Thursday, December 17, 2009

How the Bonus Tax Can Steal Christmas

Bonus taxes on bankers are all the global rage. Soon they’ll likely be extended to corporate executives and other greedy individuals. So, why not impose them on their most vocal advocates, the disproportionately left-leaning professors, especially in the highly-paid elite universities, who routinely support higher taxes on the wealthy to finance increased government spending on their favorite programs!

In keeping with President Obama’s pledge not to raise taxes on single persons earning less than $200,00 and married couples less than $250,000 a year, I suggest a 50 percent bonus tax on all professors whose earnings exceed those levels. Moreover, because the professors are so keen on progressivity, I further propose an additional 5 percent bonus tax on each incremental $50,000, up to a maximum bonus tax of 75 percent on earnings exceeding $450,000 and $500,000 for single and married taxpayers respectively.

Moreover, to avoid any loopholes, professors should also pay these bonus taxes on dividends and capital income, including hitherto tax-exempt bonds.

While we’re at it, how about applying the bonus taxes to state and local taxes!

Applying bonus taxes on academics will affirm their enthusiasm for living by their own doctrine. Or, will it? You place your bet.

Tuesday, December 1, 2009

Are the Swiss Becoming Hateful?

Swiss voters recently approved by a substantial margin (57 percent yes) a referendum to ban minarets on top of mosques. For this exercise of democracy the Swiss have been excoriated as racist bigots, bringing upon them the hostility of Muslims and Western proponents of diversity and tolerance. (Never mind that some Muslim countries do not reciprocate.)

The exercise of democracy has brought to power Hamas in Gaza, Hezbollah in Lebanon, Hugo Chavez in Venezuela, Evo Morales in Bolivia, Vladimir Putin in Russia (with 70 percent approval), and Alexander Lukashenko in Belarus, to name a few of the less attractive parties and regimes in the "democratic" world..

What is one to conclude? That democracy is good if supporters get the outcome they want, but bad if the process produces the "wrong" result.

Monday, November 23, 2009

Saving Birds or Saving the Environment?

The Endangered Species Act was passed in 1973 to halt the extermination of species. The U.S. Fish and Wildlife Service reported in 1996 that 185 bird species were on the international endangered list and 93 species on the domestic U,S. List.

The International Union for the Conservation of Nature (IUCN) red list for birds in 2008 identified 1,227 threatened bird species (12 percent of the total), with another 838 near threatened. Of the 1,227 threatened, 192 are defined as critically endangered. (An estimated 133 species have gone extinct since 1500.)

Renewable energy is at the forefront of political efforts to reduce greenhouse gases in order to mitigate climate change (although the effect of greenhouse emissions is in dispute). To the extent that wind turbines become a major source of alternate energy in future years, some bird populations may be severely diminished and species that migrate through fields of wind turbines could become extinct. Large numbers of birds are being chopped to pieces by wind turbines.

If Dr. Seuss were still alive, he would ask "Who cares for the birds?"

Thursday, November 19, 2009

China, Interest, and Taxes

China’s central bank, the China Investment Corporation, and other Chinese entities hold well over a trillion dollars in securities of U.S. federal debt and U.S. government sponsored enterprises. What is not widely understood is that the tens of billions of dollars of interest earned on these holdings are tax free. China piles up billions more simply collecting tax-free interest.

Democrats are proposing new taxes at an unprecedented rate to finance the extension of health insurance, new job creation, deficit reduction, and who knows what else. They include higher taxes on medicare and income and a transaction tax on financial instruments. Democrats say that all revenue options must be on the table. To this end, and to accommodate still other taxes, they have ordered two bigger tables to be delivered to the Senate Finance Committee and House Ways and Means Committee meeting rooms.

Tuesday, November 17, 2009

Obama in China: Learn from China

Analysts, pundits, and numerous China experts keep naysaying China’s economic growth. Sooner or later, they say, China will undergo a financial and economic implosion that hit Western economies in 2008-09.

They are wrong because they underestimate China. Chinese laborers work six-day, sixty-hour weeks, which compensates for a raft of other problems. Hard work is a key to China’s success.

Many of the pundit-analyst-experts lack long-term vision. I first saw Shenzhen in 1963 from the hills above the Lok Ma Chau lookout in Hong Kong. Shenzhen then was a small village consisting of a few huts. The urban region encompassing Zhenzhen now totals nineteen million. I first saw Shanghai in 1981. I wandered the city using a 1935 tour guide that remained accurate. Mao’s economic policies had frozen progress dead in its tracks. Shanghai now has more than double the number of skyscrapers in New York and a much better airport, to name just a few points of comparison. So on for the rest of the country, as urbanization moves westward.

China has successfully managed its transformation through property bubbles, busts, SARS, and the Asian financial crisis. Western methods of macroeconomic analysis, which exclude the propensity to hard work, are inapplicable to China.

I’m from Missouri, the "Show Me" state. Seeing is believing. I have been seeing for the better part of five decades and I believe.

Monday, November 16, 2009

Confucius Redux: Obama in China

Obama’s travels in China are a good time to take in some Chinese history and culture.

When the Communists took over China and established the People’s Republic of China on October 1, 1949, an early goal was to increase literacy. To that end, Chinese linguists introduced "simplified characters," which reduced the number of strokes needed to memorize more complex traditional characters. Despite this massive national undertaking, Shanghai-based China Eastern Airlines, which provided the ramp on which Obama descended from Air Force One, still uses the traditional form of the character for country, guo, rather than the simplified form. (Canton-based China Southern Airlines uses the simplified form.)

China has established hundreds of Confucian institutes around the world to teach traditional Chinese ideals. Confucian ideals are set forth in his "sayings," the Analects. One of my favorites is "Rarely do I meet a man who studies for three years without thinking of a post in government." In traditional China, a post in government conferred status and a relatively large income.

In the U.S. we have a different variant. "Rarely do I meet a man or woman who works in government for three years without thinking of lucrative consulting, speaking, and writing opportunities afterwards."

Finally, we should learn from China, which has managed its economy extremely well in the midst of the global financial crisis. Every business school and economics department in U.S. universities should have visiting professorships for Chinese planners and scholars who can teach Americans about China’s success.

Thursday, October 8, 2009

Thursday’s Thoughts

In years to come, immigration reform will doubtless extend government subsidized health care to illegal immigrants, either by granting them amnesty, or because the courts will rule that excluding them is discriminatory. Since every human life is valuable, why not include in health care/insurance reform all Mexicans living within ten miles of the U.S. border?

China has managed the financial crisis of 2008-09 better than the U.S. and all other Western industrial democracies. Let’s invite some of the leading Chinese economists and financial officials to lecture our economists and officials on what they did and why they succeeded.

It is often said of U.S. public debt that we owe it to ourselves, hence it’s no big deal. Not so. Almost half is held by foreign institutions and individuals. Foreigners do not pay tax on their interest earnings on these assets.

The U.S. needs an educated population to compete with other countries in the global economy. What has been happening in inner-city Chicago in mid-September 2009, gang murders of students, bodes ill for the future. The same can be said of Detroit, Oakland, Philadelphia, and numerous other inner city residents across the country.

Thursday, September 24, 2009

Economists at War: A Macroeconomics Soap Opera

The macroeconomics blogosphere is daily theater few dramas can match. The world’s leading economists are engaged in a great debate, often going for the jugular, asserting who is right and who is wrong in the choice of intellectual framework (Keynesian, classical, behavioral, Austrian, hybrid) that best explains the "Great Recession," and how to resolve the financial crisis and its aftermath.

Those at war include leading professors at Harvard, Columbia, Princeton, Chicago, Berkeley, Stanford, George Mason, Oxford (apologies to those not specifically listed), along with numerous commentators in business and the financial media. There is a strong tone of partisanship in the debate.

Among the issues: How many jobs could a stimulus stimulate...? Harvard’s Robert Barro says none, Stanford’s John Taylor says some, Princeton’s Paul Krugman, Columbia’s Joe Stiglitz, and Berkeley’s Christina Romer (head of the Council of Economic Advisers) say a lot. All use data and argument to buttress their claims.

What is the proper mix of fiscal and monetary policies? Are today’s deficits the cure or tomorrow’s problem?

Considering the following proposition. Have the students completing intermediate macroeconomics from any of the combatants take their final exams from any of their professor’s antagonists. The results should be very interesting.

Monday, September 21, 2009

Racism and the Race Card

Political debate is increasingly supercharged with claims of racism (Obama supporters) and playing the race card (anti-Obamians). Immigration reform, which is coming back to life, is being cast as anti-Hispanic by its proponents, largely Democrats, who expect newly legalized Hispanics to disproportionately vote Democrat. The Republican Party is being cast as a party of the South. Racial, ethnic, and geographic divisions are increasingly pitting Americans against each other.

On the international front, the Dayton Accord, which resolved the conflict in Bosnia and Herzegovina, is crumbling in the face of rising tensions between Bosnian Serbs, Bosnian Croats, and Bosnian Muslims. Catalans and Basques continue to press for greater autonomy from Madrid. China has a growing problem with Uighur Muslims.

Yet some continue to believe that the United States military and civilian agencies can construct, at what has been an enormous cost, a unified stable polity in Iraq out of its Shia, Sunni, and Kurdish communities that can hold together once withdrawal of U.S. Troops begins in mass.

Some also believe that a similarly positive outcome can be achieved in Afghanistan among its five large ethnic groups if only an Iraqi-style surge with an additional 40,000-60,000 U.S. troops is carried out over the next year or two or more.

If America has trouble transcending its racial and ethnic divisions, why should one suppose that success in Iraq and Afghanistan is just another surge away.

Sunday, September 20, 2009

Becoming a Matriarchate

There are more than 900 women’s/gender/feminist undergraduate and graduate studies programs, departments, and research centers around the world. Over half are in the United States, up from a mere two in 1970.

During this period, higher education has been transformed from a disproportionately male-oriented to a female-driven program. In 1970, 4.25 million males participated in undergraduate enrollment in degree-granting, post-secondary institutions compared with 3.12 million females, a ratio of 1.36 to 1. By 1980, female undergraduate enrollment surpassed that of males. In 2007, the latest year for which exact figures are available, females represented 56.9 percent of undergraduate enrollees. The projection for 2018 is that females will increase to 58.6 percent.

The Council of Graduate Schools has released its data for 2008. Females constituted 58.9 percent of all graduate enrollment, a ratio of 1.43 to men. They remain a minority in business (45.7 percent), engineering (22.0 percent), and the physical sciences (33.2 percent). They are the majority, vastly so in some instances, in arts and humanities, biological and agricultural sciences, education, health sciences, public administration, social and behavioral sciences, and the remaining other fields lumped together.

These trends parallel the growth of the service sector and relative decline of manufacturing in the United States.

Women also control about half the wealth in the United States. This share is likely to rise as women’s earnings increasingly reflect their higher education. Women are presidents of Harvard, Princeton, MIT, Penn, and other leading universities. For want of a few caucus states, America would have its first female president.

The American patriarchy has been and remains in decline. Those who want an advance look at the developing American matriarchate may want to spent some time in Scandinavia.

Friday, September 18, 2009

Obama-Care: A New Paradigm for Public Policy

Obama-Care portends a new paradigm for public policy. President Obama promises that any health care bill he signs into law will improve access, cut costs, and increase results. This means providing health coverage for tens of millions of uninsured, reducing the share of national income spent on health care, and improve "life quality indicators."

How would Obama-Care apply to tertiary education, which depends heavily on government funding for research, faculty, and student support?

First, professors would be judged on "research quality indicators" of their government-funded work. They would be expected to improve research output with smaller budgets.

Second, universities, especially elite "ivies," would be expected to educate more poor, lower-middle class, and less prepared students, thus extending brand-name education to those currently excluded, at less cost. Universities offering "gold-plated" education to a few would be taxed to support the many at less costly institutions to spread the benefits of higher education.

Third, universities would be judged on "educational quality indicators," for example, graduation rates. Roughly half of those enrolling in four-year tertiary institutions fail to graduate. Unless that ratio increases, government funding would be reduced. To insure that grades are not inflated and graduation criteria lowered, a national educational clearing house would establish universal standards of objective tests to insure quality.

Extending the paradigm of Obama-Care to higher education means more educated students, more productive research, and taxpayer savings. This is a winning recipe and ought to be endorsed by those supporting Obama-Care. To dream.

Friday, September 11, 2009

Deficit Reduction—Show Me the Money

At a CNBC town hall forum held on September 10, 2009, Treasury Secretary Timothy Geithner stated that sustained large annual (trillion dollar) budget deficits would damage the economy—but that deficit reduction measures should not be undertaken until current deficits had stabilized the economy and restored growth.

Pressed to state if he thought higher taxes would be required in the future, Geithner ducked the question and, on its repetition, did so a second time. Nor did Geithner point to any cuts that could be made in federal spending.

Many languages have a phrase akin to "show me the money." Geithner did not do so.

The night before, speaking at a joint session of Congress, President Obama stated that over $500 billion in savings could be wrung out of waste and inefficiency in Medicare and Medicaid to underwrite the lion’s share of the cost of health insurance reform. Obama failed to identify specific instances of waste and inefficiency that could be eliminated to achieve the savings. Obama did not show me the money.

Thursday, September 10, 2009

Resolving America’s Scandal of Millions of Uninsured

In his speech to a Joint Session of Congress on September 10, 2009, President Obama said it was a national scandal that the United States was the only major industrial democracy that fails to provide universal health care for all its citizens.

If all the illegal residents in the United States return to their homelands, that would reduce the number of uninsured by twelve or more million.

The immigration of U.S. citizens, legally or otherwise, to any of the countries in North America, Asia, or Europe that provide universal health care would remove the remaining thirty-plus million from the uninsured.

Perhaps Obama can explore this option with the other Western democracies at the G-20 meeting in Pittsburgh during September 24-25.

Wednesday, September 9, 2009

Is Obama Sexist?

President Obama has appointed several dozen "czars" to supervise various aspects of American economic and social life. Of these, four are women.

The dictionary definition of czar is (1) a male monarch, (2) an autocrat, or (3) an appointed official having special powers to regulate or supervise an activity.

A czarina is (1) the wife of a Russian czar, or (2) a female autocrat.

Shouldn’t Obama refer to his non-Senate confirmed special assistants as "czars" and "czarinas?"
Chinese vs. American Characteristics

China has called its economic system "Socialism with Chinese Characteristics." In truth, it is really "Capitalism with Chinese characteristics."

Meanwhile, the American economy is evolving into "Socialism with American characteristics."

If you are feeling brave, you may wish to extrapolate the trends.

Friday, September 4, 2009

Snowe’s Trojan Horse?

Speculation abounds that Maine Senator Olympia Snowe will be the kingpin in any health care/insurance reform enacted into law this year. (With Ted Kennedy’s passage, her vote might be needed to reach the magic number of 60 to shut off Senate debate in the event of a Republican filibuster.) Her proposal is that a public option be included in the law, which, after a specified period of time, would be triggered on the failure of private insurance companies to lower costs and improve coverage. As of this posting (September 4, 2009), that time period has not surfaced from conversations she has been having with the White House.

It’s ironic that a "trigger" would ignite the public option. Trigger was Roy Roger’s horse and a Trojan horse enabled the Greeks to destroy Troy.

If and when a trigger-law is enacted, Congress is likely to subsequently lower the bar for ignition. The time period will be reduced in the face of charges that insurance companies are dragging their feet on reform. New onerous conditions will be imposed on insurance companies that will be increasingly hard to meet.

The pros and cons of health care have obscured the politics behind the debate. Universal insurance and care will disproportionately benefit Hispanics. Even if legislation explicitly excludes illegal aliens, Congress will likely insert that provision in the law at some future date, and/or the courts will rule the exclusion unconstitutional. Adding ten-plus million Hispanics to the voter rolls should insure Democrat majorities for years to come, mirroring Franklin Delano Roosevelt’s long-governing coalition of Jews, Blacks, and Catholics.

Thursday, September 3, 2009

Medicare Savings?

The president and members of Congress urging national health care/insurance reform state that hundreds of billions of dollars in Medicare savings will help finance the cost in extending health care coverage to tens of millions currently uninsured.

These statements imply that over the years Medicare administrators have failed in their responsibility to spend Medicare payroll tax revenue efficiently, resulting in waste, fraud, and abuse. They proponents of national health care promise that future Medicare administrators will change their ways.

Quoting President Reagan in translation, "trust but verify," to which I add, "I’m from Missouri, show me."

Wednesday, September 2, 2009

California Burning

Fires are a recurrent problem in California every summer and fall. This year’s outbreak in late August is especially massive. The carbon footprint of so much brush and trees going up in flames must be huge. Is there anyone out there who has tried to compute the amount of carbon released into the atmosphere from these fires?
What’s Wrong with Rising Productivity?

Despite the current recovery in the stock market, leading economists, journalists, market participants, and politicians all decry the lack of job creation in the economy. This morning’s economic news (September 2, 2009) included a 6.6 percent increase in Q2 productivity, which translated into lower labor costs. Although productivity gains are the foundation of rising living standards, current gains are blamed for retarding job growth (whether productive or make work jobs).

The reverse of Parkinson’s Law may be in play here. The law, first published in 1955 by C. Northcote Parkinson, stated that "work expands to fill the time available for its completion." Parkinson pointed to such facts as the number of employees in Britain’s Colonial Office increased as the size of the British Empire declined, and the number of admirals in the British Navy rose as the number of ships declined.

I’ve witnessed the reverse of his law on the Stanford campus this summer. Over the last ten years, the number of faculty has grown less than 10 percent, while the non-academic staff has increased 50 percent. Sharp falls in endowment income and gifts have forced a reduction in staff. With fewer employees, the grounds department has done its best work since 1976 cleaning up the campus, mowing winter growth, pruning trees, and so forth.

Those with jobs are working harder than ever before to keep their jobs. New hires are working hard to stay employed. When employers begin to add net new jobs to their payrolls, these newly hired will be more productive than in previous periods of job growth. This is a good thing, even if current unemployment is troubling. A more productive economy over time is good for workers, investors, and public revenue. Why can’t more people see this?

Thursday, August 27, 2009

Too Many Graduates Employed in Private Financial Firms?

In his Financial Times column of August 27, 2009, Harvard economics professor Benjamin Friedman opines that too much of the nation’s talent in recent years went into private financial firms manipulating small margins in millisecond trading, instead of enterprises producing non-financial goods and services. While it was rational for each individual to pursue his own economic self-interest maximizing income, it fostered waste at the aggregate national level.

For a moment I thought Professor Friedman was writing about his colleagues in economics departments and business schools. The enormous growth in recent years of these two fields did little to prevent, perhaps even contributed to, the economic meltdown of 2008-09, having taught a generation of students that mastering mathematics and high-powered statistics will enable them to succeed in their individual careers and ability to manage the economy to prevent the eruption of catastrophic financial crises.

Yet, new buildings housing economics and business education are mushrooming at universities across the country, indeed around the globe. Perhaps what’s needed is a reallocation of financial and human capital teaching students how to make things and provide services?

Tuesday, August 25, 2009

Rule Bernanke, Bernanke Rules the Fed

With President Obama’s announcement on August 25, 2009, that he would nominate Fed chairman Ben Bernanke for another four-year term, two big issues will dominate macroeconomic discussion in the next few years.

The first is the so-called "exit strategy." To minimize the risk of inflation, when will the Fed begin to raise interest rates and withdraw much of the liquidity it pumped into the financial markets? Some distinguished economists and financiers warn that tightening monetary policy too soon risks another downturn; others warn that waiting too long risks inflation. We’ll find out if the Fed’s timing was right only after the fact. There is no way to run an experiment simultaneously testing the rival views.

The second issue is curtailing "staggering budget deficits" and the accumulation of a massive national debt. (Where is Jim Sasser when we need him?) The goal is to persuade political decision makers to reduce deficits by some combination of spending cuts and tax increases, two hot potatoes in Congress land. Good luck. Lecturing Members of Congress of both parties to control spending is akin to lecturing rats on the benefits of proper hygiene to control plague (acknowledgment to Brock Yates for the adaptation of his poignant phrase).

Monday, August 24, 2009

Taxpayers are Rolling in Green(backs)

It was reported on August 24, 2009, that U.S. taxpayers have thus far made a profit of $11 billion on their investment in Citigroup. So, when can we (the taxpayers) expect to receive a dividend? Or, is it more likely that the government will use the profit from the sale of its stake, when it chooses to sell, for other spending programs?

The notion that taxpayers profit from government loans and investments does a disservice to the English language.

Monday, August 17, 2009

What About Topeka?

The Kansas City Federal Reserve Board is hosting the 33rd annual Jackson Hole Economic Symposium during August 19-21. The program, as usual, will consist of morning panels and discussions, with afternoons off for recreational activities.

I’ve been to Jackson Hole several times, most recently speaking at a meeting of the Western Governors Association. The Grand Tetons are spectacular. Mid-August is perfect resort weather. Jackson Hole is a charming western town with splendid restaurants.

But why are all these distinguished central bankers, economists, financiers, and journalists meeting in Jackson Hole? Shouldn’t they be setting an example for the rest of us by meeting in a budget-priced location, such as Topeka, Kansas, in which there would be few distractions from analyzing why the world was on the verge of a global financial meltdown last fall, and how to take preventive action the next time a bubble is forming. Meeting in Topeka, or Wichita, or a host of other such modest communities, would show real seriousness as well as give a fillip to the local population.

Sunday, August 16, 2009

Constructing Finance and Economics Centers to Prevent Another Meltdown

What did you do this summer? Did you have a nice vacation? Travel? Go to the beach? Catch up on your reading?

I am having a wonderful summer browsing the financial and economics blogosphere. Eminent left, right, and center professors of finance and economics at Harvard, Yale, Princeton, Chicago, Berkeley, Stanford, and other leading universities are engaged in all-out civil war. They mince no words, charging each other with ignorance and illiteracy on the effects of the stimulus, monetary policy, financial innovation, too little or too much government regulation, and so on. In a mid-June visit to officially open the $115 million new academic building of the London School of Economics, Queen Elizabeth II asked the director of research at the school’s management department how professors of economics and finance failed to anticipate the credit crunch that harmed so many of her subjects.

A wide variety of explanations can be found in the blogosphere and in numerous books and articles written by financial journalists, economists, and historians. To this point, no one has yet spelled out a convincing remedy that would preclude future financial crises. In this vein, let me propose a solution.

Stanford University is constructing what will likely be the most modern graduate school of business facility in the world. The Knight Management Center, as it is known, consists of eight elegant buildings totaling 360,000 square feet. Three have already been framed. You can follow its progress and view drawings of the full complex at

The medium can be the message. I suggest that construction of the last three buildings be delayed to enable the architects to craft new blueprints. One building could be in the shape of a big balloon to house the Center for the Study of Bubbles. A second could be a linear one-story building that symbolizes the timeline of history; it would house the Center for the Study of Economic History. A third could resemble Archimedes using a lever to move the world to house the Center for the Study of Leverage and Risk. Students would spend a quarter or semester in each of the three buildings.

Architecture can reflect the values and ideals of contemporary civilization. It can also serve to inform.

Just a thought.

Saturday, April 11, 2009

Thoughtful Ideas - A Brief Hibernation

For the next four-five months, Thoughtful Ideas is taking a blog-sabbatical to work full time on a book assessing federal tax policy options using the experience of American tax history from the colonial times to the present.

Will reopen for business after Labor Day. See you then.

Sunday, March 29, 2009

David Stockman Reprise

Concerning President Ronald Reagan's 1981 tax cut, in November 1981 David Stockman, director of the Office of Management and Budget, said this to William Greider of the Atlantic Monthly:

“Do you realize the greed that came to the forefront? The hogs were really feeding. The greed level, the level of opportunism, just got out of control. The administration’s basic strategy was to match or exceed the Democrats [on both tax cuts and spending], and we did.”

Stockman’s experience in Washington can be boiled down to one phrase: “There are no real conservatives in Washington.”

Stockman’s words to Greider apply equally to the first six years of President Bush’s two terms with Republican control of Congress, made famous by “the bridge to nowhere.”

Following suit, the greed level, the level of opportunism, just got out of control in the financial ssector. Bush’s administrators and regulators were either inept, asleep, or willing accomplices.

The few remaining outspoken conservatives in the Republican party have no credibility when it comes to federal spending or deficits. That mantle belongs to President Clinton.

Saturday, March 28, 2009

What? Another Tax Reform Commission?

How many tax reform commissions could reform taxes if a tax reform commission could reform taxes?

On January 7, 2005, President Bush established a bipartisan Advisory Panel on Federal Tax Reform. The panel, chaired by former Senators Connie Mack III and John Breaux, produced a 280 page report with several excellent ideas for simplification and reform. On November 1, 2005, they presented it to then Treasury Secretary John Snow, who promptly threw it in the wastebasket.

Previous blue ribbon commissions have fared little better. The work of their members is praised but disregarded by the president, the Congress, or both.

On March 25, 2009, President Obama asked Paul Volcker to head up yet another tax code overhaul review. Its members include Harvard’s Martin Feldstein, Berekeley’s Laura D’Andrea Tyson, Chicago’s Austan Goolsbee, and several other prominent individuals. They will doubtless make a sincere effort to recommend measures to overhaul the tax code. As in past reviews, their report will die in the executive branch or Congress, save for those measures that raise more revenue without too much political flak.

My suggestion in one sentence: Propose that every amendment enacted since January 1, 1987, be repealed and that the federal income tax be restored to the law extant on December 31, 1986, that is, the text of President Reagan’s Tax Reform Act of 1986. The total number of pages of federal tax rules (the tax code, regulations, and various IRS rulings) published in various annual issues of the Commerce Clearing House guide to the federal income tax has grown from 26,300 in 1984 to 54,846 in 2003 to surpass 70,000 in 2008. Restoring the code to 1986 would cut complexity by more than three-fifths and reduce the top marginal rate to 28%.

Sunday, March 22, 2009

Capping Pay — Part 2

On February 6, 2009, I blogged on the issue of capping pay and bonuses at $500,000 for financial firms receiving government (taxpayer) bailouts. Now the House of Representatives has reduced that limit to $250,000, with a punitive tax of 90% on income exceeding that amount. The Senate, for its part, is proposing 70%. I wrote on February 6:

“How far might we extend the cap? How about professors who have outside earnings from royalties, speaking, consulting, or business? Let’s cap them too. After all, almost every academic institution is either funded by state governments, and/or receives federal grants, and accepts tax-deductible (tax expenditure) contributions. Ditto for every other business, profession, or line of work that receives government support.”

Once the professoriate and other left-leaning professions rise up against the punitive tax on their above-cap earnings, the proposal will vanish from the political area.

Wednesday, March 11, 2009

To Counterfeit is Death

The words “To Counterfeit is Death” appear on the reverse side of the paper money issues of several of the British American colonies. Massachusetts was the first to issue government paper money in the Western world, followed by the other 12 original colonies. Paper currency augmented a scarce supply of gold and silver coin.

Two forms of colonial paper money were issued. One was backed by taxes dedicated to the redemption of a specific note issue, usually with the colonial Treasurer burning the redeemed notes before the colonial legislature. The second was a loan office, or land bank, issue described below. When necessary, sheriffs were ordered to foreclose on delinquent mortgagees.

Colonial governments were keen to preserve the value of their paper money against currency notes of other colonies and British sterling. To discourage counterfeiting, several colonial legislatures enacted the death penalty on convicted counterfeiters.

The concept of counterfeit money is an apt metaphor for the multiple credit instruments that contributed to the currency global financial crisis.

Begin with property. In general, mortgages of a specified duration and interest rate are issued for the purpose of purchasing residential or commercial property, which are collateralized by the property for which they are issued. In the colonial era, a borrower had to pledge twice the value of a loan in land or three times in real property to secure a loan. Modern practice traditionally required a down payment of 10-20 percent to insure that a lender could reclaim the full amount of its mortgage in the event the borrower failed to repay.

Contemporary money consists of banknotes and coins, bank reserves held at a central bank, and deposits held in commercial banks. Banks grant loans on the basis of some reasonable multiple of deposits on the assumption that depositors will not rush to withdraw all their deposits at the same time. Banks profit from the difference in deposit and loan rates.

In recent years, financial innovations changed the treatment of loans. Financial institutions began to bundle up mortgages (credit card balances, auto loan balances, etc,) and sell them as securities to third party investors. These securities are known as asset backed securities (ABSs), specifically mortgage backed securities (MBSs) for property. MBSs, which included substandard, sub-prime mortgages, were diced, sliced, and combined into new securities known as collateralized debt obligations (CDOs). Financial institutions wrote credit default swaps (CDSs) to insure against losses on these various products.

One way to think about this alphabet soup of derivative securities is that they represent counterfeit forms of money. Once that discovery occurred (due to falling home values), banks, non-bank financial institutions, and other firms quit trading these securities among each other, demanding payment in non-counterfeit money. As in the case of counterfeit money, the derivative securities based on defaulted mortgage loans became worthless.

We no longer put counterfeiters to death. Nor has the Congress enacted legislation stipulating which derivative forms of money are counterfeit. To reduce the likelihood of future financial crises, it may be worthwhile to try to define the status of new financial instruments more precisely (without stifling productive innovation) and toughen penalties against counterfeiting.

Monday, March 9, 2009

Obama on Track

A Great Debate is taking place across the political spectrum of economists, financial analysts, and politicians over the several measures put in place by the Congress, the Federal Reserve Board, and the Treasury. The disputes center on whether the stimulus is too large or too small; whether the timing of its expenditures is correct or too late; whether the mix of spending and tax relief is most productive; whether the Federal Reserve Board is keeping up with or is behind the curve; whether Treasury secretary Tim Geithner is up to the job; and, whether and how many more stimulus, Treasury, and Fed packages are required.

A hundred schools of thought are contending to show the way forward, how to reduce the length and severity of the recession, and how best to foster a recovery with stable prices.

One might suppose that President Obama is having sleepless nights, trying to determine the best way out of the economic and financial mess created by years of cheap money and the manufacture of credit instruments that no one fully understood.

Despite strong rhetorical protestations, President Obama and most of his Democratic party are probably pleased with the shape of things. If the economy continues to decline and/or remains stagnant through 2009 and the first half of 2010, the government could end up owning a majority or controlling stake in the country’s leading financial institutions. So, too, for the insurance, auto, medical, and who knows which other sectors that request federal assistance. Democrats will be in no rush to return state-controlled enterprises to private hands nor will they be under pressure from their supporters to do so. Government ownership and control of key sectors, known in China as “Socialism with Chinese characteristics,” means a market economy with government control of leading sectors.

The flood of money released into the economy should begin to show a positive effect on jobs sometime in 2010. If so, Obama will attribute improving economic conditions to the stimulus package and other regulatory measures the Democrats put in place. Democrats will have the upper hand in the November 2010 Congressional elections, along with control of the flow of credit and leading industrial sectors. The “mixed economy” is a Democrat’s dream, completing Roosevelt’s economic transformation and bringing about another long period of Democratic governance.
Obama on Track

A Great Debate is taking place across the political spectrum of economists, financial analysts, and politicians over the several measures put in place by the Congress, the Federal Reserve Board, and the Treasury. The disputes center on whether the stimulus is too large or too small; whether the timing of its expenditures is correct or too late; whether the mix of spending and tax relief is most productive; whether the Federal Reserve Board is keeping up with or is behind the curve; whether Treasury secretary Tim Geithner is up to the job; and, whether and how many more stimulus, Treasury, and Fed packages are required.

A hundred schools of thought are contending to show the way forward, how to reduce the length and severity of the recession, and how best to foster a recovery with stable prices.

One might suppose that President Obama is having sleepless nights, trying to determine the best way out of the economic and financial mess created by years of cheap money and the manufacture of credit instruments that no one fully understood.

Despite strong rhetorical protestations, President Obama and most of his Democratic party are probably pleased with the shape of things. If the economy continues to decline and/or remains stagnant through 2009 and the first half of 2010, the government could end up owning a majority or controlling stake in the country’s leading financial institutions. So, too, for the insurance, auto, medical, and who knows which other sectors that request federal assistance. Democrats will be in no rush to return state-controlled enterprises to private hands nor will they be under pressure from their supporters to do so. Government ownership and control of key sectors, known in China as “Socialism with Chinese characteristics,” means a market economy with government control of leading sectors.

The flood of money released into the economy should begin to show a positive effect on jobs sometime in 2010. If so, Obama will attribute improving economic conditions to the stimulus package and other regulatory measures the Democrats put in place. Democrats will have the upper hand in the November 2010 Congressional elections, along with control of the flow of credit and leading industrial sectors. The “mixed economy” is a Democrat’s dream, completing Roosevelt’s economic transformation and bringing about another long period of Democratic governance.

Thursday, March 5, 2009

How Do I Tax Thee? Let Me Count Five More Ways

President Obama’s FY 2009 budget puts federal outlays at 27.7% of GDP, up sharply from the FY 2008 estimate of 21.0%. With receipts of 15.4% of GDP, the budget deficit is estimated at 12.3% of GDP. Thereafter, spending and deficits are projected to decline.

Obama’s plans for health reform, indefinitely extending the “Making Work Pay” tax credit, and numerous other measures that advance his agenda of bigger government are likely to keep spending well above recent levels of 21-22%. At some point, rising interest rates will limit the amount of new debt the federal government will be able to market, which means that new and higher taxes will be required.

I previously blogged five fresh sources of federal revenue. To that list let me add five more:

(1) Poll taxes on adults. Poll taxes were a principal source of revenue in the American colonies. Although regressive in nature, the need for additional revenue makes this an appealing source of revenue. To ease the sting, poverty-level households can be exempted from the tax.

(2) Higher excises on alcoholic beverages.

(3) New and/or higher royalties on natural resource extraction and pipeline deliveries.

(4) Sumptuary taxes on clothing, cosmetics, jewelry, and other luxuries.

(5) Federal tax on ATM withdrawals.

Ridiculous? Wait and see.

Tuesday, March 3, 2009

How Do I Tax Thee? Let Me Count the Ways

In his FY 2010 budget President Obama set forth an agenda of higher taxes on the top 2% of income-earning households to fund tax and spending benefits for low- and middle-income households. Among others, it includes restoring the higher 36% and 39.6% rates of the Clinton years, increasing capital gains tax rates, and limiting the tax benefits of itemized deductions to 28%. Future increases include imposing social security taxes on annual wages and salaries exceeding $250,000.

These increases are likely to fall short of the funds needed to pay for Obama’s health reform, provide refundable tax credits for low-and middle-income households, and reduce estimated annual trillion dollar deficits to around $500 billion in 2012.

If Obama needs still more money, what is left to tax?

(1) H.R. 1068 introduced by Representative DeFazio and seven others on February 13, 2009, referred to the Committee on Ways and Means, would impose a tax on certain securities transactions. Cited as the “Let Wall Street Pay for Wall Street’s Bailout Act of 2009,” a quarter percent (0.25%) tax on the sale and purchase of financial instruments such as stock, options, and futures, could raise $150 billion a year.

(2) “Stop Tax Haven Abuse Act,” introduced on March 2, 2009, by Senator Carl Levin and three others, with a counterpart bill introduced in the House, targets the use of tax havens by American residents to avoid federal income taxes. Levin estimates that offshore tax abuses cost the Treasury an estimated $100 billion a year in lost revenue, of which $40-70 billion is from individuals and $30-60 billion from corporations.

(3) A modest wealth tax on households with substantial assets—the top 1% of the population controls in the neighborhood of 40% of the nation’s wealth—could collect several hundred billion dollars.

(4) A stamp tax, a commonly-applied levy in current and former British-dependent territories, could be applied to a wide variety of public documents, from property deeds to newspapers to checks to playing cards. The Stamp Act of 1765 imposed by the British Parliament on its 13 American colonies levied stamp tax on 55 separate kinds of documents with applicable rates.

(5) A small value-added tax (VAT) on consumption (the tax equivalent of a national retail sales tax but with better enforcement provisions) could raise hundreds of billions of dollars.

“Thoughtful Ideas” does not advocate any of these measures. Nonetheless, taxpayers should not regard them as hair-brained schemes with no to little likelihood of enactment. The power to tax is limited only by the imagination of the taxing authorities.

Monday, March 2, 2009

Welcome to Denmark and Sweden

Summer travelers to Denmark and Sweden enjoy long evenings, where the sun shines almost round the clock in late June. Winter is another story.

Those enamored of their summer vacation in the two countries might consider living for a year or two as residents, working and paying taxes as do Danes and Swedes. Statistics published by the Organization for Economic Co-operation and Development (OECD) in Paris, France, show total tax revenue in Denmark and Sweden in 2007 at 48.9% and 48.2% of gross domestic product respectively. Combined federal, state, and local government tax revenue in the United States was 30.3%.

A broader measure of government is spending, the share of national resources consumed by government. Budget deficits require borrowing which ultimately leads to higher taxes to repay principal and interest. Total U.S. government spending was 33.3% of GDP in the second quarter of 2008.

President Obama’s first budget for fiscal year 2010 (October 1, 2009 - September 30, 2010), if enacted in full and if the budget’s economic assumptions materialize, shows a deficit of 12.3% of GDP for FY 2009, raising projected expenditure to 27.7% of GDP (revenue of 15.4% plus deficit of 12.3%). Including state and local government raises the figure to around 40%. Government spending in both Denmark and Sweden in 2008 was 52% of GDP. In a few short years, if the FY 2010 budget is enacted largely unchanged, Obama will have cut in half the large difference in taxation and the size of the government between the U.S. (all levels) and the two Scandinavian countries.

Wednesday, February 18, 2009

The Stimulus, Part Three: Global Coordination

The G7 finance ministers and central bankers—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—held their annual meeting in Rome on February 14-15, 2009. Their closing communiqué called for “stabilizing the global economy and financial markets.” To that end, the participants emphasized the need for global coordination, urging each country to stimulate its economy and oppose protectionism. The same conclusions will doubtless be reiterated at the larger G20 meeting, which includes another 13 emerging economies, to be held in London on April 2, 2009.

Assume the G7 and G20 can agree to coordinate their fiscal and monetary policies and that they choose a constructive course of action. What is the likelihood of success in carrying them out?

Let’s start with the U.S. The fiscal stimulus pass by an almost 100% partisan vote, with only 3 Republicans defecting in the Senate to enable its passage. Since the crisis erupted, the U.S. Treasury has wandered all over the map, changing its use of TARP funds on several occasions, and is likely to do so again. Securing passage of further stimulus measures is sure to be more difficult.

The United Kingdom faces a general election in 2010. The economic crisis in the U.K. has put the Conservative party (the Tories led by David Cameron) in position to win control of the House of Commons and establish the next government. The Tories are unlikely to support Prime Minister Gordon Brown’s efforts to stabilize the banks and the economy.

Italian politics are always fractious. Japan is running through prime ministers and finance ministers at a torrid pace. The governments of France, Germany, and Canada face internal opposition to their measures. France, Italy and Spain have granted subsidies to sustain national industries, threatening a rise in protectionism. Democratic politics, government versus opposition, in all 7 countries virtually assures that coordinated action will fall victim to partisanship inside the G7. Coordinating fiscal and monetary policies across the G20 is a pipedream. The best that can probably be hoped for is that G7 and G20 members do not work at cross purposes.

Tuesday, February 17, 2009

The Stimulus, Part Two: The Real Issue

The debate over the stimulus during the past few months focused on two big issues: (1) the composition of the stimulus, the shares for tax cuts and spending and (2) the size of the stimulus, $700 billion, $800 billion, $900 billion, or more.

First, the composition of the stimulus. The ratio of tax cuts to spending is about 40:60. But this greatly exaggerates the fraction going to tax cuts. The tax cuts consist largely of credits for low- and middle-income households, an increase in the earned income tax credit, and other credits (credits are cash payments or subsidies for low- and middle-income households, not real income-tax cuts). The law also raises the exemption in the Alternative Minimum Tax to keep millions of middle-income households from paying higher taxes. Tax incentives for business are a much smaller portion of the stimulus. Republicans and conservatives favor tax-rate reductions while Democrats and liberals prefer tax credits, which means the latter secured the vast bulk of the “tax cuts.”

Few Republicans and conservatives are happy with any part of the spending package, whereas Democrats are generally pleased with the mix and timing of the proposed expenditures. Apart from the merits of specific expenditures, they are disproportionately directed at traditional Democratic constituencies. The largest are Medicaid health care for the poor ($87 billion), direct aid to the states for local public schools ($45.6 billion with teachers’ unions the beneficiaries), infrastructure ($61 billion, labor unions), greater unemployment benefits (workers), more food stamp benefits (the poor), job training (workers), science (professors in leading universities), and investment in green technology (environmentalists).

Second, the size of the stimulus. To secure passage, Democrats required three Republican votes in the Senate to prevent a filibuster. The process that achieved the final result was a charade. The House bill was a tad over $800 billion. The Senate added a number of measures to raise the package past $900 billion. The “gang of three,” Maine’s Olympia Snowe and Susan Collins and Pennsylvania’s Arlen Spector, that provided Democrats with the required 60 votes, postured as fiscal conservatives, insisting that the stimulus be cut by $100 billion or more. The Democrats were ready to grant the threesome this gesture because the final $787.5 billion package was quite close to the original numbers in both houses. Moreover, the Democrats will likely be able to restore some of the deletions in supplemental bills or clauses attached to other appropriations.

Many economists and analysts criticized the stimulus as too small, too large, lacking incentives, failing to address pressing infrastructure and social needs, the timing of spending, and others. None of these concerns was particularly important in the architecture of the final package. The purpose of the stimulus was not so much to halt the economic decline as it was President Obama’s and the Democratic party’s payment to the various constituencies that helped them get elected and to support their re-election bids in 2010 and 2012.

Monday, February 16, 2009

The Stimulus: Part One

Gallons of metaphorical ink have been shed on the stimulus bill, H.R. 1, that President Obama signed into law on February 17, 2009. The stimulus will occupy this blog for several weeks. Before delving into its tax and spending details, it’s interesting to observe the discord that the law has generated among economists. Prominent economists of the left and right completely disagree on the “stimulus” effect of the measure. Some on the left argue that a dollar in stimulus will give the economy a substantial boost, as much as a dollar fifty in additional economic activity. Some on the right argue that it will provide no net benefit.

Two of the leading antagonists in the debate over enacting a stimulus have become increasingly uncivil. They are Princeton’s Nobel Laureate Paul Krugman, who received his prize for integrating international trade and economic geography, and Harvard’s Robert Barro, a leading macro-economist and possible future prize winner. Krugman insists that a large stimulus is essential to create jobs and avoid years of stagnation; indeed, he has repeatedly argued for a larger package than Congress approved. Barro argues that the stimulus will create no new net jobs. Barro has charged Krugman with abandoning serious economics in his New York Times columns in favor of political advocacy for Democrats and opposition to Republicans. Barro asserts that he, despite Krugman’s Nobel prize, is more qualified to comment on macroeconomic matters. Krugman has completed rejected Barro’s use of World War II to make Barro’s point as “boneheaded.” Neither man wins on charm.

Even if Barro is the more distinguished macro-economist of the two as he claims, it’s hard for the typical college-educated person to fathom how two such brilliant economists can take radically opposing views on the stimulus. Evidently the application of economic theory and evidence is unable to resolve their differences. A survey of the top several hundred economists in the nation would also likely reveal wide differences on the benefits of the stimulus. Economists have presented different interpretations on what measures ended the Great Depression and whether tax-rate reductions in the past, or other factors, were responsible for economic recoveries and growth. If this division persists throughout Obama’s presidency for the next 4 or 8 years, how can Members of Congress decide the best course of action to ameliorate the current crisis and other issues that will arise in the future, other than vote along partisan lines to maximize their prospects for re-election.

Tuesday, February 10, 2009

“Making Work Pay” Credit: The Flawed Tax Cut in the Stimulus Bill

The final stimulus bill will almost certainly include President Obama’s “Making Work Pay” tax credit of $500 for an individual and $1,000 for a family in 2009 and 2010. The credit, included in both the House and Senate versions of the bill, is to be refundable, which means that individuals without any income tax liability will also receive the tax credit as an offset of an employee’s share of the first $8,100 of the social security payroll tax levied on wages and salaries. The full credit will be limited to individuals making $70,000-75,000 (double that for two-earner households) or less, gradually phased out for higher incomes. Some prominent economists on both the right and left are calling for this tax cut to be made permanent.

There is danger lurking in this measure. The vast majority of federal income taxes is being paid by fewer and fewer households. The share of federal income taxes paid by the top 20% of all households has increased from 64.9% in 1979 to 86.3% in 2005. (That of the top 1% rose from 25.8% to 39.4% during 1986-2005, the top 5% from 43.9% to 59.7%, and the top 10% from 55.7% to 70.3%.) The share paid by the bottom 40% fell from 4.1% to -3.8% (negative tax) during 1979-2005. Negative tax means that the government is topping up household incomes with an earned income tax credit, cash, payable to low-income households. The share of the top 60% declined from 10.7% to 4.4%.

In 2003, there were 138,959,000 tax unit households in the United States. Of these, 18,131,000 (13%) were non-filers. Nontaxable returns including those with refunds, amounted to 33,544,000 (24.1%). The two categories sum to 37.1%. Those subject to income tax of $500 or less numbered 8,372,000 (6%), of which single heads of households constituted the bulk at 5,985,000.

The shares of social insurance taxes rose or fell less dramatically during 1979-2005 because social insurance taxes are paid from the first dollar of earnings. The share paid by the bottom 60% fell from 36% to 31.1% while that of the top 20% rose from 35.9% to 43.6%.

On these numbers, a refundable tax credit against employee social insurance earnings would remove more than another 8 million tax units (5.8%) from federal tax liabilities, putting the share of non-taxpaying units around 49%.

If the “Making Work Pay” credit were to become permanent, and if Congress were to raise the offset to a higher percentage of the payroll tax, the 49% of households without any federal tax liability will quickly surpass 50%. When that happens, a non-taxpaying political majority will find itself in the enviable position of being able to vote tax increases on a minority of taxpayers (thereby financing benefits for themselves) without having to pay any of the increase. The models used by economists to estimate the economic gains of making the “Making Work Pay” tax credit permanent do not include this political outcome and its implications for U.S. democracy.

Friday, February 6, 2009

Capping Pay: How Far Should it Go?

Those banks and firms which accept government funds in the future will be subject to annual executive compensation limits of $500,000. What’s good for the goose should be good for the gander.

Take Tom Daschle and Leon Panetta. Daschle earned $5 million in two years and Panetta $700,000 in one. Did they produce any goods or services other than influence peddling? Not really. They were paid to consult or speak on the basis of their past and prospective political influence.

A better example is White House chief of staff and former Member of Congress Rahm Emanuel, who served as an advisor to President Bill Clinton. He resigned from his position in the Clinton administration in 1998 and went to work as an investment banker at Wasserstein Perella (now Dresdner Kleinwort), where he worked until 2002. In 1999, he became a managing director at the firm’s Chicago office. According to Congressional disclosures, Emanuel made $16.2 million in his two-and-a-half-year stint as a banker, a profession in which he had no prior experience.

Public service is supposed to be serving the public, not working a stint in the White House, an executive branch or agency, and Congress, and then cashing in big time in the market for influence peddling. So, for the sake of symmetry, let’s cap post-public service earnings at $500,000 a year for at least five years. All income over $500,000 would be subject to a 100% tax rate.

How far might we extend the cap? How about professors who have outside earnings from royalties, speaking, consulting, or business? Let’s cap them too. After all, almost every academic institution is either funded by state governments, and/or receives federal grants, and accepts tax-deductible (tax expenditure) contributions. Ditto for every other business, profession, or line of work that receives government support.

It’s one thing for a person of means to use his or her own money to run for office and then return to private life so long as their subsequent economic activities have no connection to government. That’s real public service. But all too many individuals do a stint in government and then make millions in a few short years peddling influence. Let’s stop using the word public service for these persons. Perhaps some enterprising person might set up a web site that posts the annual earnings of those who convert public service into private fortunes.

Wednesday, January 28, 2009

Treasury Secretary Geithner's Aggregator Bank: Learning from China

China succeeded in fixing its banks through a lengthy recapitalization process that took seven years. China began to dismantle its central-plan economy in 1978 with agricultural reforms, followed by manufacturing. China’s 10 percent annual real growth since 1978 led to a massive increase in bank lending, resulting in many bad non-performing loans (NPLs). China forcefully addressed this problem. The goal was to enable the big four state-owned commercial banks—the Bank of China (BoC), China Construction Bank (CCB), the Industrial and Commercial Bank of China (ICBC), and the Agricultural Bank of China (ABC)—to sell stock and operate as public companies. This required cleaning up their balance sheets. As recently as the fourth quarter of 2003, NPLs in the four banks were estimated at 20 percent of total loans, with skeptics putting NPLs even higher.

The process of fixing China’s banks began in the midst of the Asian financial crisis in 1998. The Chinese government doubled the banks’ capital bases by giving them $32.5 billion through complex swap agreements, in which bad assets were exchanged for government bonds. In 2001 and 2002 China established four asset management companies that bought $169 billion worth of NPLs from the four banks at face value, thereby taking them off the banks’ balance sheets. Despite these measures, NPLs continued to erode the capital bases of the banks. In early January 2004 China transferred $45 billion from its foreign exchange reserves to BoC and CCB, equally split between them.

At the end of 2004, China announced plans to inject capital into ICBC and ABC to enable them to spin off NPLs and build a new corporate governance structure as publicly-listed companies. The government injected $15 billion into ICBC in April 2005. Three of the banks went public. CCB raised $8 billion in its IPO of October 21, 2005, BoC raised $9.7 billion in May 24, 2006, and ICBC raised $21.6 billion in the largest IPO in history on October 20, 2006. Some of the world’s biggest banks and financial institutions invested billions of dollars to acquire minority stakes in the three banks. ABC’s IPO will likely transpire in the next few years. Altogether, the Chinese government spent more than $400 billion to fix China’s banks.

At current market prices, ICBC's capitalized value is seven times that of Citicorp. China's success, albeit over seven long years, suggests that bank recapitalization through an aggregator bank that takes bad assets off the books of distressed banks can work.

Tuesday, January 27, 2009

Patience and Prudence: Resolving the Financial Crisis

The current financial and economic crises were years in the making. But round-the-clock coverage of the crisis and its hoped-for prompt resolution has the public on edge waiting to hear that the worst is over and the country is on the road to recovery. Sadly, President Obama has dashed these hopes with candid, realistic statements that it could take several years to clean up the mess and restore the economy to sustainable growth.

Economists are in sharp disagreement about how to resolve the crisis. Some want large immediate government spending and targeted tax cuts to stimulate the economy. Others prefer to let the market resolve the crisis. Leading economists including Nobel Prize winners are all over the map. Larry Summers, the president’s top economist, claims that a dollar in government stimulus will generate a dollar fifty in economic activity. Others claim little to no benefit. Others say the stimulus package needs to be much bigger than $825 billion. There is no consensus among economists on what to do and how much money is required. There is wide disagreement on how to get maximum bang from the remaining $350 billion in TARP funds and the $825 billion stimulus package that will be signed into law in February.

History has recorded that financial crises often take a long time to dissipate. A worldwide financial crisis in 1857 which occurred in the simpler global monetary system of the gold standard took seven months to resolve. Other crises lasted longer and some shorter. There is no “scientific” basis on which to forecast an end to the current crisis. The country needs a good dose of patience and prudence.

Wednesday, January 21, 2009

Confirming Timothy Geithner as Treasury Secretary

Timothy Geithner, President Obama’s pick to head the Treasury, has acknowledged his failure to pay, in a timely manner, four years of taxes that he owed on Social Security and Medicare. He failed to pay the required taxes despite receiving documents from the International Monetary Fund where he worked that advised him of his responsibility to do so. Moreover, he requested funds from the IMF for that purpose. It took an IRS audit and vetting by the Obama transition team to identify the failure and secure remittance of all back taxes with interest. The issue would not have received so much attention were it not for the fact that the Treasury Secretary oversees the Internal Revenue Service.

In his own words, Geithner stated that his mistake was “careless but unintentional.” Some commentators blame his “honest” mistake on the complexity of the tax code, suggesting the need for serious tax reform.

One can’t help but wonder how many individuals who have failed to pay lawfully due taxes on time are also guilty of nothing more than “careless but unintentional” mistakes The IRS claims that the federal tax gap, the gap between what is owed and what is paid, exceeds $300 billion. How much of that is due to “careless but unintional mistakes?” If charged with failure to pay taxes, how many individuals are likely to plead what could become known as “the Geithner defense?” Could unintentional carelessness in application of tax law become a valid excuse. Not only has it been excused to confirm Geithner, it should be noted that the Treasury Secretary is fifth in the presidential succession list after the Vice-President, Speaker of the House, President pro tempore of the Senate, and Secretary of State.

Friday, January 16, 2009

Simplify the Tax Code? Who’s Kidding Who!

Treasury Secretary-designate Timothy Geithner will not be confirmed in time to take office once President-elect Obama is inaugurated. Failure to pay certain taxes on time along with taking several unlawful deductions have slowed Senate proceedings. But Obama is standing by his man. Geithner is expected to be confirmed within a few days of the new administration. Indeed, failure to meet all his federal tax obligations on time is being characterized as “honest mistakes,” and have led to renewed calls to simplify the federal tax code.

Politicians, business associations, citizens’ groups, and the media have been urging tax simplification for many years. Numerous commissions have recommended simplification measures. Nonetheless, since passage of the 1986 Tax Reform Act, the tax code has steadily grown in length and complexity.

Now comes a 2009 stimulus package with proposals for $275-300 billion in tax cuts. On January 15, 2009, House Ways and Means Committee chairman Charles Rangel outlined the economic recovery program that would be considered next week in the full committee. It included several dozen tax items, some new, with other provisions expanded or modified. The full committee, along with the Senate and the White House, will likely add more provisions. The regulations that will accompany the final legislation will run hundreds of pages. Tax forms will get longer and more complicated.

Promises to simplify the federal tax code are no match for the economic and ideological pressures that result in complexity. Politicians who call for simplification turn right around and further complicate the code with new credits, exemptions, adjustments, preferences, and deductions.

Monday, January 12, 2009

Save—But Not Yet

Many economists have been wringing their hands for years over the lack of domestic saving in the United States, which has increased our financial dependence on foreigners. Finally, Americans have begun to listen and save a portion of their income, especially as their homes and investments have fallen in value.

Are Americans being praised for saving? No! In fact, they are being bemoaned. Economists of all stripes fear that a rise in saving which reduces consumer spending over the next year could lengthen and deepen the current recession. Hold off saving, they urge, until the economy shows signs of recovery. Meanwhile, keep spending, using your credit card if necessary.

How will consumers know when it’s time to rein in spending and begin saving without damaging the economy? Surely not before the end of 2010 since any premature rush to save that slows a recovery could harm Democrats at the polls. Perhaps in 2011? Or perhaps many are sufficiently frightened about the future that they will disregard the pleas to spend and save instead.

Friday, January 9, 2009

I Have a Fiscal Dream

Genesis, Chapter 41, tells the story of Joseph and Pharaoh’s dream. In his dream, seven fat cows emerged from the Nile River which were eaten by seven gaunt cows that later came up out of the Nile. Then Pharaoh woke up.

Pharaoh sent for Joseph, then in jail, to interpret his dream. Joseph told Pharaoh that Egypt would enjoy seven years of bountiful harvests, followed by seven years of famine. The solution? Pharaoh appointed Joseph to oversee the collection of a portion of the grain during the seven years of abundance to be held in reserve for the seven years of famine. And so it was done.

Fast forward several millenniums. Joseph advised Clinton to run budget surpluses in his second term, which were years of abundance. During fiscal years 1998-2001 the budget was consecutively in surplus $69.3 billion, $125.6 billion, $236.2 billion, and $128.2 billion, a total of $559.3 billion (Economic Report of the President, Table B-78).

Federal deficits resumed immediately in the first Bush administration. A portion was due to the Iraq and Afghanistan military operations, but most was due to a combination of higher domestic spending and revenue cuts. For the eight fiscal years overlapping two Bush terms, cumulative deficits will exceed $3 trillion. Four fat cows were barely an appetizer for eight gaunt cows.

As if that were not bad enough, there is no grain (money) stored in the government’s granaries (vaults) to offset any of these deficits. Rather, the new debt will have to be underwritten with much larger borrowing from the private granaries of Americans and foreigners. Sadly, one day this debt will have to be repaid. The upshot will be higher taxes and lower living standards.

Unless, that is, President Obama can find a better interpreter of dreams.

Thursday, January 8, 2009

Big Stimulus, Small Savings. Obama’s “American Recovery and Reinvestment Plan.”

Upon taking office, President-elect Obama hopes to sign a big stimulus package as soon as possible, The amount under consideration is in the neighborhood of $800 billion or so over the next two years, consisting of a mixture of tax cuts and spending measures. The federal budget deficit for the current fiscal year (October 1, 2008-September 30, 2009) is currently estimated at $1.2 trillion. Adding Obama’s stimulus package and perhaps some congressional add-ons could increase the deficit to as much as $2 trillion. Depending on the length and severity of the recession, the deficit could exceed $1 trillion in the next fiscal year. Forecasting deficits over the next few years will be a tricky business, a combination of science, art, and luck.

Obama has also stated his desire to begin the process of bringing long-term deficits under control. To that end he has established a new office in the White House, Chief Performance Officer, filling it with Nancy Killefer, a high profile appointment. He has also encouraged his head of the Office of Management and Budget, Peter Orszag, to comb through the federal budget line-by-line to get rid of inefficient and bloated programs. He has promised that the stimulus package will not include any earmarks: “Read my lips. No earmarks.”

Giving Obama the benefit of the doubt, assume he keeps earmarks out of the stimulus. Depending on the precise definition of an earmark, the savings amount to $20-30 billion, a large sum of money. But it pales against a $2 trillion deficit, offsetting a mere 1-1.5% of the additional borrowing the deficit requires.

How Obama will bring long-term deficits under control will likely to have to wait until 2010 or 2011, when, hopefully, the stimulus succeeds in ending the recession and restoring growth.