Thursday, December 30, 2010

Peter Orszag: From Middle Class to Millionaire

President Barack Obama picked Peter Orszag to head OMB (Office of Management and Budget), made famous by David Stockman under President Ronald Reagan.

In announcing Orszag’s appointment in November 2008 shortly after the election, Obama promised that Orszag would go through the federal budget line by line and scrub it free of waste.  Orszag served a relatively short time as head of OMB, resigning his position on July 31, 2010, to get married (anew).  He subsequently took up a position in December 2010 as Vice Chairman at Citigroup’s Strategic Advisory Group.

Orszag’s salary at OMB in 2009 was $193,400 a year ($199,700 in 2010), with another $60,000 or so in benefits.  That put him at the upper end of the middle class category of up to $200,000 for an individual and $250,000 for a couple (excluding fringes).  His salary at Citigroup is reportedly in the range of $2-3 million.

How much waste did Orszag scrub out of the budget during his 19 months at OMB.  The Fiscal Year 2010 Budget sought to end or eliminate 121 programs for a one-year savings of about $17 billion.  Congress approved $6.8 billion of the proposed $17 billion in cuts, which amounted to less than 1% of the $828 billion stimulus package that added to the deficit and debt.

The Budget of the U.S. Government for Fiscal Year 2011 (October 1, 2010, to September 30, 2011), included a 131-page report entitled “Terminations, Reductions, and Savings” that itemized each termination, reduction, administrative savings, and program integrity savings. If approved by Congress, $23 billion in waste would be cut from expenditure.

The federal budget has been on continuing resolution from the beginning of FY 2011 and will remain so until March 4, 2011.  It is highly unlikely that all the president’s proposed savings will materialize in FY 2011.

At the end of 2010, less than $7 billion in waste has been scrubbed from the budget.  The most thorough attempt to scrub waste has achieved a trivial fraction, 0.0018% of $3,834 billion of proposed outlays.  So much for ending waste, fraud, and abuse in the federal budget!

Monday, December 27, 2010

Fixing California's Finances

California is in bad fiscal shape.  Its projected budget deficit over the next 18 months amounts to a staggering $28 billion.  The state’s public finances worsened under Governor Schwarzenegger, who promised to fix the cycle of boom and bust but left the state worse off.  Governor Jerry Brown, after a long absence from the governorship, is back at the helm.  He will need all the help he can get.

Here is my suggestion.  Replace the state constitution with the Basic Law (mini-constitution) of Hong Kong, a Special Administrative Region of Hong Kong.  Chapter V, Economy, stipulates that Hong Kong shall maintain low taxes, balanced budgets, free trade, and other liberal economic measures.  These requirements are the antithesis of California practices.

Thursday, December 16, 2010

Democratic Stability in Iraq: What About Christians?

On March 20, 2003, the U.S. invaded Iraq and overthrew Saddam Hussein.  At that time about 1.4 million Christians lived in Iraq.  Since then, about half have left the country, and a new wave of departures is likely following targeted killings of Christians and church bombings.  Apart from occasional condemnations, the U.S. has failed to protect Iraqi Christians from Muslim attacks.

This sounds like ethnic cleansing to me.  The liberation and pacification of Iraq has come at the cost of more than a trillion dollars, more than 4,400 U.S. troop fatalities, and 32,000 wounded.  Worse still, most of the killed and wounded U.S. troops were Christian and most of the taxes expended were collected from Christian Americans.

If and when Iraq achieves some measure of democratic stability and allies itself with U.S. security concerns, will Christians be allowed to live and work in Iraq?

The Clinton administration took stern action against Serbian ethnic cleaning of Bosnian Muslims?  Are Iraqi Christians to be sacrificed on the altar of Muslim outreach?

Wednesday, December 15, 2010

Chinese Yuan Supplanting U.S. Dollar is Good for America

China’s yuan (its dollar), also known as renminbi (people’s currency), is increasingly becoming a means of savings, payments, and financial instruments outside China.  Yuan deposits in Hong Kong banks have doubled in the second half of 2010.  China and Russia have agreed to conduct trade in yuan and rubles.  China has negotiated yuan payments in trade with countries in Southeast Asia and elsewhere.

The yuan is not yet fully convertible.  China controls the amount of yuan that is allowed to circulate outside its borders.  It is, nonetheless, steadily removing barriers to the use of the yuan outside China.  This trend is likely to accelerate, but it is hard to say how fast.

At some point in the future, the yuan will become convertible and acquire the status of reserve currency for countries that want to diversify away from the dollar, euro, and yen.  Reserve status for the yuan is good for the United States.

As the dollar loses its status as the world’s chief reserve currency, the global demand for U.S. treasuries will decline.  China and other Asian countries will no longer fund U.S. deficits.  To offset reduced demand for American paper, the U.S. government will have to pay higher interest, making it more costly to issue debt.  Higher interest means higher taxes to service and repay debt, or higher inflation if the fed prints money to buy bonds.  Losing reserve status for the dollar will pressure the U.S. government to live increasingly within its means.

Kosovo and Kurdistan

The global community enthusiastically supported the separation of Muslim-dominated Kosovo from Serbia and its establishment as an independent state.  On December 12, 2010, Kosovo held its first general election since independence, which went relatively smooth.  One surprise was considerable support for a party that wants to unify with Muslim Albania.

Iraqi Kurdish leader Massud Barzani recently called for self-determination.  Sunni and Shia leaders, along with the United States, oppose the breakup of Iraq into several nations, each for their own reasons.  A case can be made for self-determination or a unified Iraq.

Why support for the one but not for the other?

Sunday, December 12, 2010

Thoughts on the Health Mandate

Assume the courts uphold the health insurance mandate in Obamacare, with the IRS as its enforcer.  Reasons for the mandate are broader coverage and lower costs, among others.  If so, what is to stop the mandate from being extended to:

Diet: Forced eating of fruits and vegetables, fish and chicken, whole grains, and limits on red meats, pasta, and bakery products.  Let the IRS enforce this too.

Retail: Strict mandates on what can be sold in food stores.  Ration coupons for purchases of unhealthy foodstuffs.

Ditto for restaurants, daily exercise, public transportation, water, electricity, housing size.

Are there any limits to what a progressive government and supportive courts can mandate?  Think it can’t happen here?  Just asking...

Wednesday, December 8, 2010

Will The U.S. Be Able To Compete With China? Yeah, Sure

A New York Times article of December 8, 2010 was headlined Top Test Scores From Shanghai Stun Educators.”  It is must reading for all those concerned about the future competitiveness of the U.S. and the poor achievement of our K-12 students.

On seeing the data, Chester E. Finn, Jr., who served in President Reagan’s Department of Education, commented that “...if they can do this in Shanghai in 2009, they can do it in 10 cities in 2019, and in 50 cities by 2029.”

Shanghai students were first in math, reading, and science, surpassing previously first Singapore, Korea, and Finland respectively.  The students were, admittedly, a select group of China’s brightest, but the results portend a bleak future for U.S. students who ranked 23rd or 24th in most subjects.

Tuesday, December 7, 2010

Waiting for China to Crash

Since 1981, China’s economic growth has been the most rapid in world history.  Despite this fact, my colleague Michael S. Bernstam and I are constantly amazed by the sheer volume of stories, reports, and blogs warning of China’s impending crash.

Google “China economic crisis.”  The result is 1,020,000 results (Dec. 6, 2010).  “China economic crash” yields 118,000.  “China economic problems,” 193,000.

In contrast, “China economic growth” turns up 121,000 hits.  “China economic opportunity” 94,900.

The ratio of crisis to growth is 8 to 1

The “daily China crash” is a wondrous, never-ending, daily outpouring of bad omens and prospects.  In defiance of this prognosis, an increasing number of firms are moving their headquarters and top people to Shanghai, Beijing, or Hong Kong.  Wait and see.

Monday, December 6, 2010

The Fed Can’t Print New Money

A shocking revelation was reported on Monday, December 6, 2010, that the $110 billion in newly-designed $100 bills has been put under lock and key in vaults in Forth Worth and Washington, D.C.  They are unusable due to a printing malfunction that left part of the bill face blank.

The new bill, with greater security, was the first to be signed by Treasury Secretary Tim Geithner.  To make up the shortfall in $100 notes, the Fed has instructed the Bureau of Printing and Engraving to produce more of the old-design $100 bills signed by Henry Paulsen.

Instead of printing new money, the Fed is printing fresh stocks of old money.

I still recommend, as previously blogged, that the Fed put $500 and $1000 notes back into circulation.

Congratulations to Jim Harbaugh and Stanford

As my four-and-a-half year old granddaughter would say “You did it!”  Everything’s coming up oranges at Stanford.

Whoduvthunkit!  An Ivy League school, one of the top three in the country, has just become a football power.  To maintain Stanford’s football status, athletic director Bob Bowlsby has just made a preemptive offer to Harbaugh to keep him on the farm.  Stanford sports enthusiasts hope he accepts.

Two other football comments.

Have you noticed that every player, in college or the pros, is labeled a superstar or underrated, despite half being under average by definition?

Would ESPN kindly instruct its female sideline reporters to ask intelligent questions?  For example, why not ask about offensive or defensive schemes, rather than such inane questions about why your team is ahead or behind, and what are you going to tell the team at halftime.  And so on.

Friday, December 3, 2010

Obama and Clinton Have Lost Their Oomph

On December 2, 2010, the International Football Federation awarded Russia the 2018 and Qatar the 2022 World Cup.  Russia beat out England and Qatar trumped the U.S.

The 2010 World Cup was held in South Africa.  The 2014 is set for Brazil.  Brazil and Russia are two of the BRICs (with India and China) and Qatar reflects the importance of the Middle East.

Ditto for the Olympics.  President Obama tried to help secure the 2016 Olympics for Chicago but lost out to Rio de Janeiro (Brazil).

Its hard to blames these losses on Bush.  Obama’s Muslim outreach did not help Chicago’s 2016 Olympics bid.  Clinton, perhaps the best speaker in the Western world after Pericles, did not win the World Cup for the U.S.

Do these results reflect America’s decline in world affairs?

Thursday, December 2, 2010

Double Taxation in Bowles-Simpson Tax Reform Plan Vitiates Lower Corporate Tax Rate

Erskine Bowles and Alan Simpson released their revised report, entitled “The Moment of Truth,” on December 1, 2010.  Section II deals with tax reform.

Most tax reform plans aim to broaden the tax base by eliminating tax expenditures (deductions, exemptions, credits) and lowering marginal tax rates.  Bowles-Simpson fits this mold.  The illustrative fully phased in individual and corporate tax reform plans appear in figures 7 and 9.

The individual plan calls for three brackets of 12%, 22%, and 28%; the latter is a reduction from the current top marginal rate of 35% or 39.6% if the Bush rate reductions are permitted to expire on December 31, 2010.  Lower rates reflect the elimination of itemized deductions and reductions in the tax benefits of employer provided health care insurance, mortgage interest, and charitable giving.  Taxes would rise on capital gains, dividends, and interest (municipal bonds), which are treated as ordinary income.  (Other details are discussed in the report.)

Corporate tax reform establishes one bracket of 28%, down from the current 35% for large enterprises.  Another benefit is that corporate taxes would be assessed on a territorial system, which means that income of foreign subsidiaries is not subject to U.S. tax.

The international competitiveness of a lower corporate rate is not what it appears to be.  A corporation is simply a legal entity that allows the income of the owners of the business to be taxed and collected at the business level.  Taxing that income at 28% means that after-tax income is 72%.  If the corporation pays all its income as dividends, that income would be taxed a second time, as high as 28% for top-rate taxpayers.  Multiplying 28% times 72% yields another 20% in tax, for a total of 48%.  Similarly, if the business retains all earnings, capital gains tax of 20% is the equivalent of a second tax on retained earnings (72% times 20% equals 14.4%), yielding a potential top rate of 42.4% on corporate income.

The current top rate on corporate income is 35% on profits.  The preferential treatment of capital gains, assuming all earnings are retained, is 15% (individual capital gains rate) times 65% (after-tax income), which equals another 10%, for a total of 45%.  The same calculation applies to dividends if all after-tax earnings are distributed.

For top-bracket taxpayers, the Bowles-Simpson combined corporate and individual reforms do not improve the after-tax return on corporate income.