Wednesday, July 30, 2008

Stimulus or Stepped-up Tax Collection?

On February 13, 2008, President Bush signed the $168 billion stimulus package enacted by Congress. Democratic presidential candidate Barack Obama said on July 28, 2008, that an early act of an Obama administration would be an additional stimulus package, as much as $100 billion. The large projected budget deficits for the current and next fiscal years are attributable, in part, to the February stimulus package.

At the same time that Congress and the president are putting money in the hands of Americans to promote consumption and economic activity, the General Accounting Office reported new details on the federal tax gap—the amount of outstanding taxes owed by businesses and individuals. The purpose of the report is to recommend methods to collect unpaid taxes.

As of September 30, 2007, the federal tax gap due to unpaid individual and business taxes amounted to $282 billion. Of that, over 1.6 million businesses owed $58 billion in unpaid (not remitted) federal payroll taxes, including penalties and interest. Other unpaid business taxes totaled $50 billion, of which about half is corporate income taxes.

To the extent that the Internal Revenue Service succeeds in reducing the tax gap, it will vitiate the intent of the stimulus package and any future stimulus packages. The federal government needs to make up its mind. Should it hand out money and increase the deficit or try to collect unpaid taxes and reduce the deficit?

Tuesday, July 29, 2008

Russian Riches

It’s easy to understand why Russia is able to flex its muscles in international affairs and why Vladimir Putin is so popular with the Russian people. At the end of 1999, the country was broke, with a sharply devalued currency. On Boris Yeltsin’s sudden resignation, Putin became acting president on December 31, 1999. Putin was elected president in his own right on March 26, 2000. During his two four-year terms in office, Russia recovered from a great contraction in the 1990s and, in the past few years, has recorded strong growth and become a major market for exporters and foreign investment from the West and Asia.

Russia’s international reserves were a paltry $12.5 billion at the end of 1999. Since then, they have risen steadily, sharply accelerating in the last few years. Except for the July 2008 entry, the numbers are for the last week in December of each year.

2000: $27.9 billion
2001: $36.5 billion
2002: $47.7 billion
2003: $77.8 billion
2004: $124.5 billion
2005: $182.2 billion
2006: $303.0 billion
2007: $474.0 billion
7/2008: $588.3 billion

At the current rate of accumulation, Russia’s reserves are likely to reach $700 billion at year’s end and perhaps $1 trillion in late 2009 or early 2010. Russia will soon join the superpowers of international reserves, which includes China with $1.75 trillion and Japan with just over $1 trillion. Russia has gone from bust to boom in a less than a decade, just as the United States and Western Europe struggle to avoid a lengthy period of no to slow growth.

In international affairs, as in most matters, the golden rule applies: He who has the gold rules!

Monday, July 28, 2008

Staggering Deficits—The Law of Large Numbers

On July 28, 2008, the White House estimated that the budget deficit for the current fiscal year, FY 2007-08 (October 1, 2007 - September 30, 2008), will amount to $389 billion, and that the deficit for FY 2008-09 will be a record $490 billion. The explanation for these enormous deficits is a weak economy, which reduces tax receipts, and the $170 billion stimulus package approved by Congress earlier this year. The Congress plans to raise the federal debt limit from $9.815 trillion to $10.615 trillion, an increase of $815 billion, as part of the FY 2008-09 budget.

If elected, Senator Obama has said that his first legislative act as president would be another stimulus package, as much as $100 billion, to fix a broken economy. If $100 billion is good, wouldn’t $200 billion be better? $300 billion, anyone? This is a game of fiscal poker, which means higher future interest payments and greater dependence on foreign buyers of U.S. debt.

Millions, billions, trillions. Who can make sense of such large numbers? There is little point in attempting to save a few hundred million dollars here and there in government programs with deficits of half a trillion dollars.

Monday, July 14, 2008

Conservation: Hotword of the Day

With oil at $145 a barrel and gasoline exceeding $4.00 a gallon, we are implored to conserve energy. With drought in several regions of the country, we are told to conserve water.

To conserve is noble and uplifting. But what does it actually mean? In simple, non-inflated words: use less. Dictionary definitions include "to use carefully or sparingly, avoiding waste" and "to economize."

Using less is rather depressing. It means smaller cars, colder homes in winter and hotter in summer, shorter showers, and browner lawns, among others. Senator Obama has gone so far as to say that we may have to eat less to hold down food prices in developing countries. This is not the stuff of the American dream.

Private individuals are asked to conserve in all aspects of their lives. Why has no one said that the government has to conserve, to make do with lower taxes and less spending? Or does conservation really mean the transfer of resources from private individuals to government?

Sunday, July 6, 2008

Campaign Contributions: Biased or Balanced?

Individuals are permitted to give a presidential candidate a maximum of $2,300 for the primary elections and another $2,300 for the national election. Campaign treasurers are required to report monthly totals and list every donor that contributes $200 or more per donation. Multiple contributions in lesser amounts that aggregate in excess of $200 need not be itemized.

94305 is the zip code for Stanford University. Some 860 faculty and staff families live in campus residences along with about 10,700 undergraduate and graduate students. Many of the latter are foreign or out-of-state students and hence don’t vote in California. U.S. citizens can contribute regardless of their home address.

As of June 30, 2008, John McCain had received $6,900 from two Stanford residents, both fellows at the Hoover Institution. Barack Obama had received $107,991 from dozens of Stanford residents; of these, Hoover fellows contributed $5,850. If spouses of Hoover fellows are included, Obama received $9,100. On these numbers, Hoover is well balanced.

Thus far, Obama has received 94 percent of all contributions received from campus residents. Apart from two Hoover fellows, McCain has not received a dime from any Stanford resident. Is the rest of the campus biased?

Friday, July 4, 2008

You’re a Grand Old Flag—Or Are You?

July 4, America’s Independence Day, often brings out feelings of patriotism. Americans typically celebrate July 4 with family barbeques, along with watching parades, fireworks, and musical performances, which include such favorites as "Stars and Stripes Forever," "Yankee Doodle," and "You’re a Grand Old Flag."

Stanford University is blessed with lots of land. From its founding in 1891, the university has provided land on which its professors and high-level administrators could build homes and reside. The stock of housing has increased over the years, especially since the late 1950s, to some 860 homes, which consist largely of single family houses, a few duplexes, and several hundred condominiums. About 30 percent of the faculty and staff that is eligible to live on campus do so; the remainder live in the surrounding towns and cities.

During the early afternoon of July 4, my wife and I drove up and down all the campus streets housing Stanford faculty and staff. We counted thirteen flags in all, of which three were displayed in front of residences owned by Hoover Institution fellows (myself and two colleagues). Thirteen homes displaying the stars and stripes constitute 1.5 percent (halfway between one and two percent) of all campus faculty staff residences. Even neighboring Palo Alto has a higher percentage of homes displaying flags.

What is one to make of this minuscule display of affection for the national flag on Independence day among the faculty of one of the world’s greatest universities?