China’s GDP Surpasses U.S.’s: Who Loses and When?

In 2010, China’s gross domestic product (GDP) was approximately one-fourth that of the U.S. Since then, China’s overall economy has advanced at an annual compound growth rate of 10% compared to the U.S.’s much slower expansion of 4.1%. Should this trend persist, China’s GDP will surpass the U.S.’s in 2027. Other than bragging rights, what are the impacts? Could the U.S. dollar lose its reserve status?

At the 1971 Bretton Woods Agreement, the U.S. dollar was officially crowned the world’s reserve currency. Even without this official designation, due to the size of the U.S. economy, and its debt markets, the U.S. dollar was, and is, the global reserve currency. As a result of this status, other countries accumulate reserves of U.S. dollars equivalents instead of gold. But rather than holding U.S. dollars, these nations purchase and hold interest earning U.S. Treasury bonds. These purchases have the impact of reducing U.S. interest rates. Furthermore, these bond purchases strengthen the U.S. dollar making purchases of foreign products such as Paris vacations and German automobiles cheaper in price for U.S. consumers.

However, in 2015, the IMF awarded the Chinese yuan status as one of four reserve currencies with the dollar supreme. The IMF basket of reserve currencies currently includes the euro, the Japanese yen, the British pound, and U.S. dollar. Should China’s GDP surpass that of the U.S., and they abandon currency manipulation, there will be pressure from global investors to abandon the dollar and crown the yuan as THE global reserve currency.

The yuan replacing the dollar as THE global reserve would push U.S. interest rate much higher, increase borrowing costs for U.S. firms engaged in international trade, and boost U.S. consumer/business borrowing costs.

At this time, China’s interest rates on government debt are approximately two percentage points higher than the U.S.’s. Thus, the dollar losing its status as the global reserve currency could increase U.S. federal debt service by as much as two percentage points and cost U.S. taxpayers as much as $600 billion per year in interest payments, other factors unchanged.

Ernie Goss

Since taking office, the Biden Administration has passed a $1.9 trillion stimulus bill to fuel an economy that was already expanding at a very healthy pace. Now President Biden is advancing a so-called $2.0 trillion “infrastructure” bill. To pay for a portion of this exploding spending, the president has called for an increase in the corporate income tax rate from 21% to 28%, and a boost in the income tax rate on households making more than $400,000. The added corporate tax rate is on top of state the assessment of 44 states and D.C. that have corporate income taxes on the books ranging from North Carolina’s single rate of 2.5% to a top marginal rate of 11.5% in New Jersey. An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to an average of almost 34% and would be the highest among the 37 OECD nations which have an average corporate rate of 22% with lowest rates for Ireland at 12.5%, and Switzerland at 8.5%. This increase would harm U.S. economic competitiveness and increase the cost of U.S. firms. The Tax Foundation estimated that the hike would reduce long-run GDP growth by approximately one-fourth, eliminate 159,000 jobs, and reduce wages by 0.7%. But instead of engaging in global competition, the Biden Administration is attempting to coerce OECD members into raising their rates. To quote ex-academic economist, Federal Reserve Chairman, and current U.S. Treasury Secretary Janet Yellen, “Destructive tax competition will only end when enough major economies stop undercutting one another and agree to a global minimum tax.” I guess she only believed in market-based economics and competition when she was teaching macroeconomics at the University of California-Berkley. Welcome to the 21st Century Dr. Yellen. The U.S. must compete in the global economy, not attempt to fix prices, and limit competition. This is not legal for companies in the U.S., and should be verboten for OECD nations.

Biden Taxes Will Reduce Global Competition, Slow Growth: Practice What You Preached Dr. Yellen

Since taking office, the Biden Administration has passed a $1.9 trillion stimulus bill to fuel an economy that was already expanding at a very healthy pace. Now President Biden is advancing a so-called $2.0 trillion “infrastructure” bill.

To pay for a portion of this exploding spending, the president has called for an increase in the corporate income tax rate from 21% to 28%, and a boost in the income tax rate on households making more than $400,000. The added corporate tax rate is on top of state the assessment of 44 states and D.C. that have corporate income taxes on the books ranging from North Carolina’s single rate of 2.5% to a top marginal rate of 11.5% in New Jersey.

An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to an average of almost 34% and would be the highest among the 37 OECD nations which have an average corporate rate of 22% with lowest rates for Ireland at 12.5%, and Switzerland at 8.5%. This increase would harm U.S. economic competitiveness and increase the cost of U.S. firms. The Tax Foundation estimated that the hike would reduce long-run GDP growth by approximately one-fourth, eliminate 159,000 jobs, and reduce wages by 0.7%.

But instead of engaging in global competition, the Biden Administration is attempting to coerce OECD members into raising their rates. To quote ex-academic economist, Federal Reserve Chairman, and current U.S. Treasury Secretary Janet Yellen, “Destructive tax competition will only end when enough major economies stop undercutting one another and agree to a global minimum tax.”

I guess she only believed in market-based economics and competition when she was teaching macroeconomics at the University of California-Berkley. Welcome to the 21st Century Dr. Yellen. The U.S. must compete in the global economy, not attempt to fix prices, and limit competition. This is not legal for companies in the U.S., and should be verboten for OECD nations.

Ernie Goss

March 23, 2021 Misery Indices by State

Mainstreet Versus Wallstreet: Stocks Did Better Under Democrat Presidents (Workers Under Republicans)

Since the onset of Covid-19, Wallstreet, as captured by stock market indices, has significantly outperformed the overall U.S. economy. Since the fourth quarter of 2019 until the end of the fourth quarter of 2020, the Standard & Poor’s 500 index (S&P) soared by 14.6% as the overall U.S. economy (GDP) shrank by 1.2%. This has caused critics to argue that the responses of the Republican Whitehouse, and the Federal Reserve (Fed) to Covid-19, as well as other economic maladies, have benefited Wallstreet business interests at the expense of workers, and small businesses on Mainstreet. Is there merit in the critics’ argument? Figure 1 compares the ratio of the S&P stock average and employee compensation to GDP from 1985 to 2020. As presented, since reaching a low of 52,6% of GDP in 2014 in the Obama Administration, employee compensation has risen to 54.6% in 2019 (the latest data) in the Trump Administration. During this same period of time, the S&P stock average climbed from 11.1% to 15.4% of GDP. However, the Fed has been clearly on the side of the stock market by reducing interest rates during 2020. For example, the yield on the 6-month U.S. Treasury bond tumbled from an average 2.11% in 2019 to 0.37% in 2020. Table 1 compares the impact of 16 years of Democrat presidencies versus 20 years of Republican presidencies on stocks and workers. As presented in Table 1, stocks and business profits have expanded at a faster pace during Democrat presidencies, while worker compensation excelled under Republican presidencies. Likewise, the Fed appears to have been more supportive of stocks during Democrat presidencies than Republican presidencies by keeping interest rates lower. While differences between Democrat and Republican presidencies listed in Table 1 are not substantial, they are surprising and contrary to the popular narrative. Furthermore, differences may spring from many factors, just one of which is control of the White House.

Ernie Goss

Punishing Success by Raising Taxes: Biden’s Bite to Support Government Expansion

 

President Biden has promised to raise taxes on high income individuals to fund his planned rapid decade-long expansion in federal spending. His approach calls for raising the top income tax rate from 37% to 39.6%, limiting deductions for top earners, and boosting the long-term capital gains tax rate for high earners from 20% to 39.6%.

 

Table 1 below lists the 10 states with current highest income tax rates on additional income. As presented, a California high wage earner, or self-employed, keeps only $35.85 of every $100 of additional income. Importantly, these rates do not account for other taxes paid primarily by higher income individuals such as capital gains taxes, and do not consider Biden’s proposed cap on deductions for high income earners. The rates do include Medicare, and Social Security taxes.

 

Even before the Biden Bite, the top 5% of earners pay approximately 58% of federal income taxes. Likewise, the increase is ill-timed hitting earners in an economic downturn (i.e. a reverse stimulus). The Keynesians should be properly outraged, but don’t count on witnessing it.

 

In addition to funding a plethora of new government programs, proponents of the Biden Bite argue that these tax hikes will reduce income inequality as measured by the Gini Coefficient. The Gini Coefficient measures income inequality with the coefficient varying from zero (least income inequality) to 1.00 (maximum income equality).

 

Table 2 lists the ten states experiencing the greatest degree on income inequality. Four states with the highest income inequality are ranked in the top 15 states in terms of income tax rates. Calculating the correlation between top tax rates and the Gini Coefficients for the 50 states and D.C. indicates only a slight association between tax rates and the Gini Coefficients. However, the association is opposite to that argued by the Biden proponents. That is, states with higher tax rates on higher earners experience greater income inequality, not less.

 

This essay is based on state income tax data indicating that increasing the tax rate on higher income has not and will not reduce income inequality, and in fact may increase income inequality.

Taxing better educated, higher earners will instead further burden high earners which discourages initiative, reduces the motivation to improve human capital via education, and incentivizes tax avoidance and/or tax evasion. Furthermore, raising taxes at this time, offsets some of the positive impacts of stimulating the economy with higher consumer spending fueled by Stimulus I and II.

Table 1: Top tax rates for highest (rates are for income tax rates only, and do not include other Biden increase such as capital gains)
	Current Top Income tax rate	Biden addition	New top tax rate
1. California	64.15%	2.60%	66.75%
2. Hawaii	61.85%	2.60%	64.45%
3. New Jersey	61.60%	2.60%	64.20%
4. Oregon	60.75%	2.60%	63.35%
5. Minnesota	60.70%	2.60%	63.30%
6. D.C.	59.80%	2.60%	62.40%
7. New York	59.67%	2.60%	62.27%
8. Vermont	59.60%	2.60%	62.20%
9. Iowa	59.38%	2.60%	61.98%
10. Wisconsin	58.50%	2.60%	61.10%
Notes: Iowa’s income tax rate allows the deductibility of federal income taxes and is thus somewhat lower than that listed.

Table 2: Ten states with the greatest income inequality
State	Total Current top tax rate	2018 Gini coefficient
1. District of Columbia	59.80%	0.524
2. New York	59.67%	0.513
3. Connecticut	57.84%	0.501
4. Louisiana	56.85%	0.494
5. California	64.15%	0.491
6. New Mexico	55.75%	0.489
7. Florida	50.85%	0.489
8. Massachusetts	55.85%	0.488
9. Alabama	55.85%	0.486
10. Arkansas	57.45%	0.485

Will Biden Forgive Student Loans? Why Not Automobile Loans?

 A kettle of progressive Democrats is demanding that President-Elect Biden issue an executive order extinguishing student debt in the first week of his reign. Past and present students currently owe $1,700 billion (yes that is $1.7 trillion). Since 2006, student debt has expanded by 253.4%, while income to pay the debt has advanced by one-third that pace, or 79.8%. But there are clear problems and benefits of such action.

 

Wrong Beneficiaries? It has been well documented that income inequality has soared over the past five decades as college educated incomes rose at a much faster pace than workers that did not earn a two-year, or four-year degree.

Except during the Trump Administration, the top 20% of income earners received a greater share of income than the bottom 80% of earners. Furthermore, higher education institutions have sucked up much of the rocketing student debt in the form of higher tuition and fees which, since 2006, expanded at 2.5 times the rate of growth in prices of other consumer goods and services.

 

Fairness? This month, 45 million of the U.S. population owed approximately $38,000 per individual. Thus, the remaining 284 million Americans either have paid off their student debt, or never received a student loan. How fair will the many view shifting $1.7 trillion to the favored few? Furthermore, any delay in making an executive decision, either yes, or no, will only incentivize student debtors to further delay payments, and even ramp up their borrowing.

 

Productivity? Economic theory postulates that higher productivity begets higher income. The latest Bureau of Labor Statistics data show that a college graduate earns 71.0% more than a high school graduate without any college experience. Thus, other factors unchanged, encouraging more individuals to earn their college degree will stimulate higher productivity and economic growth.

 

Economic Stimulus? It is argued that forgiving $1.7 trillion in student debt will help pull the economy out of the current recession. However, the multiplier of providing $1.7 trillion in direct payments to consumers that spend the funds on goods and services will be between 0.08 and 0.23, compared to 0.36 for small business aid, and 0.60 for unemployment benefits, according to the Committee for a Responsible Federal Budget.

 

The question for the Biden Administration is, will the stimulative productivity impact of debt forgiveness offset the many negatives of such a move?  This economist has serious doubts.

Ernie Goss

Impact of Economic Lockdowns