the table with the intent of undermining policy she opposed. Her subsequent attempts to save her CIA pension lay bare the extent to which she is willing to sacrifice for the sake of her values. All of this suggests that she was moved by crude political opposition to a democratically elected administration, not moral impulse. If the charges against her are true, Ms. McCarthy has used her position of access to classified information in the CIA to further the partisan priorities and interests of those not elected to office. Further, she has done so by breaking her oath to protect classified information, and she has violated (shall I dare say it?) the sacred public trust granted her. And that is morally repugnant.
What is even more troubling however is that some are willing to defend Ms. McCarthy's supposed right to interject herself into the policy process by divulging classified information. Their eagerness to do so raises the question of just how far these same groups will go to impose their private policy preferences by undemocratic means. Democrats, Republicans, and independents are justly outraged.
Friday, April 28, 2006
Russia Playing the Oil Card
The Russians have been successfully check-mating the United States of late in the effort to dissuade Iran from obtaining a nuclear capability. The continuing impasse has continued to fuel rising oil prices on international markets. While the Russians have openly declared that they are opposed to Iran’s development program, they are also opposed to the use of economic sanctions or military force to accomplish the goal. So, what is left? Nothing, really, other than moral persuasion.
Without Russia’s support, the UN Security Council will not be able to act. If anything is to be done, NATO will have to assume full responsibility.
Why is Russia blocking the US and Western Europe? Part of the answer lies in Moscow’s desire to deconstruct the current world order from US (or potentially a US/EU) hegemony into a multi-polar order in which Russia is a major player. A nuclear Iran could potentially assist in the process.
A more complete picture begins to take shape, however, when one considers Russia’s complaints about US and European insistence that it sell rights to the pipelines through which it provides natural gas to the EU. The Russians believe they are being treated unfairly, arguing that the West would not accept similar conditions. More importantly, however, the Russians calculate that world energy prices have given them a strong hand to play vis-à-vis Europe and the US at present and into the foreseeable future. They intend to press their advantage while global oil and natural gas prices remain high in order to obtain a better deal, politically and economically, on a whole host of issues. They will also do everything possible to keep those prices high.
Without Russia’s support, the UN Security Council will not be able to act. If anything is to be done, NATO will have to assume full responsibility.
Why is Russia blocking the US and Western Europe? Part of the answer lies in Moscow’s desire to deconstruct the current world order from US (or potentially a US/EU) hegemony into a multi-polar order in which Russia is a major player. A nuclear Iran could potentially assist in the process.
A more complete picture begins to take shape, however, when one considers Russia’s complaints about US and European insistence that it sell rights to the pipelines through which it provides natural gas to the EU. The Russians believe they are being treated unfairly, arguing that the West would not accept similar conditions. More importantly, however, the Russians calculate that world energy prices have given them a strong hand to play vis-à-vis Europe and the US at present and into the foreseeable future. They intend to press their advantage while global oil and natural gas prices remain high in order to obtain a better deal, politically and economically, on a whole host of issues. They will also do everything possible to keep those prices high.
Thursday, April 27, 2006
Political Contribution Imbalance
I could not resist posting one more thought on the political rumblings involving the oil companies. As mentioned yesterday, the political machinery is moving to find some way to address consumer fears about high gas prices. Even people otherwise known for sound economic policies are seeming to turn on the oil industry, as they seek a scapegoat to mollify voter concerns.
A look at the data at www.opensecrets.org, a site run by the Center for Responsive Politics, may provide some insight. The opensecrets site collects data on political contributions, which can be sliced and diced many different ways. You may be wondering where oil industry money goes?
Republicans have been getting an increasing share of these funds. In 1990, Republicans outdistanced Democrats by 62% -38%, which is still a considerable margin. But data for 2006 show that the margin has increased, reaching 84% to 16%. Thus, Republicans have raised about $6 million to the Democrats $1 million. The actual data by year can be found here:
http://www.opensecrets.org/industries/indus.asp?Ind=E01
This got me thinking. Political contributions don't come with guarantees. The recipient can always change his or her mind about your cause. If you hedge your bets, giving some to both sides, you may be able to exert some quiet influence if your position is sound, and the money you give to the other side will perhaps mollify them somewhat in order to keep them from resisting your interests. Lopsided giving removes the silencing effect on the minority side. When, as in the current situation, you touch upon a hot-button political issue, the minority-fundraising side has a big wedge issue to expose the other side's unseemly behavior. They can point fingers without a mirror shining back at them.
That could be what is happening with Republicans these days. In response to the concerns about finger pointing, they have incentives to do whatever they can to seem independent and uncooperative with the affected interest group. As mentioned above, we all know that support can be fickle, and the industry can expect its support to shift if the votes aren't there from the people.
I don't think that supporting the Oil & Gas industry is a bad thing. There are good reasons for the shift in contributions. After all, contributing to a political machine that wants to raise gasoline taxes for the purpose of cutting demand for your product is hardly good for business. (Other commentators have recently raised this point about Democrat association with schemes to raise gas taxes - including Ann Coulter.) The windfall profits tax discussed by Ernie a couple of days ago is along these same lines, though even worse for business due to its direct impact on global competitiveness.
But this era of transparency in political support, coupled with the potential for rapid communication, means that there may be special risks associated with being a lopsided contributor. It may also help explain some of the crazy political rhetoric we have been hearing.
EAM
A look at the data at www.opensecrets.org, a site run by the Center for Responsive Politics, may provide some insight. The opensecrets site collects data on political contributions, which can be sliced and diced many different ways. You may be wondering where oil industry money goes?
Republicans have been getting an increasing share of these funds. In 1990, Republicans outdistanced Democrats by 62% -38%, which is still a considerable margin. But data for 2006 show that the margin has increased, reaching 84% to 16%. Thus, Republicans have raised about $6 million to the Democrats $1 million. The actual data by year can be found here:
http://www.opensecrets.org/industries/indus.asp?Ind=E01
This got me thinking. Political contributions don't come with guarantees. The recipient can always change his or her mind about your cause. If you hedge your bets, giving some to both sides, you may be able to exert some quiet influence if your position is sound, and the money you give to the other side will perhaps mollify them somewhat in order to keep them from resisting your interests. Lopsided giving removes the silencing effect on the minority side. When, as in the current situation, you touch upon a hot-button political issue, the minority-fundraising side has a big wedge issue to expose the other side's unseemly behavior. They can point fingers without a mirror shining back at them.
That could be what is happening with Republicans these days. In response to the concerns about finger pointing, they have incentives to do whatever they can to seem independent and uncooperative with the affected interest group. As mentioned above, we all know that support can be fickle, and the industry can expect its support to shift if the votes aren't there from the people.
I don't think that supporting the Oil & Gas industry is a bad thing. There are good reasons for the shift in contributions. After all, contributing to a political machine that wants to raise gasoline taxes for the purpose of cutting demand for your product is hardly good for business. (Other commentators have recently raised this point about Democrat association with schemes to raise gas taxes - including Ann Coulter.) The windfall profits tax discussed by Ernie a couple of days ago is along these same lines, though even worse for business due to its direct impact on global competitiveness.
But this era of transparency in political support, coupled with the potential for rapid communication, means that there may be special risks associated with being a lopsided contributor. It may also help explain some of the crazy political rhetoric we have been hearing.
EAM
Wednesday, April 26, 2006
A "Speed Pass by the Tax Man'?
In the latest of the parade of political grandstanding over rising gasoline prices, the Senate Finance Committee is now asking to examine the tax returns of major oil companies for the past five years. In the words of Chairman Charles Grassley, “"I want to make sure the oil companies aren't taking a speed pass by the tax man."
The full story can be found here:
http://www.breitbart.com/news/2006/04/26/D8H7VKKG0.html
I’m a little puzzled by this analogy, which I would guess comes from the tollway vernacular. Is there something wrong, somehow, with using a speed pass, instead of waiting in line to put in your coins? I would think that a speed pass involves efficiency, which we want in a tax system, don’t we?
But perhaps I’m being too cute by half. The real problem here is that I am highly skeptical they will be able to make any reasonable policy decisions based on the tax returns alone, without also poring over reams of additional financial data. That is a task best left to IRS auditors. But it makes for good political drama, and that’s apparently why they are doing it.
Members of both parties seem intent on making every political point possible on the gasoline price concerns of consumers. Harnessing fear is common political ploy. But the reality is that all of this effort will either do nothing helpful, or worse, it may do positive harm (as Ernie’s post from yesterday illustrates so well). We live in a global market for petroleum products, and when you have developing countries with appetites to become more like the U.S. in terms of consumption, coupled with political instability in the world, you will have higher prices. The politician's empathy (“feeling our pain”) and rhetorical bashing of "big oil" is not going to solve the problem. It will probably give me indigestion to listen to it all, though.
* * *
This will be my last post for a week or so, as I’m headed to an academic conference in Hamburg, Germany, to present a paper on Internet gambling issues. If you are interested, you can read a copy of the paper on my faculty webpage:
http://culaw2.creighton.edu/morse
Since Dr. Goss is also going to this conference, that means our colleague Terry Clark has full responsibility for the blog. Let him hear from you this week.
Best regards.
EAM
The full story can be found here:
http://www.breitbart.com/news/2006/04/26/D8H7VKKG0.html
I’m a little puzzled by this analogy, which I would guess comes from the tollway vernacular. Is there something wrong, somehow, with using a speed pass, instead of waiting in line to put in your coins? I would think that a speed pass involves efficiency, which we want in a tax system, don’t we?
But perhaps I’m being too cute by half. The real problem here is that I am highly skeptical they will be able to make any reasonable policy decisions based on the tax returns alone, without also poring over reams of additional financial data. That is a task best left to IRS auditors. But it makes for good political drama, and that’s apparently why they are doing it.
Members of both parties seem intent on making every political point possible on the gasoline price concerns of consumers. Harnessing fear is common political ploy. But the reality is that all of this effort will either do nothing helpful, or worse, it may do positive harm (as Ernie’s post from yesterday illustrates so well). We live in a global market for petroleum products, and when you have developing countries with appetites to become more like the U.S. in terms of consumption, coupled with political instability in the world, you will have higher prices. The politician's empathy (“feeling our pain”) and rhetorical bashing of "big oil" is not going to solve the problem. It will probably give me indigestion to listen to it all, though.
* * *
This will be my last post for a week or so, as I’m headed to an academic conference in Hamburg, Germany, to present a paper on Internet gambling issues. If you are interested, you can read a copy of the paper on my faculty webpage:
http://culaw2.creighton.edu/morse
Since Dr. Goss is also going to this conference, that means our colleague Terry Clark has full responsibility for the blog. Let him hear from you this week.
Best regards.
EAM
Tuesday, April 25, 2006
The Windfall Profits Tax is Bad for the Economy
Congress is currently deliberating the merits of what has been termed a “windfall” profits tax. According to the legislation (Senate Bill 1631), the federal government would impose a 50 percent excise tax on the excessive profits earned by U.S. oil companies. The tax, net of administrative expenses, would be returned to taxpayers in the form of rebates. The difficulties and the problems of such a tax are beyond the scope of this blog, but let me list just few of the negative outcomes and problems with this bill.
http://www.govtrack.us/congress/bill.xpd?bill=s109-1631
First, the tax is a 50 percent tax on the price of a barrel of oil in excess of $40. Historically, empirically, and theoretically, this will only reduce oil production thus creating shortages. It will also result in a higher price. Certainly the price will not rise by the full extent of the tax, but it will increase. Thus, oil companies and consumers are sharing the burden of the tax and the consumer is more likely to encounter gasoline outages and long queues at petroleum (I’m going to Europe this week) stations.
Second, it increases the size of the federal bureaucracy. In order for the tax to be something less than disastrous, the federal government will have to hire a fleet of accountants and economists to insure the proper administration and disposition of the tax. Just another “no economist left behind” law.
Third, it discourages firms in the oil industry from undertaking the investment necessary to produce more oil in years to come. Of course, there is a tax break for oil from new wells. But investors weary and wary of government involvement in this industry and others will provide diminished funds for ventures in which the government is likely to confiscate a portion of the profits.
Fourth, it politicizes the marketplace placing a drag on investment activities in the U.S. That is, investors will place a higher probability that the federal government will intervene in other industries. Is the pharmaceutical industry next?
Fifth, it is inconsistent with our notions of fair play. If we are going to tax an industry’s success, then we must stand ready to subsidize an industry’s failures. I assert that federal, state and local governments should do neither.
EPG
http://www.govtrack.us/congress/bill.xpd?bill=s109-1631
First, the tax is a 50 percent tax on the price of a barrel of oil in excess of $40. Historically, empirically, and theoretically, this will only reduce oil production thus creating shortages. It will also result in a higher price. Certainly the price will not rise by the full extent of the tax, but it will increase. Thus, oil companies and consumers are sharing the burden of the tax and the consumer is more likely to encounter gasoline outages and long queues at petroleum (I’m going to Europe this week) stations.
Second, it increases the size of the federal bureaucracy. In order for the tax to be something less than disastrous, the federal government will have to hire a fleet of accountants and economists to insure the proper administration and disposition of the tax. Just another “no economist left behind” law.
Third, it discourages firms in the oil industry from undertaking the investment necessary to produce more oil in years to come. Of course, there is a tax break for oil from new wells. But investors weary and wary of government involvement in this industry and others will provide diminished funds for ventures in which the government is likely to confiscate a portion of the profits.
Fourth, it politicizes the marketplace placing a drag on investment activities in the U.S. That is, investors will place a higher probability that the federal government will intervene in other industries. Is the pharmaceutical industry next?
Fifth, it is inconsistent with our notions of fair play. If we are going to tax an industry’s success, then we must stand ready to subsidize an industry’s failures. I assert that federal, state and local governments should do neither.
EPG
Monday, April 24, 2006
Mainstreet Economy Slows for April
The Survey of the Mainstreet Economy for April indicates that the economies of the non-urban, agriculturally dependent portions of the seven-state survey area weakened for the month.
Furthermore, retail sales and hiring were anemic for much of the survey area.
"Bank presidents and CEOs in the region, which includes the rural and non-urban portions of Colorado, Iowa, Kansas, Missouri, Nebraska, South Dakota and Wyoming, reported declining economic conditions as the overall index decreased to 48.0 from March’s soft 51.6, and below growth-neutral 50.0.
Conversely, farm land price growth remained strong with an April reading of 60.4, while farm equipment sales dropped below 50.0 for the first time to 47.8. It is clear that higher farm expenses are cutting into farmers’ willingness to buy new farm equipment.
Hiring in the rural areas weakened significantly to 39.4 from March’s already anemic 48.3. However, job growth was not uniformly weak with Colorado, Wyoming, Nebraska and South Dakota CEOs reporting positive growth in hiring for the month while Iowa, Kansas and Missouri bankers detailed pullbacks in job growth.
It is clear that rural areas with ties to energy production continue to fare very well even as higher energy prices generate significantly higher farm expenses and lower farm income.
As the Mainstreet economy softened, banking conditions remained robust with expansions in loan volume, checking deposits and certificates of deposits.
Looking six months out, bankers see future conditions stronger than current conditions with an April confidence index of 54.3, up from March’s stable 51.6. According to Gary Meyer of Peoples Webster County Bank in Red Cloud, Nebraska, “The biggest impact over the next four to six months will be the price of crude oil if it reaches $90 or more will probably force some agriculture producers out at the end of this year.”
Responses to two specific April survey questions showed that:
About 44 percent of the CEOs expect ethanol production to have a positive and significant impact on their rural economies for 2006.
Nearly 92 percent of the bankers say Wal-Mart’s impact on retail establishments in their area has been negative and significant. “In a community 12 miles from a Wal-Mart it is hard to have a retail main street,” reported Don Eberly, CEO of Stanton National Bank in Stanton, Nebraska.
Each month community bank presidents and CEOs are surveyed regarding current economic conditions in their area and their projected economic outlook six months down the road.
for more details go to:
www.outlook-economic.com
EPG
Furthermore, retail sales and hiring were anemic for much of the survey area.
"Bank presidents and CEOs in the region, which includes the rural and non-urban portions of Colorado, Iowa, Kansas, Missouri, Nebraska, South Dakota and Wyoming, reported declining economic conditions as the overall index decreased to 48.0 from March’s soft 51.6, and below growth-neutral 50.0.
Conversely, farm land price growth remained strong with an April reading of 60.4, while farm equipment sales dropped below 50.0 for the first time to 47.8. It is clear that higher farm expenses are cutting into farmers’ willingness to buy new farm equipment.
Hiring in the rural areas weakened significantly to 39.4 from March’s already anemic 48.3. However, job growth was not uniformly weak with Colorado, Wyoming, Nebraska and South Dakota CEOs reporting positive growth in hiring for the month while Iowa, Kansas and Missouri bankers detailed pullbacks in job growth.
It is clear that rural areas with ties to energy production continue to fare very well even as higher energy prices generate significantly higher farm expenses and lower farm income.
As the Mainstreet economy softened, banking conditions remained robust with expansions in loan volume, checking deposits and certificates of deposits.
Looking six months out, bankers see future conditions stronger than current conditions with an April confidence index of 54.3, up from March’s stable 51.6. According to Gary Meyer of Peoples Webster County Bank in Red Cloud, Nebraska, “The biggest impact over the next four to six months will be the price of crude oil if it reaches $90 or more will probably force some agriculture producers out at the end of this year.”
Responses to two specific April survey questions showed that:
About 44 percent of the CEOs expect ethanol production to have a positive and significant impact on their rural economies for 2006.
Nearly 92 percent of the bankers say Wal-Mart’s impact on retail establishments in their area has been negative and significant. “In a community 12 miles from a Wal-Mart it is hard to have a retail main street,” reported Don Eberly, CEO of Stanton National Bank in Stanton, Nebraska.
Each month community bank presidents and CEOs are surveyed regarding current economic conditions in their area and their projected economic outlook six months down the road.
for more details go to:
www.outlook-economic.com
EPG
Saturday, April 22, 2006
Ethanol and Mileage- More information
I heard that a reader has questioned whether my April 15 post regarding ethanol was correct in suggesting that E-85 ethanol blends provided significantly lower mileage than regular unleaded gasoline. The reader thought that this differential was closer to three percent, which is not much. I did some further checking, and I identified two sources that speak to this issue.
First, the Illinois Corn Growers (whom you could expect to take a favorable view about ethanol) state as follows on their website:
How will mileage and fuel economy be effected[sic]?
A gallon of E-85 ethanol fuel contains about 2/3 the energy of a gallon of gasoline. This means the E-85 vehicles should get about 2/3 the fuel mileage of the gasoline versions of these vehicles. However, the E-85 vehicles in the Illinois fleet are getting 5-10% above what was expected or 18-20 miles per gallon. Repairs and reliability of the E-85 Luminas have been slightly better than their gasoline counterparts.
Source: The Illinois Corn Growers Association
http://www.ilcorn.org/Ethanol/85__Ethanol/85__ethanol.html
Another study funded by the American Coalition for Ethanol focused on the mileage of 10% ethanol blend, which is commonly used in Iowa. The study reported that the 10% blend has 3% fewer BTUs than the same gallon of gasoline. However, that there is some indication that mileage does not always precisely track BTU content. For example, their tests showed much closer mileage spreads.
http://www.ethanol.org/documents/ACEFuelEconomyStudy.pdf
Thus, it appears that the 3 percent differential is for 10% Ethanol, not the E-85 mentioned in my prior post (which is 85 percent ethanol). The 10 percent blend regularly sells in Iowa for less than regular unleaded, and it requires no engine modifications. (Older vehicles might experience problems with fuel filters, though, if you have not burned ethanol before.) At an estimated $2.80 for ethanol blend and 2.85 for regular unleaded, if the mileage differential is three percent you probably would be ahead paying for the regular unleaded. You would need a much bigger discount for the E-85 fuel, though, as the increasing ethanol content means much less energy and, to some degree, lower mileage.
I hope this information helps. I note that this information comes from ethanol-friendly organizations, so if you think there is a conspiracy, you'll have to find another test to satisfy yourself. Or what the heck - why not do your own? You'll find it may not even be so difficult being "green". From my own experience, the mileage difference is small - but my driving habits vary depending on what music I play and how many semis are bearing down on my tail end as I try to accelerate gently. Sometimes fuel economy is not the top priorty, no?
Query whether we will see a larger discount for ethanol as petroleum prices rise relative to ethanol (and corn). The 5 cent discount that appeared when gas was $1 plus was closer to an even exchange assuming a 3 percent mileage disadvantage.
EAM
First, the Illinois Corn Growers (whom you could expect to take a favorable view about ethanol) state as follows on their website:
How will mileage and fuel economy be effected[sic]?
A gallon of E-85 ethanol fuel contains about 2/3 the energy of a gallon of gasoline. This means the E-85 vehicles should get about 2/3 the fuel mileage of the gasoline versions of these vehicles. However, the E-85 vehicles in the Illinois fleet are getting 5-10% above what was expected or 18-20 miles per gallon. Repairs and reliability of the E-85 Luminas have been slightly better than their gasoline counterparts.
Source: The Illinois Corn Growers Association
http://www.ilcorn.org/Ethanol/85__Ethanol/85__ethanol.html
Another study funded by the American Coalition for Ethanol focused on the mileage of 10% ethanol blend, which is commonly used in Iowa. The study reported that the 10% blend has 3% fewer BTUs than the same gallon of gasoline. However, that there is some indication that mileage does not always precisely track BTU content. For example, their tests showed much closer mileage spreads.
http://www.ethanol.org/documents/ACEFuelEconomyStudy.pdf
Thus, it appears that the 3 percent differential is for 10% Ethanol, not the E-85 mentioned in my prior post (which is 85 percent ethanol). The 10 percent blend regularly sells in Iowa for less than regular unleaded, and it requires no engine modifications. (Older vehicles might experience problems with fuel filters, though, if you have not burned ethanol before.) At an estimated $2.80 for ethanol blend and 2.85 for regular unleaded, if the mileage differential is three percent you probably would be ahead paying for the regular unleaded. You would need a much bigger discount for the E-85 fuel, though, as the increasing ethanol content means much less energy and, to some degree, lower mileage.
I hope this information helps. I note that this information comes from ethanol-friendly organizations, so if you think there is a conspiracy, you'll have to find another test to satisfy yourself. Or what the heck - why not do your own? You'll find it may not even be so difficult being "green". From my own experience, the mileage difference is small - but my driving habits vary depending on what music I play and how many semis are bearing down on my tail end as I try to accelerate gently. Sometimes fuel economy is not the top priorty, no?
Query whether we will see a larger discount for ethanol as petroleum prices rise relative to ethanol (and corn). The 5 cent discount that appeared when gas was $1 plus was closer to an even exchange assuming a 3 percent mileage disadvantage.
EAM
Friday, April 21, 2006
Must-See TV: Ernie on NETV Tonight
Ernie is not into shameless self-promotion, so I am doing it for him. (What are friends for, anyway!?!)
You can watch him discuss economic trends tonight on Statewide, which is broadcast on Nebraska Public Television at 7:30 p.m. It is also rebroadcast at 12:00 noon on Sunday, and perhaps also later on Sunday evening.
I don't know the topic, but knowing Ernie I predict it will be insightful, witty, and engaging. He just told me he is leaving to get a haircut before taping, so you might also tune in just to see how that turned out. (I hope his barber is having a good day.)
Have a great weekend.
EAM
You can watch him discuss economic trends tonight on Statewide, which is broadcast on Nebraska Public Television at 7:30 p.m. It is also rebroadcast at 12:00 noon on Sunday, and perhaps also later on Sunday evening.
I don't know the topic, but knowing Ernie I predict it will be insightful, witty, and engaging. He just told me he is leaving to get a haircut before taping, so you might also tune in just to see how that turned out. (I hope his barber is having a good day.)
Have a great weekend.
EAM
To the Gulag? Falun Gong Protestor Charged
I see from a Reuters news story that the protestor mentioned in my previous blog has indeed been charged with "intimidating and harassing a foreign official". I did a little research and found the applicable federal statute: 18 usc § 112
Subsection (b) states:
Whoever willfully--
(1) intimidates, coerces, threatens, or harasses a foreign official or an official guest or obstructs a foreign official in the performance of his duties;
(2) attempts to intimidate, coerce, threaten, or harass a foreign official or an official guest or obstruct a foreign official in the performance of his duties; or
(3) within the United States and within one hundred feet of any building or premises in whole or in part owned, used, or occupied for official business or for diplomatic, consular, or residential purposes by--
(A) a foreign government, including such use as a mission to an international organization;
(B) an international organization;
(C) a foreign official; or
(D) an official guest;
congregates with two or more other persons with intent to violate any other provision of this section;shall be fined under this title or imprisoned not more than six months, or both.
Subsection (d) clarifies, however, that this section should not be construed to inhibit first amendment rights: "Nothing contained in this section shall be construed or applied so as to abridge the exercise of rights guaranteed under the first amendment to the Constitution of the United States."
According to the Reuter's story, the defendant stated: "President Hu, your days are numbered. President Bush, make him stop persecuting Falun Gong." http://news.yahoo.com/s/nm/20060421/pl_nm/
china_usa_protester_dc_2
I did not witness this exchange. Those who have might wish to comment. But I see no inherent intimidation in telling someone "your days are numbered." It is, after all, a factually true statement. It is also a statement with religious signficance to some people. The Psalms include this admonition: "Teach us to number our days aright, that we may gain a heart of wisdom." (Ps. 90:12) Recall also the story of the prophet Daniel (Daniel 5) and the strange writing on the wall of the King, which was loosely translated as telling him the days of his kingdom were numbered, and that he had been weighed in the balance and found lacking. These are not threatening words, but words suggesting judgment and justice are inescapable. They are uncomfortable words of a prophet.
As to whether she "harassed" or prevented the performance of an official duty, I think the quality of those terms must be considered in light of the nature of the speech. Some harassment, in the form of discomfort, should be tolerated.
As previously discussed, we may not like impolite people. We may wish to stop them from disrupting the words of those we came to hear, and we may wish that they direct their protests elsewhere. But throwing them in jail is another matter. Certainly President Bush must deal with protestors who "harass" him, and I have noticed that they are often lionized (e.g., Cindy Sheehan) instead of criticized for subjecting the President to "indignity" as decried in an op-ed I read. This could simply mean that we want our guests treated better than we expect our family to be treated. Or it may reveal something less flattering about the mainstream press. This story is worth following.
EAM
Subsection (b) states:
Whoever willfully--
(1) intimidates, coerces, threatens, or harasses a foreign official or an official guest or obstructs a foreign official in the performance of his duties;
(2) attempts to intimidate, coerce, threaten, or harass a foreign official or an official guest or obstruct a foreign official in the performance of his duties; or
(3) within the United States and within one hundred feet of any building or premises in whole or in part owned, used, or occupied for official business or for diplomatic, consular, or residential purposes by--
(A) a foreign government, including such use as a mission to an international organization;
(B) an international organization;
(C) a foreign official; or
(D) an official guest;
congregates with two or more other persons with intent to violate any other provision of this section;shall be fined under this title or imprisoned not more than six months, or both.
Subsection (d) clarifies, however, that this section should not be construed to inhibit first amendment rights: "Nothing contained in this section shall be construed or applied so as to abridge the exercise of rights guaranteed under the first amendment to the Constitution of the United States."
According to the Reuter's story, the defendant stated: "President Hu, your days are numbered. President Bush, make him stop persecuting Falun Gong." http://news.yahoo.com/s/nm/20060421/pl_nm/
china_usa_protester_dc_2
I did not witness this exchange. Those who have might wish to comment. But I see no inherent intimidation in telling someone "your days are numbered." It is, after all, a factually true statement. It is also a statement with religious signficance to some people. The Psalms include this admonition: "Teach us to number our days aright, that we may gain a heart of wisdom." (Ps. 90:12) Recall also the story of the prophet Daniel (Daniel 5) and the strange writing on the wall of the King, which was loosely translated as telling him the days of his kingdom were numbered, and that he had been weighed in the balance and found lacking. These are not threatening words, but words suggesting judgment and justice are inescapable. They are uncomfortable words of a prophet.
As to whether she "harassed" or prevented the performance of an official duty, I think the quality of those terms must be considered in light of the nature of the speech. Some harassment, in the form of discomfort, should be tolerated.
As previously discussed, we may not like impolite people. We may wish to stop them from disrupting the words of those we came to hear, and we may wish that they direct their protests elsewhere. But throwing them in jail is another matter. Certainly President Bush must deal with protestors who "harass" him, and I have noticed that they are often lionized (e.g., Cindy Sheehan) instead of criticized for subjecting the President to "indignity" as decried in an op-ed I read. This could simply mean that we want our guests treated better than we expect our family to be treated. Or it may reveal something less flattering about the mainstream press. This story is worth following.
EAM
Falun Gong: A Protest Focuses Attention
As I type this blog, I am grateful for the freedom to do so. I am reminded of a quote attributed to Mark Twain: “Every American has the right to free speech and the good sense not to exercise it.” (I came across this in reading Jeremy Rabkin’s book, The Case for Sovereignty – a great book. More to come on that.)
Our main deterrence to expression is the risk of saying something stupid. Many of our readers undoubtedly think we cross that line regularly when they read our posts. But we persist nevertheless. The Internet makes this possible, as the blogspot provides us this space for free; we don’t even have to buy pen and ink.
We don’t face imprisonment or other punishment for our views if they conflict with the Government’s. (Well, there was that audit a few years back … hmm.) In fact, our government officials expect to be lampooned, caricatured, harassed, and otherwise treated with some level of skepticism by the public. Mostly we are polite, as that is the way we were brought up, but we are still free to raise our concerns. The main deterrence is looking like an impolite person, or in cases when you are factually wrong, a stupid ass. Some may think that is not enough deterrence, but it is still pretty good. Teachers, parents, and clergy everywhere have a big job in helping to instill those values of civil behavior.
But there may be times when polite behavior is not called for, when someone has to speak up. (It may be harder to teach this - but we must somehow learn.) The woman who called upon the Chinese President at the news conference yesterday may be in such a situation. It is really hard to know at this point, but if her allegations are true, it does seem hard to do business as usual with China.
Here is a website reporting news associated with the alleged organ harvesting and brutality toward Falun Gong prisoners. http://www.theepochtimes.com/211,111,,1.html
I have been wondering about these allegations for some time. I don’t know about this paper, or about the interests promoting the Falun Gong. I hate to be taken in by a scam. (By the way, do you use http://www.snopes.com/? It is a good site to detect urban legends and frauds, which often circulate via e-mail. But of course, they may just be part of a vast conspiracy. I heard “the man” works there, but I am not sure.)
The problem with Internet media is the classic problem of marketing – which I learned from Herb Schulte in an undergraduate course (hope you are well, Mr. Schulte): you can eliminate the middleman, but you cannot eliminate his function. We don’t have the editors and staffs of fact checkers that the traditional media has, so we approach these sources with some skepticism. (Yes, I approach traditional media with skepticism, too. But I think there are qualitative differences.) You must go with reputation, which can be sketchy.
I have received unsolicited e-mails from Falun Gong advocates spreading the word on the alleged atrocities. However, I also get unsolicited e-mails from various advertisers promising me stuff. Somehow, these can get lumped together and dismissed. But when the claim involves atrocities to humans, should we dismiss this so easily? In this case, we may just not want to believe it is true. Who wants to encounter this kind of monstrous evil? Moreover, if you are Wal-Mart (and hundreds of other retailers) and you are trading regularly, doesn't that create a PR problem that is even worse than the situation poor Kathy Lee Gifford faced a few years back? As a result of this skepticism, China gets a free pass and its government may be allowed to continue doing evil -- or it may just get a free pass.
I am pleased to know that we got to hear about, see, and discuss this woman’s protest. Drudge reported, however, that the news feeds in China were blacked out. Like the Watergate tapes, there were unexplained gaps. Surely the Chinese citizens know something is up. I also saw a Frontline program on PBS recently involving the protest in Tianamen Square. If you Google this term, you see pictures of the man standing defiantly before tanks. If a Chinese Google user does that, he gets tourist information. The Frontline people interviewed some Chinese graduate students, and they had no clue about this part of their history.
We can only hope that the truth comes out. I understand the UN is investigating. (But we know how altruistic and freedom-loving the U.N. officials can be. And when they are supposed to inspect, they get the job done right, no? Hmm.) But it is hard to maintain a grip on all the holes in a sieve. Some of the water will leak out. What will we do if we learn the Falun Gong allegations are true?
EAM
Our main deterrence to expression is the risk of saying something stupid. Many of our readers undoubtedly think we cross that line regularly when they read our posts. But we persist nevertheless. The Internet makes this possible, as the blogspot provides us this space for free; we don’t even have to buy pen and ink.
We don’t face imprisonment or other punishment for our views if they conflict with the Government’s. (Well, there was that audit a few years back … hmm.) In fact, our government officials expect to be lampooned, caricatured, harassed, and otherwise treated with some level of skepticism by the public. Mostly we are polite, as that is the way we were brought up, but we are still free to raise our concerns. The main deterrence is looking like an impolite person, or in cases when you are factually wrong, a stupid ass. Some may think that is not enough deterrence, but it is still pretty good. Teachers, parents, and clergy everywhere have a big job in helping to instill those values of civil behavior.
But there may be times when polite behavior is not called for, when someone has to speak up. (It may be harder to teach this - but we must somehow learn.) The woman who called upon the Chinese President at the news conference yesterday may be in such a situation. It is really hard to know at this point, but if her allegations are true, it does seem hard to do business as usual with China.
Here is a website reporting news associated with the alleged organ harvesting and brutality toward Falun Gong prisoners. http://www.theepochtimes.com/211,111,,1.html
I have been wondering about these allegations for some time. I don’t know about this paper, or about the interests promoting the Falun Gong. I hate to be taken in by a scam. (By the way, do you use http://www.snopes.com/? It is a good site to detect urban legends and frauds, which often circulate via e-mail. But of course, they may just be part of a vast conspiracy. I heard “the man” works there, but I am not sure.)
The problem with Internet media is the classic problem of marketing – which I learned from Herb Schulte in an undergraduate course (hope you are well, Mr. Schulte): you can eliminate the middleman, but you cannot eliminate his function. We don’t have the editors and staffs of fact checkers that the traditional media has, so we approach these sources with some skepticism. (Yes, I approach traditional media with skepticism, too. But I think there are qualitative differences.) You must go with reputation, which can be sketchy.
I have received unsolicited e-mails from Falun Gong advocates spreading the word on the alleged atrocities. However, I also get unsolicited e-mails from various advertisers promising me stuff. Somehow, these can get lumped together and dismissed. But when the claim involves atrocities to humans, should we dismiss this so easily? In this case, we may just not want to believe it is true. Who wants to encounter this kind of monstrous evil? Moreover, if you are Wal-Mart (and hundreds of other retailers) and you are trading regularly, doesn't that create a PR problem that is even worse than the situation poor Kathy Lee Gifford faced a few years back? As a result of this skepticism, China gets a free pass and its government may be allowed to continue doing evil -- or it may just get a free pass.
I am pleased to know that we got to hear about, see, and discuss this woman’s protest. Drudge reported, however, that the news feeds in China were blacked out. Like the Watergate tapes, there were unexplained gaps. Surely the Chinese citizens know something is up. I also saw a Frontline program on PBS recently involving the protest in Tianamen Square. If you Google this term, you see pictures of the man standing defiantly before tanks. If a Chinese Google user does that, he gets tourist information. The Frontline people interviewed some Chinese graduate students, and they had no clue about this part of their history.
We can only hope that the truth comes out. I understand the UN is investigating. (But we know how altruistic and freedom-loving the U.N. officials can be. And when they are supposed to inspect, they get the job done right, no? Hmm.) But it is hard to maintain a grip on all the holes in a sieve. Some of the water will leak out. What will we do if we learn the Falun Gong allegations are true?
EAM
Thursday, April 20, 2006
Tax Credits/Deductions for Buying Gas Guzzlers and Hybrids
In its boundless wisdom, Congress passed a bill in 2001 authorizing the immediate write-off of certain investments, termed Section 179 property. The goal of this legislation, ostensibly, was to encourage businesses to purchase capital goods contributing to current economic output and future growth. Also contained in this legislation was authority of corporations, partnerships, and proprietorships, to write off the purchase of Sports Utility Vehicles (SUV). http://www.taxguru.org/incometax/Rates/Sec179.htm
However pressured by U.S. automakers who manufacture many of the monstrous SUVs cruising the nation’s roads, Congress stipulated that the SUV must weigh more than 6,000 pounds in order to receive the tax deduction. Imagine that, the tax code encouraging conflicting actions. First, Congress passed legislation stimulating Americans to buy gas guzzling SUVs, then it subsequently enacted a bill providing a tax break of up to $3,400 for buying a hybrid vehicle. http://www.fueleconomy.gov/feg/tax_hybrid.shtml
So don’t be surprised to see in your neighbor’s garage a Ford Expedition for which the individual obtained a $25,000 tax deductiont (the limit for 2005 and 2006) and a Ford hybrid which qualified for a $3,400 tax credit. Unfortunately if the individual drives each vehicle equal miles per year, the overall impact on gas consumption is not good, and the drain on the U.S. Treasury is considerable.
I know some of you are surprised to see an essay on this blog criticizing tax cuts. In reality, this essay only points to the damaging economic aspects of using the tax code to accomplish social agendas and to reward successful lobbying efforts of special interest groups such as automobile producers and environmentalists.
EPG
However pressured by U.S. automakers who manufacture many of the monstrous SUVs cruising the nation’s roads, Congress stipulated that the SUV must weigh more than 6,000 pounds in order to receive the tax deduction. Imagine that, the tax code encouraging conflicting actions. First, Congress passed legislation stimulating Americans to buy gas guzzling SUVs, then it subsequently enacted a bill providing a tax break of up to $3,400 for buying a hybrid vehicle. http://www.fueleconomy.gov/feg/tax_hybrid.shtml
So don’t be surprised to see in your neighbor’s garage a Ford Expedition for which the individual obtained a $25,000 tax deductiont (the limit for 2005 and 2006) and a Ford hybrid which qualified for a $3,400 tax credit. Unfortunately if the individual drives each vehicle equal miles per year, the overall impact on gas consumption is not good, and the drain on the U.S. Treasury is considerable.
I know some of you are surprised to see an essay on this blog criticizing tax cuts. In reality, this essay only points to the damaging economic aspects of using the tax code to accomplish social agendas and to reward successful lobbying efforts of special interest groups such as automobile producers and environmentalists.
EPG
Wednesday, April 19, 2006
Tax Credits for Hiring Felons? Delaware Innovation
An article in yesterday’s BNA Daily Tax Report covers a recent legislative development in Delaware offering employers an interesting hiring incentive. If you hire a person convicted of a nonviolent felon for a job paying more than $15,600 per year, and you retain that employee for one year, you get a tax credit of $10,000. The credit can be claimed only once per felon – thus, no moving from job to job and creating largess for the employer.
This sounds rather odd, as it effectively distorts the hiring market in favor of those with a felony conviction. In effect, the state will pick up $10,000 of the salary cost for the employer, making the net cost $5600 to the employer. However, the idea here is to promote employment and decrease recidivism. It may cost the state a lot more than $10,000 if the person decides to return to a life of nonviolent crime.
But it seems to me that this incentive provision may have flaws. First, if the cost reduction goal is important, why not include violent felons? It seems that employment prospects for these people would be lower, and the risk of recidivism here would thus be greater.
Second, the “cliff” nature of the credit could create some interesting problems. Suppose that the felon has worked 11 months. Keep in mind he is in a low-paying job, earning maybe $7.80 per hour. (In our part of the country, fast food restaurants pay close to this wage.) The employee says he has found another job, and would like to move on, unless he gets a raise. How much would the employer pay? The employer is about to lose $10,000 in tax credits.
I guess the assumption here is that the employee would prefer the long-term prospects of employment rather than change jobs. I’m not sure that would be the case in low-wage work. Credits that induce distortions in hiring behaviors may, in fact, induce other distortions.
EAM
This sounds rather odd, as it effectively distorts the hiring market in favor of those with a felony conviction. In effect, the state will pick up $10,000 of the salary cost for the employer, making the net cost $5600 to the employer. However, the idea here is to promote employment and decrease recidivism. It may cost the state a lot more than $10,000 if the person decides to return to a life of nonviolent crime.
But it seems to me that this incentive provision may have flaws. First, if the cost reduction goal is important, why not include violent felons? It seems that employment prospects for these people would be lower, and the risk of recidivism here would thus be greater.
Second, the “cliff” nature of the credit could create some interesting problems. Suppose that the felon has worked 11 months. Keep in mind he is in a low-paying job, earning maybe $7.80 per hour. (In our part of the country, fast food restaurants pay close to this wage.) The employee says he has found another job, and would like to move on, unless he gets a raise. How much would the employer pay? The employer is about to lose $10,000 in tax credits.
I guess the assumption here is that the employee would prefer the long-term prospects of employment rather than change jobs. I’m not sure that would be the case in low-wage work. Credits that induce distortions in hiring behaviors may, in fact, induce other distortions.
EAM
Tuesday, April 18, 2006
Exxon-Mobil's PR Problem
Lots of media attention has been focused on Exxon-Mobil’s former chairman, Lee Raymond, and his compensation/retirement package totaling nearly $400 million. Of this total, nearly $100 million is a lump sum payment for pension benefits. Instead of taking an annuity, he received it all in one fell swoop. (This would be like taking out your entire 401(k) balance at once – which might cause an outrage over your compensation, too.) Over his 43 years with the company, this amounts to over $2 million per year – a substantial reward. The rest appears to be income from stock options and other incentive compensation plans, which have benefited from the run-up in Exxon-Mobil stock.
I will be the first to agree that this sounds like a lot of money for a corporate manager. If I were a shareholder of Exxon-Mobil, I would have my doubts about the compensation committee. However, it would be important to evaluate the deal at the time it was made, not in hindsight. After all, if stock performance increased, then he benefits, but it could go the other way.
In a commodity-based industry like oil, where price volatility can be dramatic and unrelated to the management performance, one should pause before granting largess to corporate managers in the form of “incentive” compensation tied to stock performance in relation to broader benchmarks. If oil gets pricey, the company sitting on oil reserves will make money. But is this a consequence of good operating management, or just dumb luck? Compensation agreements should take a more nuanced approach to measuring performance of management. However, that is strictly a matter of corporate governance, and the shareholders of Exxon-Mobil are the constituents to be concerned here. After all, the board is spending their money. Is it worth it? I have my doubts.
Unfortunately, major news outlets are approaching this not from the perspective of the shareholders, but instead from consumers. Most of them are beginning their stories like this, on the ABC News website: “Soaring gas prices are squeezing most Americans at the pump, but at least one man isn’t complaining.” Later, the article quotes a member of the Institute for Policy Studies, stating: “Clearly much of his high-level pay is due to the high price of gas.”
The story seems to suggest that he is benefiting from consumer pain, and that this is really unfair. To paraphrase: “Consumers are suffering, when “the man” is getting rich, and that, dude, this is, like really wrong.”
Whoa, Nellie! (Where is Keith Jackson when we need him? He should be reigning in the news guys, not just calling the sports on ABC.) Let’s back up a minute and go to the blackboard for a moment. Don’t be fooled into thinking this is a consumer issue. Companies make money taking risks to deliver products and services we want. Their profit motive gives us the products we need.
Exxon-Mobil is not an altruistic, people-loving enterprise. I’m sure they are fine people who love their neighbors as much as the next guy, but mostly they want profits from the good they have to sell. Fortunately for them, their product happens to be in high demand globally. That means that prices rise, and they make profits. If the company decides to spend a chunk of those profits on CEO compensation, that is their choice. It will not matter to consumers whether the profit is used to pay employees, or to pay investors (unless, of course, the consumer is also in one of these categories). The capital markets may punish them for choosing wrongly, but that is a matter for the shareholders, not consumers. The high cost of gasoline is not a reason to worry about his compensation.
We could actually make claims about prices in other areas affecting consumers, but I don’t see them being made. For example, last year concert tours generated over $3 billion in revenue in the U.S. – up sharply from 2004. Consumers are now accustomed to paying hundreds of dollars for concert seats. (This is more mystifying to me than high gas prices, but I confess the prospect of watching and listening to aging rockers is not high on my consumption list.).
In this concert market, high compensation for the artists has a lot to do with these rising ticket prices. Are these artists making money on the backs of their fans? And where is the outrage? In short, there is none, because people pay that much willingly. Lower prices would mean more consumer surplus, which might ultimately be captured by ticket scalpers instead of the artists and their promoters.
The hard truth here: markets work. Political instability in Nigeria and Iran, coupled with sizzling world demand translates into higher prices. (China’s economy grew at 10% of GDP – and check out yesterday’s WSJ for reports on automobile demand in developing countries – it is huge!). Similarly, higher consumer demand means that concert tickets are more costly than they once were. We have choices, and we should make them carefully without giving in to demagoguery about blaming “the man” or someone else.
Having said all that, though, I will bet that Exxon-Mobil wishes it was not in the spotlight for this behavior. Sunlight is a good disinfectant – and some people may not buy its products on account of this behavior. This public response is important and potentially powerful. You may choose not to buy products from companies who behave badly, and you don’t have to trace your decisions to sound reason if you want to.
It is a great country. Thanks for reading.
EAM
I will be the first to agree that this sounds like a lot of money for a corporate manager. If I were a shareholder of Exxon-Mobil, I would have my doubts about the compensation committee. However, it would be important to evaluate the deal at the time it was made, not in hindsight. After all, if stock performance increased, then he benefits, but it could go the other way.
In a commodity-based industry like oil, where price volatility can be dramatic and unrelated to the management performance, one should pause before granting largess to corporate managers in the form of “incentive” compensation tied to stock performance in relation to broader benchmarks. If oil gets pricey, the company sitting on oil reserves will make money. But is this a consequence of good operating management, or just dumb luck? Compensation agreements should take a more nuanced approach to measuring performance of management. However, that is strictly a matter of corporate governance, and the shareholders of Exxon-Mobil are the constituents to be concerned here. After all, the board is spending their money. Is it worth it? I have my doubts.
Unfortunately, major news outlets are approaching this not from the perspective of the shareholders, but instead from consumers. Most of them are beginning their stories like this, on the ABC News website: “Soaring gas prices are squeezing most Americans at the pump, but at least one man isn’t complaining.” Later, the article quotes a member of the Institute for Policy Studies, stating: “Clearly much of his high-level pay is due to the high price of gas.”
The story seems to suggest that he is benefiting from consumer pain, and that this is really unfair. To paraphrase: “Consumers are suffering, when “the man” is getting rich, and that, dude, this is, like really wrong.”
Whoa, Nellie! (Where is Keith Jackson when we need him? He should be reigning in the news guys, not just calling the sports on ABC.) Let’s back up a minute and go to the blackboard for a moment. Don’t be fooled into thinking this is a consumer issue. Companies make money taking risks to deliver products and services we want. Their profit motive gives us the products we need.
Exxon-Mobil is not an altruistic, people-loving enterprise. I’m sure they are fine people who love their neighbors as much as the next guy, but mostly they want profits from the good they have to sell. Fortunately for them, their product happens to be in high demand globally. That means that prices rise, and they make profits. If the company decides to spend a chunk of those profits on CEO compensation, that is their choice. It will not matter to consumers whether the profit is used to pay employees, or to pay investors (unless, of course, the consumer is also in one of these categories). The capital markets may punish them for choosing wrongly, but that is a matter for the shareholders, not consumers. The high cost of gasoline is not a reason to worry about his compensation.
We could actually make claims about prices in other areas affecting consumers, but I don’t see them being made. For example, last year concert tours generated over $3 billion in revenue in the U.S. – up sharply from 2004. Consumers are now accustomed to paying hundreds of dollars for concert seats. (This is more mystifying to me than high gas prices, but I confess the prospect of watching and listening to aging rockers is not high on my consumption list.).
In this concert market, high compensation for the artists has a lot to do with these rising ticket prices. Are these artists making money on the backs of their fans? And where is the outrage? In short, there is none, because people pay that much willingly. Lower prices would mean more consumer surplus, which might ultimately be captured by ticket scalpers instead of the artists and their promoters.
The hard truth here: markets work. Political instability in Nigeria and Iran, coupled with sizzling world demand translates into higher prices. (China’s economy grew at 10% of GDP – and check out yesterday’s WSJ for reports on automobile demand in developing countries – it is huge!). Similarly, higher consumer demand means that concert tickets are more costly than they once were. We have choices, and we should make them carefully without giving in to demagoguery about blaming “the man” or someone else.
Having said all that, though, I will bet that Exxon-Mobil wishes it was not in the spotlight for this behavior. Sunlight is a good disinfectant – and some people may not buy its products on account of this behavior. This public response is important and potentially powerful. You may choose not to buy products from companies who behave badly, and you don’t have to trace your decisions to sound reason if you want to.
It is a great country. Thanks for reading.
EAM
Monday, April 17, 2006
Hu Jintao Visit: "Bill Gates as Britney Spears"
Late last week, several news agencies announced the upcoming visit of Chinese President Hu Jintao to the United States. Though this story has all the trappings of a “dog bites man” headline, the twist came when it was disclosed that the welcome to the United States would not be hosted by President Bush, or Secretary Rice, or other government officials. The host is Bill Gates at his home in Washington State, not Washington D.C.
This is not surprising given the significance accorded to technology, growth, and opportunity in China today. Thomas Friedman in his book, The World Is Flat, gives extensive treatment to Microsoft in China. Microsoft has established a research facility in Bejing that is mining talent from the best and brightest of Chinese students. Its other two research facilities are located in in Redmond, Washington and in Cambridge, England.
Friedman explains how Microsoft started out the program by administering math, IQ, and programming tests to PhD students in China. Out of 2000 takers, they chose 20. Subsequently, the number of applicants grew so rapidly that they dispensed with the test and just chose the 20 by reputation from recommendations by the top scientists in the country. Microsoft became known as the best place to work, which presented the greatest opportunity for progress among these students.
Going to China for intellectual talent should be a wake-up call to U.S. students. Friedman wryly concludes: “In China today, Bill Gates is Britney Spears. In America today, Britney Spears is Britney Spears – and that is our problem.” (p. 265).
So, watch for coverage of this visit, which is scheduled for April 18.
EAM
This is not surprising given the significance accorded to technology, growth, and opportunity in China today. Thomas Friedman in his book, The World Is Flat, gives extensive treatment to Microsoft in China. Microsoft has established a research facility in Bejing that is mining talent from the best and brightest of Chinese students. Its other two research facilities are located in in Redmond, Washington and in Cambridge, England.
Friedman explains how Microsoft started out the program by administering math, IQ, and programming tests to PhD students in China. Out of 2000 takers, they chose 20. Subsequently, the number of applicants grew so rapidly that they dispensed with the test and just chose the 20 by reputation from recommendations by the top scientists in the country. Microsoft became known as the best place to work, which presented the greatest opportunity for progress among these students.
Going to China for intellectual talent should be a wake-up call to U.S. students. Friedman wryly concludes: “In China today, Bill Gates is Britney Spears. In America today, Britney Spears is Britney Spears – and that is our problem.” (p. 265).
So, watch for coverage of this visit, which is scheduled for April 18.
EAM
Sunday, April 16, 2006
Easter Reflections
Though this blog focuses on the topic of economic growth, from time to time we are known to digress into other topics. Today is Easter, one of the principal holidays in Christianity. Please give me some latitude, or if you prefer, just tune in tomorrow.
Easter follows Good Friday, which is a day that makes me very uncomfortable. Sin, judgment, suffering, and death are not pleasant topics. Good Friday reminds us of God’s “No” to some things, and we don’t willingly embrace “No”. Easter, in contrast, reminds us of the “Yes” to life and resurrection. It resonates with themes of hope, growth, and opportunity. We like those themes, and given our druthers we would prefer to dwell there. But like many things, there are hard realities that we sometimes must address first. The yes is not meaningful unless it is contrasted to the no.
Though we often focus on the economic and political world with an eye toward development and improvement of material conditions and political freedom, we all recognize that there is more to development than what happens outside. There is the matter of inward development and growth, which is an important yet often neglected part of the human experience.
Collective action towards inward development doesn't work so well, particularly that fostered by government. We seem to gravitate to a model that leaves the human soul off limits to government, and with good reason. We react strongly to governments that seek to crush the human spirit by oppression, “reeducation”, and in some cases physical violence and death. We don’t trust governments to do good in the realm of the soul, and thus we leave that realm to other institutions – like the church – where answers to bigger questions about meaning and significance can be answered.
Some of our heroes, like Alexander Solzhenitsyn, come to their senses and recognize the significance of the human soul in the midst of government oppression. It seems like the government pressure to shape their souls into something useful to the state instead drove them to become stronger, building human dignity and depriving their enemies of their power. In contrast, others of us, who dwell with luxury, security, and material abundance, seem to neglect the soul. It is a sad paradox. We fight for freedom, but without constant vigilance that freedom can ultimately enslave.
I have marked several passages in the Gulag Archipelago that have struck me as very insightful. One of them goes like this: “If only there were evil people somewhere insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart?” (1974 Harper & Row, p. 168.)
Solzhenitsyn reminds us that we all have problems with evil. Serious ones. And later he raises some questions about the building a society on materialist presuppositions. Quoting from a “sermon” by one of his fellow captors: “Do you think you can build a just society on a foundation of self-serving and envious people?” (Id., p. 171).
Though this question was addressed to communist captors, the question must also be answered by those of us in the capitalist camp. When we speak of the “invisible hand of self interest”, as described by Adam Smith, we are relying on that self-serving and envious nature of human beings as predictable outcomes. In this sense, we are dealing with a reality of a fallen nature and we are trying to harness it for productive purposes.
But we must also remember that we need to cultivate and develop other dimensions of human nature if we are to have a just society. The opportunity for second chances -- for showing mercy, and for giving a hand up to those who need it – flows from generous and charitable impulses. Our government may reflect these human traits, but it is really powerless to inculcate them. Mediating institutions such as the church have important work to do here, as these aspects of the human condition also play an important role in creating a world of hope, growth, and opportunity.
Happy Easter.
EAM
Easter follows Good Friday, which is a day that makes me very uncomfortable. Sin, judgment, suffering, and death are not pleasant topics. Good Friday reminds us of God’s “No” to some things, and we don’t willingly embrace “No”. Easter, in contrast, reminds us of the “Yes” to life and resurrection. It resonates with themes of hope, growth, and opportunity. We like those themes, and given our druthers we would prefer to dwell there. But like many things, there are hard realities that we sometimes must address first. The yes is not meaningful unless it is contrasted to the no.
Though we often focus on the economic and political world with an eye toward development and improvement of material conditions and political freedom, we all recognize that there is more to development than what happens outside. There is the matter of inward development and growth, which is an important yet often neglected part of the human experience.
Collective action towards inward development doesn't work so well, particularly that fostered by government. We seem to gravitate to a model that leaves the human soul off limits to government, and with good reason. We react strongly to governments that seek to crush the human spirit by oppression, “reeducation”, and in some cases physical violence and death. We don’t trust governments to do good in the realm of the soul, and thus we leave that realm to other institutions – like the church – where answers to bigger questions about meaning and significance can be answered.
Some of our heroes, like Alexander Solzhenitsyn, come to their senses and recognize the significance of the human soul in the midst of government oppression. It seems like the government pressure to shape their souls into something useful to the state instead drove them to become stronger, building human dignity and depriving their enemies of their power. In contrast, others of us, who dwell with luxury, security, and material abundance, seem to neglect the soul. It is a sad paradox. We fight for freedom, but without constant vigilance that freedom can ultimately enslave.
I have marked several passages in the Gulag Archipelago that have struck me as very insightful. One of them goes like this: “If only there were evil people somewhere insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart?” (1974 Harper & Row, p. 168.)
Solzhenitsyn reminds us that we all have problems with evil. Serious ones. And later he raises some questions about the building a society on materialist presuppositions. Quoting from a “sermon” by one of his fellow captors: “Do you think you can build a just society on a foundation of self-serving and envious people?” (Id., p. 171).
Though this question was addressed to communist captors, the question must also be answered by those of us in the capitalist camp. When we speak of the “invisible hand of self interest”, as described by Adam Smith, we are relying on that self-serving and envious nature of human beings as predictable outcomes. In this sense, we are dealing with a reality of a fallen nature and we are trying to harness it for productive purposes.
But we must also remember that we need to cultivate and develop other dimensions of human nature if we are to have a just society. The opportunity for second chances -- for showing mercy, and for giving a hand up to those who need it – flows from generous and charitable impulses. Our government may reflect these human traits, but it is really powerless to inculcate them. Mediating institutions such as the church have important work to do here, as these aspects of the human condition also play an important role in creating a world of hope, growth, and opportunity.
Happy Easter.
EAM
Saturday, April 15, 2006
Iowa Fuel Tax Credits: Popular Legislative Folly?
The Iowa House voted 97-1 this week to provide tax credits to Iowa retailers of motor fuels who meet certain targets at marketing ethanol-based fuels. The legislation, H.F. 2754, is designed to move Iowa consumers toward a goal of using targeted percentages of ethanol-based (renewable) fuels. By 2009, the target is 10 percent from renewable fuels; by 2019, the target is 25 percent. (Source: 4/14/06 BNA Daily Tax Report).
The credits reward stations who sell more than the targeted amount, thus giving them an incentive to lower prices and pass this along to consumers who choose ethanol-based fuels.
This legislation is politically popular, as evidenced by overwhelming approval. (I can think of few issues of significance where 97 legislators would agree with one another.) Environmentalists, farmers, ethanol investors (there are getting to be more of these), and those favoring energy independence all think that renewable fuels are good ideas. But in light of that, why do we need to incentivize their purchase with a tax credit?
Furthermore, what is rational about a targeted rate of 10 percent, 25 percent, or any percent, particularly when we are talking about conditions years from now? In a time of technological change, government should wait and let markets sort out which technology will prevail. (One point to be noted here: it takes about 1.56 gallons of E-85 ethanol to produce the same energy as gasoline. Thus, even with an ethanol blend, you need a considerable price advantage to make up for the lowered fuel efficiency.)
This bill seems like good politics, but bad policy. And this opinion comes from someone who satisfies three of the four categories mentioned above. (OK, if you are curious, I not an ethanol investor.)
EAM
The credits reward stations who sell more than the targeted amount, thus giving them an incentive to lower prices and pass this along to consumers who choose ethanol-based fuels.
This legislation is politically popular, as evidenced by overwhelming approval. (I can think of few issues of significance where 97 legislators would agree with one another.) Environmentalists, farmers, ethanol investors (there are getting to be more of these), and those favoring energy independence all think that renewable fuels are good ideas. But in light of that, why do we need to incentivize their purchase with a tax credit?
Furthermore, what is rational about a targeted rate of 10 percent, 25 percent, or any percent, particularly when we are talking about conditions years from now? In a time of technological change, government should wait and let markets sort out which technology will prevail. (One point to be noted here: it takes about 1.56 gallons of E-85 ethanol to produce the same energy as gasoline. Thus, even with an ethanol blend, you need a considerable price advantage to make up for the lowered fuel efficiency.)
This bill seems like good politics, but bad policy. And this opinion comes from someone who satisfies three of the four categories mentioned above. (OK, if you are curious, I not an ethanol investor.)
EAM
Friday, April 14, 2006
The Coming War with Iran
The Iranians are insisting on their right to enrich uranium and in the process are continuing to ignore increasing international concerns that they might be doing so in an effort to develop a nuclear capability. Should they succeed in deploying such a capability, at a minimum they will have created a nuclear stalemate with Israel and the U.S. in the Middle East, which would effectively provide them with an umbrella under which they would be able to engage in low-level and mid-level intensity operations aimed at destabilizing U.S. allies and transforming the region into a solidly anti-western bloc. This would in turn make Iran the major power in the Middle East and deconstruct the current global order from U.S. hegemony into a multi-polar balance of power system. Since the latter is exactly what the Russians and Chinese want as well, don’t look for either of them to work with the U.S. in the U.N. Security Council to stop the Iranians.
As for the Europeans, while they wish to balance U.S. power, they wish to do so in such a way as to create a U.S.-E.U. global hegemony, not a balance of power system that will only water-down their own claim to a share in global management. Furthermore, the Europeans have too much experience with the Middle East to lead them to desire a nuclear balance of power game in that region.
Given this, we can expect to see the Europeans and the U.S. work slowly to build international consensus against the Iranian nuclear program while simultaneously making the case for military intervention should international pressure fail to persuade the Iranians. Should military intervention become necessary, it is likely to be similar to the NATO air war against Kosovo, in which the U.S. and its NATO allies would systematically dismantle the Iranian government’s command and control, intelligence, military, and nuclear production capability. While a NATO-led ground operation is highly unlikely and probably unnecessary, a further important aim of the air war would be to isolate Tehran from regions dominated by Kurds, Azeris, and others in order to provide them with the opportunity to seize control of the oil resources in their regions and establish permanent independence. An air campaign might also induce the country’s disgruntled youth, who are thought to yearn to break out of the global isolation they find themselves trapped in by the country’s fundamentalist regime, to rise up against a government under increasing duress. In either event, the final outcome of an air war is likely to be a down-sized and far less dangerous Iran at a minimum.
Should the air campaign succeed, one more major supporter of terrorism in the Middle East will have been removed from the map. That would leave Hamas in a seriously weakened position, isolate Syria, and force the Egyptian regime to show its true hand.
The only resource that the Iranians have is Western resolve, which has been seriously undermined by the perception of chaos in Iraq. However, rising oil prices associated with continuing instability related to Iranian great power ambitions are likely to help change all of that. The optimum timeframe for an air campaign is spring 2007. By that time public impatience with oil prices is likely to have forced Western governments to act.
As for the Europeans, while they wish to balance U.S. power, they wish to do so in such a way as to create a U.S.-E.U. global hegemony, not a balance of power system that will only water-down their own claim to a share in global management. Furthermore, the Europeans have too much experience with the Middle East to lead them to desire a nuclear balance of power game in that region.
Given this, we can expect to see the Europeans and the U.S. work slowly to build international consensus against the Iranian nuclear program while simultaneously making the case for military intervention should international pressure fail to persuade the Iranians. Should military intervention become necessary, it is likely to be similar to the NATO air war against Kosovo, in which the U.S. and its NATO allies would systematically dismantle the Iranian government’s command and control, intelligence, military, and nuclear production capability. While a NATO-led ground operation is highly unlikely and probably unnecessary, a further important aim of the air war would be to isolate Tehran from regions dominated by Kurds, Azeris, and others in order to provide them with the opportunity to seize control of the oil resources in their regions and establish permanent independence. An air campaign might also induce the country’s disgruntled youth, who are thought to yearn to break out of the global isolation they find themselves trapped in by the country’s fundamentalist regime, to rise up against a government under increasing duress. In either event, the final outcome of an air war is likely to be a down-sized and far less dangerous Iran at a minimum.
Should the air campaign succeed, one more major supporter of terrorism in the Middle East will have been removed from the map. That would leave Hamas in a seriously weakened position, isolate Syria, and force the Egyptian regime to show its true hand.
The only resource that the Iranians have is Western resolve, which has been seriously undermined by the perception of chaos in Iraq. However, rising oil prices associated with continuing instability related to Iranian great power ambitions are likely to help change all of that. The optimum timeframe for an air campaign is spring 2007. By that time public impatience with oil prices is likely to have forced Western governments to act.
Thursday, April 13, 2006
EITC: Erroneous Claims Run High
Today’s BNA Daily Tax Report contains an interesting story on the Earned Income Tax Credit. It reports that 17 percent of taxpayers claim this credit, and up to one-fourth of these claims are paid erroneously.
First, a little background. The EITC concept was the brainchild of Milton Friedman, who conceived of a refundable credit or “negative income tax” as a means of delivering a welfare benefit to those working in low-wage jobs. In effect, the credit becomes a form of subsidy to adults, and particularly families with children, who are working their way up the economic ladder. Although these individuals pay social security, sales, and other forms of taxation, most are not earning enough to be paying federal income taxes. Instead, they receive a “refund” (a misnomer, admittedly, for those without tax liability) based on filing a claim for the EITC.
Though this approach appears to avoid a separate welfare bureaucracy and it also requires work to earn the credit, which is something welfare programs have not done well, there are still complexities associated with claiming the credit. The IRS has sought out volunteers to provide income tax assistance for lower-income Americans (the VITA program) in order to help those eligible for the credit to claim it. Thus, unpaid volunteer hours are also associated with this program in lieu of some government bureaucrats.
For lower-income taxpayers, particularly those with dependent children, the benefit does make a difference. The maximum credit for a taxpayer with two children is $4,400 (2005). However, that maximum is achieved at AGI of $11,000 (i.e., you get 40% of the first 11,000). Beginning at $14,370, the credit phases out, reaching zero at $35,263. (See Rev. Proc. 2004-71). In effect, you lose the credit at a rate of about 21% - which is much higher than the applicable tax bracket you are likely to be in. (Other possible credits may also be available, including the Child credit, which is partially refundable. Some states also have EITC programs - more on that to come in a later blog.)
Here are a few thoughts:
(1) A program in which one fourth of funds are paid out in error raises serious concerns about administrative effectiveness. According to a 1999 IRS study, overpayments of EITC claims were estimated between $8.5 and $9.8 billion.
(That study is referenced in a 2005 report to Congress, which can be found here:
http://www.irs.gov/pub/irs-utl/irs_earned_income_tax_credit_initiative_final_report
_to_congress_october_2005.pdf) (You may have to paste this in your browser due to wrapping problems.)
False claims or erroneous claims about eligible children are thought to comprise the largest share of these erroneous payments. Thus, additional compliance efforts might produce some savings here
(2) The indirect payment approach, which avoids a welfare bureacracy, still involves administrative costs. The BNA article indicates that about 45% of individual tax audits involve EITC. Many of these are apparently of the “letter audit” variety, as the IRS official in charge is quoted as saying that only 5 percent of the audit budget is spent on the EITC.
A recent press release from Commissioner Everson gives us this perspective on enforcement: “Last year, the IRS produced direct enforcement revenues of more than $43 billion from collection, audit and document-matching efforts. This reflects better than a 4-1 return for every dollar invested in the total agency budget. Increased enforcement funding makes good sense and contributes to deficit reduction.”
(See http://www.irs.gov/newsroom/article/0,,id=134880,00.html)
Assuming about $10 billion is spent to collect that $43 billion, then perhaps half a billion is spent auditing EITC (i.e., 5 percent of $10 billion). Who knows how much more would have to be spent to make a dent in as much as $10 billion being paid out erroneously.
(3) Despite the fact that there is probably money to be gained for the government till through more enforcement efforts here, taking on this issue is a political hot potato. The issue suffers from the same kind of blame-shifting we engaged in as kids: I may have done wrong, but my brother did worse.
With a tax gap (estimated difference in legal liability over collections) totaling more than $345 billion, one might argue that there are a lot of people out there who are not paying their legal liability. Targeting the tax shelter industry addresses this concern, and that has proven politically popular. However, the latest from Commissioner Everson indicates that enforcement efforts on abusive tax shelters netted only $2 billion last year.
See http://tax.cchgroup.com/news/headlines/2006/nws32806.htm .
When we tried the shifting blame game on my parents, that usually meant my brother and I were both sent out to clean the barn or some other unpleasant task – a just result. We need to respond more like my parents, I think, in keeping a judicious eye on all forms of tax abuse. The reality is that human beings are not angels – and that applies to all humans. In fact, that is quite a good note to end on before the Easter/Passover holidays.
EAM
First, a little background. The EITC concept was the brainchild of Milton Friedman, who conceived of a refundable credit or “negative income tax” as a means of delivering a welfare benefit to those working in low-wage jobs. In effect, the credit becomes a form of subsidy to adults, and particularly families with children, who are working their way up the economic ladder. Although these individuals pay social security, sales, and other forms of taxation, most are not earning enough to be paying federal income taxes. Instead, they receive a “refund” (a misnomer, admittedly, for those without tax liability) based on filing a claim for the EITC.
Though this approach appears to avoid a separate welfare bureaucracy and it also requires work to earn the credit, which is something welfare programs have not done well, there are still complexities associated with claiming the credit. The IRS has sought out volunteers to provide income tax assistance for lower-income Americans (the VITA program) in order to help those eligible for the credit to claim it. Thus, unpaid volunteer hours are also associated with this program in lieu of some government bureaucrats.
For lower-income taxpayers, particularly those with dependent children, the benefit does make a difference. The maximum credit for a taxpayer with two children is $4,400 (2005). However, that maximum is achieved at AGI of $11,000 (i.e., you get 40% of the first 11,000). Beginning at $14,370, the credit phases out, reaching zero at $35,263. (See Rev. Proc. 2004-71). In effect, you lose the credit at a rate of about 21% - which is much higher than the applicable tax bracket you are likely to be in. (Other possible credits may also be available, including the Child credit, which is partially refundable. Some states also have EITC programs - more on that to come in a later blog.)
Here are a few thoughts:
(1) A program in which one fourth of funds are paid out in error raises serious concerns about administrative effectiveness. According to a 1999 IRS study, overpayments of EITC claims were estimated between $8.5 and $9.8 billion.
(That study is referenced in a 2005 report to Congress, which can be found here:
http://www.irs.gov/pub/irs-utl/irs_earned_income_tax_credit_initiative_final_report
_to_congress_october_2005.pdf) (You may have to paste this in your browser due to wrapping problems.)
False claims or erroneous claims about eligible children are thought to comprise the largest share of these erroneous payments. Thus, additional compliance efforts might produce some savings here
(2) The indirect payment approach, which avoids a welfare bureacracy, still involves administrative costs. The BNA article indicates that about 45% of individual tax audits involve EITC. Many of these are apparently of the “letter audit” variety, as the IRS official in charge is quoted as saying that only 5 percent of the audit budget is spent on the EITC.
A recent press release from Commissioner Everson gives us this perspective on enforcement: “Last year, the IRS produced direct enforcement revenues of more than $43 billion from collection, audit and document-matching efforts. This reflects better than a 4-1 return for every dollar invested in the total agency budget. Increased enforcement funding makes good sense and contributes to deficit reduction.”
(See http://www.irs.gov/newsroom/article/0,,id=134880,00.html)
Assuming about $10 billion is spent to collect that $43 billion, then perhaps half a billion is spent auditing EITC (i.e., 5 percent of $10 billion). Who knows how much more would have to be spent to make a dent in as much as $10 billion being paid out erroneously.
(3) Despite the fact that there is probably money to be gained for the government till through more enforcement efforts here, taking on this issue is a political hot potato. The issue suffers from the same kind of blame-shifting we engaged in as kids: I may have done wrong, but my brother did worse.
With a tax gap (estimated difference in legal liability over collections) totaling more than $345 billion, one might argue that there are a lot of people out there who are not paying their legal liability. Targeting the tax shelter industry addresses this concern, and that has proven politically popular. However, the latest from Commissioner Everson indicates that enforcement efforts on abusive tax shelters netted only $2 billion last year.
See http://tax.cchgroup.com/news/headlines/2006/nws32806.htm .
When we tried the shifting blame game on my parents, that usually meant my brother and I were both sent out to clean the barn or some other unpleasant task – a just result. We need to respond more like my parents, I think, in keeping a judicious eye on all forms of tax abuse. The reality is that human beings are not angels – and that applies to all humans. In fact, that is quite a good note to end on before the Easter/Passover holidays.
EAM
Wednesday, April 12, 2006
Massachusetts Health Insurance Proposal Is Bad Idea
Let me begin by staying that I think that Massachusetts residents are just as smart as residents of any state in the nation. That said, why do they continue to enact and implement what can only be regarded as “lunacy legislation”? The latest, and perhaps, most distressing, is the recently passed Health Care Amendment. For the first time ever in the U.S., according to this legislation, all state residents would be required to have health insurance -- dubbed an individual mandate. To quote one advocate, “The Health Care Amendment creates that constitutional anchor for affordable, comprehensive, equitable coverage.” It certainly does that, but it is quite likely to retard the state’s already anemic economy.
Between 2000 and 2005, only two states grew their population more slowly than Massachusetts, North Dakota and West Virginia. Furthermore during this same time span, Massachusetts ranked number 31 in terms of state per capita income growth. Seems as though the state’s already liberal legislative environment does not blend well with competitive markets.
The Republican governor of the state, Mitt Romney, has been adamantly opposed to funding the mandate with a new payroll tax on businesses. Despite his rhetoric, Romney indicated that he had no major objections to a proposed $295-per-employee charge on employers who don't provide insurance, a component designed to raise about $45 million a year, and the mandate that all companies with more than 10 employees provide health insurance for their workers. Romney said he considered the assessment or a “fee”, not a tax and the mandate just good business. I suppose this nuance will serve him well in his run for the Republican nomination for President. Maybe calling a tax a fee works in Massachusetts, but I think such nonsense will be soundly rejected by the rest of the nation. At least this serves to define what certain elements of the press mean by a “Moderate Republican.”
Of course this is not the first time Massachusetts has attempted to link working with health insurance. However, the state’s earlier efforts were fruitless. A state mandated employer coverage in 1988 termed, Massachusetts Universal Health Care Law, was repealed before it was ever implemented. This latest effort will likely meet the same fate.
As stated by Senate President Robert Travaglini, “The eyes of the nation are on us.” Unfortunately for Massachusetts, Mr. Travaglini is correct.
EPG
Between 2000 and 2005, only two states grew their population more slowly than Massachusetts, North Dakota and West Virginia. Furthermore during this same time span, Massachusetts ranked number 31 in terms of state per capita income growth. Seems as though the state’s already liberal legislative environment does not blend well with competitive markets.
The Republican governor of the state, Mitt Romney, has been adamantly opposed to funding the mandate with a new payroll tax on businesses. Despite his rhetoric, Romney indicated that he had no major objections to a proposed $295-per-employee charge on employers who don't provide insurance, a component designed to raise about $45 million a year, and the mandate that all companies with more than 10 employees provide health insurance for their workers. Romney said he considered the assessment or a “fee”, not a tax and the mandate just good business. I suppose this nuance will serve him well in his run for the Republican nomination for President. Maybe calling a tax a fee works in Massachusetts, but I think such nonsense will be soundly rejected by the rest of the nation. At least this serves to define what certain elements of the press mean by a “Moderate Republican.”
Of course this is not the first time Massachusetts has attempted to link working with health insurance. However, the state’s earlier efforts were fruitless. A state mandated employer coverage in 1988 termed, Massachusetts Universal Health Care Law, was repealed before it was ever implemented. This latest effort will likely meet the same fate.
As stated by Senate President Robert Travaglini, “The eyes of the nation are on us.” Unfortunately for Massachusetts, Mr. Travaglini is correct.
EPG
Monday, April 10, 2006
Another View on Global Warming
Following up on my recent post on CO2 emissions, check out this article in the London Daily Telegraph from a UK scientist. (Drudge linked to it today.) His views suggest that the sky may not be falling after all. In fact, he points out that global warming seems to have stopped in 1998. (Of course, eight years may not represent a viable trend. But by the same token, should we point to the prior few decades as a trend when the referent time period may be thousands of years?)
We should tread carefully before making economic policies that could harm the livelihood of millions of people without any measurable beneficial effects. Before you constrict economic activities, you should have the burden of proof that the problem at which your policy is directed is real, and that your policy will actually help the problem. This is merely a restatement of a form of Hippocratic oath that should be administered to all politicians.
The URL is as follows (you may have to paste this in your browser to get it to work properly.)
http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2006/04/09/do0907.xml&sSheet=
/news/2006/04/09/ixworld.html
Happy Monday.
EAM
We should tread carefully before making economic policies that could harm the livelihood of millions of people without any measurable beneficial effects. Before you constrict economic activities, you should have the burden of proof that the problem at which your policy is directed is real, and that your policy will actually help the problem. This is merely a restatement of a form of Hippocratic oath that should be administered to all politicians.
The URL is as follows (you may have to paste this in your browser to get it to work properly.)
http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2006/04/09/do0907.xml&sSheet=
/news/2006/04/09/ixworld.html
Happy Monday.
EAM
Sunday, April 09, 2006
What is a fair tax rate? More Tax Foundation Study
The Tax Foundation’s annual survey, mentioned a couple of days ago, also contained this question:
Q650. What is the maximum percentage of a person's income that should go to taxes – that is, all taxes, state, federal, and local? Please enter a whole number amount only; do not enter a percent sign. If you are not sure, please give your best estimate.
Results:
'06 '05 Rate
0% 0% 100%
0% 0% 90% - 99%
0% 0% 80% - 89%
0% 0% 70% - 79%
0% 0% 60% - 69%
1% 2% 50% - 59%
1% 3% 40% - 49%
6% 7% 30% - 39%
22% 23% 20% - 29%
43% 41% 10% - 19%
24% 20% 1% - 9%
1% 3% 0%
15% 16% MEAN percentage
Source: Tax Foundation
This result is obviously a lot lower than what many folks are paying. Interestingly enough, the top rate that seems to get any support at all is under 30 percent – which is still below even the top federal rate.
The Tax Foundation reports that women actually chose lower tax rates than men. Singles generally chose higher rates than marrieds. And the group choosing the highest rates: those with post-graduate degrees, who weighed in at an average of 23 percent – about 8 percent above the mean. What explains the disparity? I would guess that this group includes many who benefit from government spending: whether directly through research grants, or indirectly through employment in the educational establishment. They realize that it takes money to feed that establishment, which would not be coming in if we spent only 15 percent.
I would venture to guess that most people have no idea about what percentage of their income goes to the government in the form of taxes. Our current system is diffused and taxes are levied on many different items without much attention from those paying them. (For example, do you know how much tax you paid to fill your gas tank? Federal taxes are 18.4 cents, and state taxes are added on top of that. In Nebraska, that is about 24 cents a gallon; 20 cents in Iowa. Thus, at current prices, we’re spending about 18 percent of the cost of this commodity in taxes; as prices go down, that percentage increases.)
At the federal level, our tax system contains so many exceptions, credits, deductions, phase-outs, and the like that you never really know how much it takes to pay your taxes until you get them prepared by April 15.
A more important question might be: if we paid only 15 percent of our income in taxes, would you accept the size of government that results?
EAM
Q650. What is the maximum percentage of a person's income that should go to taxes – that is, all taxes, state, federal, and local? Please enter a whole number amount only; do not enter a percent sign. If you are not sure, please give your best estimate.
Results:
'06 '05 Rate
0% 0% 100%
0% 0% 90% - 99%
0% 0% 80% - 89%
0% 0% 70% - 79%
0% 0% 60% - 69%
1% 2% 50% - 59%
1% 3% 40% - 49%
6% 7% 30% - 39%
22% 23% 20% - 29%
43% 41% 10% - 19%
24% 20% 1% - 9%
1% 3% 0%
15% 16% MEAN percentage
Source: Tax Foundation
This result is obviously a lot lower than what many folks are paying. Interestingly enough, the top rate that seems to get any support at all is under 30 percent – which is still below even the top federal rate.
The Tax Foundation reports that women actually chose lower tax rates than men. Singles generally chose higher rates than marrieds. And the group choosing the highest rates: those with post-graduate degrees, who weighed in at an average of 23 percent – about 8 percent above the mean. What explains the disparity? I would guess that this group includes many who benefit from government spending: whether directly through research grants, or indirectly through employment in the educational establishment. They realize that it takes money to feed that establishment, which would not be coming in if we spent only 15 percent.
I would venture to guess that most people have no idea about what percentage of their income goes to the government in the form of taxes. Our current system is diffused and taxes are levied on many different items without much attention from those paying them. (For example, do you know how much tax you paid to fill your gas tank? Federal taxes are 18.4 cents, and state taxes are added on top of that. In Nebraska, that is about 24 cents a gallon; 20 cents in Iowa. Thus, at current prices, we’re spending about 18 percent of the cost of this commodity in taxes; as prices go down, that percentage increases.)
At the federal level, our tax system contains so many exceptions, credits, deductions, phase-outs, and the like that you never really know how much it takes to pay your taxes until you get them prepared by April 15.
A more important question might be: if we paid only 15 percent of our income in taxes, would you accept the size of government that results?
EAM
Saturday, April 08, 2006
The Regional Greenhouse Gas Initiative
A Reuters news report from Friday indicates that Maryland’s Republican governor has signed a bill that will allow Maryland to join a pact with other Northeastern states, including New York, Vermont, Connecticut, New Jersey, New Hampshire, and Maine, in seeking to reduce their greenhouse gas emissions by power plants. This group seeks to cap greenhouse emissions to 1990 levels by 2009, and to reduce them thereafter.
Such a bill will likely increase the costs of power in these areas. (Supporters claim potential future savings from “efficiency gains.” Show me the money. If the plants will be more efficient – and provide savings at a cost-effective rate – we would not need laws to make them do this.) As a result, businesses that depend on power to run electric motors will find their costs are driven up. Individuals will have less disposable income after they pay their personal power bills. This can’t be good for business – and why would you want to disadvantage your state when it comes to attracting business and population?
But of course, there is the benefit to the environment, with global warming and all. But wait a minute: what is the benefit to the environment of a reduction in CO2 by only power plants, and only in these few states? Annapolis, we have a problem.
The putative benefits would appear to be entirely political in nature. It may make some folks feel good to pay that extra power bill. But query: is this belief grounded in the least on any sound scientific basis? Will the reduction from power plants alone have any tangible benefits for the Maryland economy? If I were a resident, I would be calling my representative and asking for an explanation.
As a side note, I wonder if the hunting enthusiasts should be advertising that their hunting exploits save on valuable CO2 emissions. And perhaps the vegetarians would be at a disadvantage – look at all those plants they are killing, thus preventing more oxygenation. I imagine that some of the movie stars will be coming out to Maryland to support the governor – on their jets no doubt.
But seriously, folks, there is an energy option that provides no CO2 at all: nuclear power. Are the supporters of the initiative closet nuke enthusiasts? This is a hard one for me to figure out.
EAM
Such a bill will likely increase the costs of power in these areas. (Supporters claim potential future savings from “efficiency gains.” Show me the money. If the plants will be more efficient – and provide savings at a cost-effective rate – we would not need laws to make them do this.) As a result, businesses that depend on power to run electric motors will find their costs are driven up. Individuals will have less disposable income after they pay their personal power bills. This can’t be good for business – and why would you want to disadvantage your state when it comes to attracting business and population?
But of course, there is the benefit to the environment, with global warming and all. But wait a minute: what is the benefit to the environment of a reduction in CO2 by only power plants, and only in these few states? Annapolis, we have a problem.
The putative benefits would appear to be entirely political in nature. It may make some folks feel good to pay that extra power bill. But query: is this belief grounded in the least on any sound scientific basis? Will the reduction from power plants alone have any tangible benefits for the Maryland economy? If I were a resident, I would be calling my representative and asking for an explanation.
As a side note, I wonder if the hunting enthusiasts should be advertising that their hunting exploits save on valuable CO2 emissions. And perhaps the vegetarians would be at a disadvantage – look at all those plants they are killing, thus preventing more oxygenation. I imagine that some of the movie stars will be coming out to Maryland to support the governor – on their jets no doubt.
But seriously, folks, there is an energy option that provides no CO2 at all: nuclear power. Are the supporters of the initiative closet nuke enthusiasts? This is a hard one for me to figure out.
EAM
Friday, April 07, 2006
Are the Wheels Coming Off the Stock Market Expansion?
This morning the U.S. Bureau of Labor Statistics announced that the national unemployment rate dipped to 4.7 percent, its lowest level in almost five years, and that the nation added 211,000 jobs in March. This was very good economic news. So why is the market reacting so badly (the Dow lost almost one percent of its value after the jobs numbers came out)?
Before yesterday's low reading for first time claims for unemployment insurance (below 300,000) and today's jobs report were released, investors were dancing through mine fields. That is, most investors, encouraged by Fed officials, thought the Fed would cease raising rates as early as June of this year, thus leaving the funds rate at an acceptable 5.25 percent. It is now very likely that the Fed will continue to push rates higher. In fact I now expect rates to increase by another one percent before the Fed sees the error of their rate hiking ways.
These rate increases will liklely produce several outcomes. First, equity investments will be reduced in value. Second, bond prices will fall. Third, mortgage rates will rise. Fourth, the value of the dollar will rise. Fifth, economic growth will slow, as intended. Unless we investors see some evidence of a cooling labor market, stand by for these bitter pills. Unfortunately in this case, what is good for the worker is not good for the investor!
Remember that semi-old adage--don't fight the Fed.
EPG
Before yesterday's low reading for first time claims for unemployment insurance (below 300,000) and today's jobs report were released, investors were dancing through mine fields. That is, most investors, encouraged by Fed officials, thought the Fed would cease raising rates as early as June of this year, thus leaving the funds rate at an acceptable 5.25 percent. It is now very likely that the Fed will continue to push rates higher. In fact I now expect rates to increase by another one percent before the Fed sees the error of their rate hiking ways.
These rate increases will liklely produce several outcomes. First, equity investments will be reduced in value. Second, bond prices will fall. Third, mortgage rates will rise. Fourth, the value of the dollar will rise. Fifth, economic growth will slow, as intended. Unless we investors see some evidence of a cooling labor market, stand by for these bitter pills. Unfortunately in this case, what is good for the worker is not good for the investor!
Remember that semi-old adage--don't fight the Fed.
EPG
Wednesday, April 05, 2006
Losing Confidence in Congress?
We consider ourselves blessed to live in a country with a representative form of government, which is supposed to be responsive to the interests of the people. Our belief in this form of government is strong – so strong that we fight wars to help bring this to others. And yet we also make fun of our representatives – quite often in fact. One reason to love this form of govenrment is that we can do this without ending up in the gulag. For those who remember Yakof Smirnof, “I love this country.” (What is he up to these days any way?)
A recent survey by the Tax Foundation, a nonprofit organization devoted to the study of taxation, suggests we don’t have much confidence in our representatives these days – at least when it comes to controlling their spending. The survey also suggests that there is popular sentiment for shrinking government as a way to deal with the deficit.
In particular, consider these questions:
Q727. This year the U.S. budget deficit will be $340 billion, or $2,470 per individual tax return. Some people say it is important to balance the budget. Thinking about your own situation, would you be willing to pay an additional $2,470 in federal taxes to eliminate the deficit and balance the budget?
9%
Yes, I would be willing to pay the additional tax.
79%
No, I would not be willing to pay the additional tax.
12%
Not sure
Source: Tax Foundation
Q729. If you paid that extra $2,470 in additional taxes, which one of the following do you believe today’s Congress would do? (Base: Willing to Pay Tax)
63%
Mostly increase spending and not pay off the deficit
20%
Pay off part of the deficit and increase spending with the rest
17%
Pay off the entire deficit
1%
Not sure
(The study summary can be found here:
http://www.taxfoundation.org/publications/show/1408.html)
Q727 is understandable – most folks I know have somewhere they would rather spend $2470. (Most people with kids would definitely relate.) Alternatively, they may be among the group that have a zero or negative tax burden. They just would not have the money to make this contribution.
But if we look at the 9 percent, and if we take them seriously, we should note that there is nothing stopping them from making a voluntary contribution. That should generate a cool $34 billion.
But if we see the results in the next question, we may understand why they don’t do this. Most people think that the Congress would increase spending and not pay off the deficit. In other words, we don’t really think these guys can resist the temptation to spend. It is like an alcoholic working at a bar – too much temptation.
And as far as that spending goes, most people also don't think they are getting good value from their taxes. Consider this question:
Q635. How would you rate the value you personally get from the taxes you pay to the federal government?
2006 2005
27% 25% (Total Excellent or Pretty Good)
65% 66% (Total Fair or Poor)
8% 9% (Total Not sure)
Source: Tax Foundation
Only about ¼ think they are getting excellent or good value from their taxes; two thirds think not. This suggests popular sentiment for shrinking government. But of course, the real test of this view is how people behave in the voting booth.
EAM
A recent survey by the Tax Foundation, a nonprofit organization devoted to the study of taxation, suggests we don’t have much confidence in our representatives these days – at least when it comes to controlling their spending. The survey also suggests that there is popular sentiment for shrinking government as a way to deal with the deficit.
In particular, consider these questions:
Q727. This year the U.S. budget deficit will be $340 billion, or $2,470 per individual tax return. Some people say it is important to balance the budget. Thinking about your own situation, would you be willing to pay an additional $2,470 in federal taxes to eliminate the deficit and balance the budget?
9%
Yes, I would be willing to pay the additional tax.
79%
No, I would not be willing to pay the additional tax.
12%
Not sure
Source: Tax Foundation
Q729. If you paid that extra $2,470 in additional taxes, which one of the following do you believe today’s Congress would do? (Base: Willing to Pay Tax)
63%
Mostly increase spending and not pay off the deficit
20%
Pay off part of the deficit and increase spending with the rest
17%
Pay off the entire deficit
1%
Not sure
(The study summary can be found here:
http://www.taxfoundation.org/publications/show/1408.html)
Q727 is understandable – most folks I know have somewhere they would rather spend $2470. (Most people with kids would definitely relate.) Alternatively, they may be among the group that have a zero or negative tax burden. They just would not have the money to make this contribution.
But if we look at the 9 percent, and if we take them seriously, we should note that there is nothing stopping them from making a voluntary contribution. That should generate a cool $34 billion.
But if we see the results in the next question, we may understand why they don’t do this. Most people think that the Congress would increase spending and not pay off the deficit. In other words, we don’t really think these guys can resist the temptation to spend. It is like an alcoholic working at a bar – too much temptation.
And as far as that spending goes, most people also don't think they are getting good value from their taxes. Consider this question:
Q635. How would you rate the value you personally get from the taxes you pay to the federal government?
2006 2005
27% 25% (Total Excellent or Pretty Good)
65% 66% (Total Fair or Poor)
8% 9% (Total Not sure)
Source: Tax Foundation
Only about ¼ think they are getting excellent or good value from their taxes; two thirds think not. This suggests popular sentiment for shrinking government. But of course, the real test of this view is how people behave in the voting booth.
EAM
Tuesday, April 04, 2006
The Concord Coalition and the Budget Deficit
I just attended a breakfast featuring prominent researchers from the Concord Coalition. The group, based in WASHINGTON, is attempting to sensitize the pubic to the impending economic meltdown brought on by the U.S. budget deficit. While the members of the coalition have professed political agnosticism, they clearly speak with a BIG GOVERNMENT bias.
For example, when they cite past successes, they invariably identify the 1990s as a golden era. Despite the fact that federal government spending expanded at unsustainable rates during this period, members of the coalition cite the declining deficit as visible evidence of successful policy. Of course they underplay the negative aspects of the 1993 Clinton tax increase and instead focus on the achievement of a budget surplus in the waning years of the decade. Not surprisingly, when you boil down all of their rhetoric, the Concord Coalition is calling for a cap on spending and tax increases to achieve a balanced budget.
Caps on spending do not work. Let me provide an alternative. Instead, we need draconian spending cuts. First let’s abolish the Veterans Administration and the Department of Education. As a U.S. Navy veteran and a university professor, I judge both departments as, ineffectual, at best. The beneficial portions of both departments could be more effectivly provided by the private sector. For example, veterans with health problems, instead of visiting deadly and costly VA hospitals, could receive vouchers that could be used at private hospitals. Second, abolish the newly enacted prescription drug program. Third, provide incentives to encourage those approaching retirement to delay their retirement date.
Space does not allow me to defend these seemingly heretical positions. However, as long as 15 percent of workers pay for the benefits of federal spending going primarily to the remaining 85 percent, there will be no effective change on the spending side. Instead, marginal tax rates will rise on the rich, and the definition of the rich will be ratcheted down each year until the average worker is included. If this does not occur, or if spending cuts equivalent to my suggestions are not enacted, U.S. citizens will face long-term interest rates that will equal those achieved in the “good old days” when that old fiscal conservative, Jimmy Carter, was in the White House and we had mortgage rates a full 4 percent higher than they are today.
EPG
For example, when they cite past successes, they invariably identify the 1990s as a golden era. Despite the fact that federal government spending expanded at unsustainable rates during this period, members of the coalition cite the declining deficit as visible evidence of successful policy. Of course they underplay the negative aspects of the 1993 Clinton tax increase and instead focus on the achievement of a budget surplus in the waning years of the decade. Not surprisingly, when you boil down all of their rhetoric, the Concord Coalition is calling for a cap on spending and tax increases to achieve a balanced budget.
Caps on spending do not work. Let me provide an alternative. Instead, we need draconian spending cuts. First let’s abolish the Veterans Administration and the Department of Education. As a U.S. Navy veteran and a university professor, I judge both departments as, ineffectual, at best. The beneficial portions of both departments could be more effectivly provided by the private sector. For example, veterans with health problems, instead of visiting deadly and costly VA hospitals, could receive vouchers that could be used at private hospitals. Second, abolish the newly enacted prescription drug program. Third, provide incentives to encourage those approaching retirement to delay their retirement date.
Space does not allow me to defend these seemingly heretical positions. However, as long as 15 percent of workers pay for the benefits of federal spending going primarily to the remaining 85 percent, there will be no effective change on the spending side. Instead, marginal tax rates will rise on the rich, and the definition of the rich will be ratcheted down each year until the average worker is included. If this does not occur, or if spending cuts equivalent to my suggestions are not enacted, U.S. citizens will face long-term interest rates that will equal those achieved in the “good old days” when that old fiscal conservative, Jimmy Carter, was in the White House and we had mortgage rates a full 4 percent higher than they are today.
EPG
Monday, April 03, 2006
Federal Reserve Will Raise Rates Again in May
On March 28, the Federal Reserve Open Market Committee (FOMC) raised rates for the fifteenth time since June of 2004. With a probability of almost 100 percent, investors across the globe had already priced in the rate hike. More importantly on March 28, the FOMC announced that they remained ready to raise rates again depending on the "data." Of course the market took this statement as evidence of another rate hike at the Fed's next meeting. In fact, currently investors place the likelihood of a rate increase at the Fed's next meeting on May 10 at 80 percent.
Our monthly survey results have just been released (to be posted later today) and they underpin the market's assessment:
www.outlook-economic.com
Our Business Conditions Index for the Mid-America region points to brisk second quarter growth, but with potentially higher inflationary pressures, according to the monthly survey of supply managers and business leaders in the nine-state region. The overall index for March climbed to 63.6, its highest level since November 2004 and up from February’s 59.9.
The region is rebounding from the slower fourth quarter 2005 growth. However, this upturn is contributing to somewhat higher inflationary pressure.
The prices-paid index, which tracks inflation at the wholesale level, for March rose for the first time since September 2005 to 78.6 from February’s 74.3. In January I placed the likelihood of a Federal Reserve rate hike in May at less than 10 percent. I now set the probability of at least a 25 basis point or quarter percent increase at 90 percent when the Fed meets again on May 10.
I believe the Fed should stop right now with the rate increasing. At 290 basis points, the real federal funds rate (actual rate minus inflation) is already well above its average for the past three decades. In my judgement, the Fed, and the rest of us, have been fooled by the warmer than normal weather. That is, the economic data that the Fed is using to justify rate increases is overly robust due to warm weather which has propelled construction activity for quarter one. Growth in the second half of 2006 will be significantly restrained by the Fed action. There is even rising potential for a recession (remote at this point-in-time).
EPG
Our monthly survey results have just been released (to be posted later today) and they underpin the market's assessment:
www.outlook-economic.com
Our Business Conditions Index for the Mid-America region points to brisk second quarter growth, but with potentially higher inflationary pressures, according to the monthly survey of supply managers and business leaders in the nine-state region. The overall index for March climbed to 63.6, its highest level since November 2004 and up from February’s 59.9.
The region is rebounding from the slower fourth quarter 2005 growth. However, this upturn is contributing to somewhat higher inflationary pressure.
The prices-paid index, which tracks inflation at the wholesale level, for March rose for the first time since September 2005 to 78.6 from February’s 74.3. In January I placed the likelihood of a Federal Reserve rate hike in May at less than 10 percent. I now set the probability of at least a 25 basis point or quarter percent increase at 90 percent when the Fed meets again on May 10.
I believe the Fed should stop right now with the rate increasing. At 290 basis points, the real federal funds rate (actual rate minus inflation) is already well above its average for the past three decades. In my judgement, the Fed, and the rest of us, have been fooled by the warmer than normal weather. That is, the economic data that the Fed is using to justify rate increases is overly robust due to warm weather which has propelled construction activity for quarter one. Growth in the second half of 2006 will be significantly restrained by the Fed action. There is even rising potential for a recession (remote at this point-in-time).
EPG
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