ZEEV, MARKET/ECONOMY - up to ZEEV:217657, 03/14/04
(Don't be dismayed by the verbiage. Some of it is actually worth reading. flg)
03/12: (217467) (*COMMENT*)
fed won't raise rates ... ever ... well, almost ...
=DJ FED WATCH: Goldman Goes Long - Really Long - On Fed Call
(This article was originally published Thursday) By Michael S. Derby A DOW JONES NEWSWIRES COLUMN NEW YORK (Dow Jones)--Long in the vanguard of banks that see the Federal Reserve keeping interest rates low for a long time, Goldman Sachs just edged a bit further out onto the bleeding edge.
The bank suggested in a research note that the Fed may never again hike interest rates while Fed Chairman Alan Greenspan is holding the reigns at the central bank. For those keeping score, that means a steady Fed until sometime in 2006.
For quite some time, Goldman Sachs analysts have argued that the Fed, faced with an economy defined by a large divide between actual and potential growth levels, will be keeping what's currently a 1% federal funds rate in place for a long time.
And it's this so-called output gap that's looked to by many forecasters, along with Federal Reserve officials, as the main determinant of inflationary pressures. The farther the economy is under potential, and the longer it stays there, the lower the inflation pressure it's likely to face.
And it's inflation that remains at the forefront of the Fed's focus. Indeed, Fed officials from Chairman Alan Greenspan on down have all said that even with growth heating up, the dearth of meaningful price pressures is what takes pressure off the central bank to raise rates.
Goldman, along with banks such as Citigroup, Credit Suisse First Boston, HSBC Securities, Lehman Brothers and Merrill Lynch, all agree the Fed won't be doing anything this year with interest rates, even though a modest majority of banks that deal directly with the Fed - called primary dealers - still favor some sort of rate hike action much later this year.
The latter camp grew smaller last Friday, after the government released dismal February jobs data. Financial markets also priced securities and futures contracts for a much-reduced chance of central bank interest rate action this year.
Goldman Sachs says the Fed wants inflation higher and trends are still not moving in the direction, and may not for some time. Which leads to their argument and forecasts for the all important output gap.
Ugly Roadmap
"Based on conservative assumptions, it is unlikely that the (gross domestic product) gap will close before mid-2005 and, therefore, that the (Federal Open Market Committee) will tighten before then," Goldman Sachs economist Ed McKelvey argued in a research note from Wednesday.
"To close the gap in a year, the economy needs to grow by the sum of the GDP gap and the potential growth rate. If the gap is 2% and the potential growth rate is 3%, then 5% growth would be required to close the gap by the spring of 2005," he said.
McKelvey flags the fact that the needed level of growth is well above what economists in the latest monthly Blue Chip economic indicator poll are predicting. And if the Blue Chip forecasters - the poll is the definitive forecaster survey - are right about 4% growth, the output gap won't close until early 2006.
And that's right around the time when Greenspan, at the top of the Fed since 1987, will be leaving the job. His term ends on Jan. 31, 2006.
"This raises a tantalizing question - have we seen the last tightening from Mr. Greenspan?," the Goldman economist asked.
Perhaps in a recognition of the dangers of all long term forecasts, McKelvey admits he's not yet willing to follow where the forecast may be pointing. "We won't push the point other than to note that there is some risk that our expectation of tightening in mid-2005 could be premature," he wrote.
(Michael S. Derby writes about markets, the economy and the Federal Reserve for Dow Jones Newswires.)
-Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com (*END*)
How much are they paid for such stupid analysis, yes, there is an output gap, it is also called excess capacity, and sometimes excess capacity, when aggregate demand is not increased simply needs to be closed and written off. The Tax reforms of the last two years are to blame for that problem. You don't just throw money at the economy and hope it creates aggregate demand, you got to throw it where it counts, where it creates demand. The excuse for the reforms was that with more money "small businesses" will invest and create job. Small business is smart enough that they do not invest unless aggregate demand for their goods and services increases. There is not shortage of money to be invested in increased capacity (as I said, there is excess capacity), their is shortage of money to create aggregate demand. You want to "prime" the economy, here is a suggestion (and by tweaking the numbers it can be made "revenue neutral")
1. Forget about most of the recent tax reforms, cancel them completely.
2. Replace the dividend exclusion from income by dividend deduction to corporations (and simultaneously raise corporate marginal tax rate by about 1%, it will be revenue neutral and corporation will end up with the same tax load, since their paid out dividends are no longer "taxed " twice, a lot of structural advantages to that). Shares buy back by corporations should be treated as dividend paid for tax purposes (right now, these are tax free dividends to the stockholders), deductible to the corporations but taxable to the stockholders. Minor problems there with timing and distribution of tax liability, but not greater than with divdend exclusion currently on the book.
3. Change the payroll taxes in the following manner: Employers will pay their share on the full first $100.000, employees however will pay this payroll tax only on their income from $25,000 to $100,000. That will put an average of $2000/year in the pocket as a pay raise to every employee making less than $75,000, and be a real boost in aggregate demand (the numbers may have to be tweaked, maybe the first $15,000 but still keeping the ceiling at $100.000 to $125,000 to keep the system balanced might be best). That will also add $200 B or so in real spendable aggregate demand per year. Once the economy start and creates job, lower back, slowly, maybe by just $1000 per year the threshold. I would never get it under $10,000 though.
If "forgetting" the tax reforms means reverting back to the old tax brackets, fine. If that creates surpluses like in 1998/2000, don't let these surpluses go to more than 1% of GDP. If it seems that they do, once or twice a year send a check to each tax payer, independently of how much tax he paid, which is the expected excess surplus (above 1% of GDP) divided by the number of tax payers. If surpluses continues and the national debt starts to decline, don't let it decline to less than about 40% of GDP, if it gets there, send more money back to each tax payer (getting into that 1% excess). Within about 10 years, of prosperity, the economy should be about 60% bigger and budgets would be within 1% or so of break even, enough "wiggle room" would be there to handle any future emergencies.
Raise the fed rate to at least 3%, gradually, but before another recession hit.
Sorry, Here I go like an advisory letter writer, mumbling verbosely, no my name is not Maulding, but it sure was a long rant.
03/13: (217475) (*COMMENT*) It is not so much that dividends are taxed twice, but that corporate income is taxed twice. S-corporations and LLC's are taxed only once - when income flows through to the owners. Why should publicly traded coporations be treated any differently? Yes, raise corporate rates to individual rates (and get rid of the deductions), but then eliminate all taxes on dividends and capital gains. Or raise dividend and capital gains rates to individual rates, but then eliminate all corporate taxes. The double taxation on corporate income is a great impediment to capital formation, and the fact that other countries do the same is no excuse.
On payroll taxes, somebody published a piece here within the past few days that shows that corporations really do not pay these taxes - workers do. Supposedly shifting the burden more toward companies will not accomplish anything.
On returning surpluses to taxpayers, fine. But what makes you optimistic that this will happen? As Milton Friedman said, government will spend as much as we send them in taxes, plus as much more as they can get away with. Surpluses only occur when the money rolls in faster than Congress can figure out how to spend it...and they always manage to solve this "problem" pretty quickly. I fear higher taxes will never eliminate deficits.
BTW, congrats on the amazing turnips' calls. (*END*)
Ardent, you are assuming that there is a problem of "great impediment on capital formation". The problem is certainly not the "tax law", the problem is "opportunities for such capital formation". Such opportunities are created in the market place in terms of end aggregate demand. The "cost of capital", including the taxation of such capital, at the present is not the impediment. Right now, capital is as cheap as it has been in 60 years. By setting the cost of capital (equity vs debt) on the same foundation (cost in term of dividends on equity and interest on debt), namely taxing it the same way, you create a much better corporate balance sheet. The current state of affairs encourages weak balance sheets with excess debt, because the interest on debt is tax deductible while dividends paid to equity holders is not (to corporations). I agree with you that dividends and capital gains should be taxed at the same rates as interest received on debt instruments are (except that cap gains may need to have an inflation adjustment, thus the special treatment of LT or extra LT gains, may be valid), but if that is the case for recipients of such "income on capital", then the cost of capital (interest and dividends) should be treated the same way as well (both need to be deductible as "cost of capital").
If you go that route, the debt equity ratio n average will be reduced resulting in much more robust corporate balance sheets n general.
Do you have any support for your claim that current aggregate ("double") taxation on corporate revenues has proven a "great impediment to capital formation"?
Quite to the contrary, the biggest long-term problem this economy has is the inefficient application of capital that rises from being awash in liquidity and too much easy money. Wealth creation is all about ROIC and ROIC declines in a world of inefficient application of capital.
The average publicly traded corporation isn't undercapitalized as a result of too high a tax on capital. In fact many of them today are still wasting and applying capital inefficiently because they have an excess -- and thereby creating less wealth per unit of capital investment. (Take a look at Sun Microsystems or 3Com or the wireless companies). The part of the economy that's in greater need of capital is small business -- which is why S-corps should be and are treated more favorably.
In an ideal world, we could go through and calculate the external costs each C-corporation creates and then shifts on to society generally, then bill them in the form of taxes that would pay for those costs on a dollar for dollar basis. But that would be an impossible formula to create and apply on a one-off basis, so instead we have general corporate rates.
This is "unfair" to some corporations, which shift relatively fewer costs onto society generally, and suck up fewer public resources, and equally a "ripoff" for other corporations, which are egregious cost-shifters and producers of external costs, and voracious consumers of public resources, which their corporate taxes don't begin to cover.
Natural resource extraction and production companies are notorious in this regard. Think about what Exxon Mobil's tax bill would be if it were merely required to pay corporate tax equivalent to the extra societal costs the production and use of its goods are responsible for creating.
This is the ultimate in showing profitability by shifting costs off-balance sheet. To expect some of those revenues gained to be re-allocated back to cover the costs shifted onto the back of the public is not only sensible but fair. (*END*)
You are right, and the government creates inefficiencies in that area by promulgating laws that favor special form of capital formation, in the 70' it was the real estate bubble that was created because of the deduction of "not at risk" capital invested in RE, till the sudden change to "at risk" rule which destroyed the S&L in the early 80' a vey big mistake (the first, in causing mis allocation of capital, and the second, by having a sudden change, not allowing gradual shift of capital to more productive channels). In h early 90' Clinton promulgated the SQB 1242 exclusion, getting a lot of excess capital into new start ups, which eventually went to "money heaven" in the 2000 bubble.
03/13: (217478) (*COMMENT*) Zeev - who was behind SQB 1242?
And also the change to the "at risk" rule of the S&L era? Perhaps a naive question, but somewhere in American business journalism, isn't there anyone who blows the whistle on poor policy decisions?
For all the Democrats' crowing about the "great Clinton economy", I am quite surprised there hasn't been any real intellectual debunking of some of the mythology and connecting the nasty bubble consequences to policies that contributed to them. (*END*)
There is enough blame to go around. The Republican should bear the whole responsibility of the 80' collapse of the real estate bubble and the S&L, and the dems, thought that with QSB 1242 they promote small business formation (so much that many had no economic right to be formed). Government should interfere as little as possible in decisions relating to capital allocation, using taxation to favor one or another, apart of cases of National defense, is ridiculous. Where, IMTO, they should intervene, by massive investment of massive wasted funds on unnecessary wars to the roots of that war (oil/energy). If we spent only 20% of those wasted funds in a policy of real energy independence and renewable energy resources, we would be much better of, and the world would be a more peaceful place. But I think we are shifting from economy to politics (yes, these are intertwined...)
03/13: (ZTTP: 37187) (*COMMENT*)
Gaffes Worry Bush Backers
Missteps on Economy Worry Bush Supporters
By Jonathan Weisman and Mike Allen Washington Post Staff Writers Saturday, March 13, 2004; Page A01
A string of glaring missteps by President Bush's economic team has raised alarm among the president's supporters that his economic policymakers may have lost the most basic ability to formulate a persuasive message or anticipate the political consequences of their actions.
In recent weeks, the White House has had to endure its chief economist's positive comments about job "outsourcing," or sending work overseas; controversial passages in the annual Economic Report of the President; questions over the legitimacy of Bush's 2005 budget; a California swing in which Bush bragged about the creation of two jobs in Bakersfield; and a flap over a job-creation forecast that not even the president could stand by.
On March 1, a host of U.S. industries began paying trade sanctions to Europe because Congress and the White House have not replaced illegal export subsidies with new aid for ailing manufacturers.
But the non-naming of Anthony F. Raimondo on Thursday as assistant commerce secretary for manufacturing and services has brought the concerns to a boil.
The long-anticipated announcement of a manufacturing czar was supposed to be a good-news day for a White House struggling with its economic message. Instead the planned, smiling photo op fizzled when it came to light that a year ago Bush's choice had opened a major plant in Beijing.
"Clearly, the machinery's not working very well," said Bruce Bartlett, an economist with the conservative National Center for Policy Analysis, who noted that this White House has been known for its discipline on message.
Republicans on Capitol Hill and in the lobbying world of K Street say that the incidents may be minor, but they are many, each amplified by the last. And they are supplying a steady, nourishing diet for Sen. John F. Kerry (D-Mass.), who has made jobs and Bush's economic policies a centerpiece of his campaign to capture the White House.
Several former administration officials said the debacle over Raimondo illustrated broader weaknesses in Bush's White House as he gears up his reelection campaign. Some Republicans said the situation crystallized their concerns about his weakened political position. These Republicans refused to speak for the record because they said that if they did, they could not be candid about the problems without infuriating Bush and his most powerful aides.
These Republicans noted that several key officials who were steeped in Bush's first campaign have moved out of the West Wing or out of the government, and their replacements -- especially in the economic arena -- have weaker political antennae.
"People are doing their jobs, but most of them don't have the authority to do something once they find a mistake," said a former official who stays in frequent touch with the West Wing. "Somebody over there has to take complete and utter responsibility for everything that is publicly released from that White House. And no one is doing that.
"They also note that Democrats are drawing scrutiny to errors and inconsistencies that might have passed unnoticed a few months ago. "This is a hyper-charged political environment, and they have not adapted," the former official said.
And Karl Rove, who is on the government payroll as the White House senior adviser, is stretched thin between trying to watch what the administration is doing and overseeing the ramping up of a campaign that has accelerated its plans in response to Kerry's early lock on the nomination.
"There's a trade-off," said a Republican who advises both the administration and the campaign. "It means you end up talking through get-out-the-vote activities instead of looking at every single element of the economic report before it is released."
A former White House official pointed to other personnel issues. Bush loaded his first economic team with brash, outspoken officials, full of ideas, such as Treasury Secretary Paul H. O'Neill, National Economic Council Director Lawrence B. Lindsey and economic adviser R. Glenn Hubbard, he said.
But those ideas often clashed, and the officials proved too outspoken. So Bush swung the team in the opposite direction, filling it with replacements who would stick to the White House message and keep out of the news. But those officials have not generated fresh policies.
"They've populated the place with an absence of ideas guys, which is fine if you think you can put it on autopilot and win," he said. "But it doesn't look like it's working.
Others say the economic team was kept straight in the first two years by Joshua B. Bolten, the deputy chief of staff for policy. When Bolten left last year to head the White House budget office, the wheels started coming off the operation, one Senate GOP aide said.
Administration officials contend that as the economic recovery takes hold and jobs begin proliferating, Republican concerns will disappear. Treasury spokesman Rob Nichols said that already, the unemployment rate has fallen, disposable income has risen, single-family home ownership is at record levels and worker productivity is high.
But outside the White House, allies are worried. The recent losing streak has the administration "on its heels," said Daniel J. Mitchell, an economist at the Heritage Foundation.
This week, Reps. Robert W. Ney (R-Ohio) and Donald Manzullo (R-Ill.), who represent hard-hit manufacturing districts, requested a meeting with Bush to get him to refocus his economic message. "Let me try to be diplomatic about this," Manzullo said. "The president needs to bring together in a single, simple focus the things he really believes in. He's got the right stuff. He just needs to sharpen the focus."
The flap over Raimondo may be the most glaring breakdown, critics say. He is a well-respected chairman and chief executive of a prefabricated-building manufacturer. But his company -- Behlen Manufacturing Co., of Columbus, Neb. -- laid off 1,180 workers from its five U.S. plants in the past three years while opening a plant in Beijing.
That was only the most recent problem. The release last month of the Economic Report of the President by the White House Council of Economic Advisers has proven to be rich fodder for Democrats, who promise it will appear in ads. First came the flap over a passage that appeared to praise the recent movement of U.S. service jobs to such low-wage countries as India: "When a good or service is produced more cheaply abroad, it makes more sense to import it than make or provide it domestically."
Then, critics turned their attention to the report's anticipation that 2004 employment would on average be 2.6 million jobs higher than last year. The secretaries of commerce and the Treasury, and then the president, quickly backed off that projection.
Finally, Democrats latched onto an obtuse question in the report, "When a fast-food restaurant sells a hamburger . . . is it providing a 'service' or is it combining inputs to 'manufacture' a product?" The point, administration economists say, was to (*COMMENT*)
House of wanting to reclassify burger flippers as Joe Lunchpails.
The reactions were unfair, said two former White House officials, but in an election year, they should have been anticipated. They said the extensive vetting process that governed previous report releases must have broken down. "Clearly, people didn't read it," one of the former officials said. "This stuff was not hard to find."
As the White House was putting out those brush fires, officials had to deal with the comments of N. Gregory Mankiw, chairman of the Council of Economic Advisers. Mankiw managed to anger manufacturers, software writers and even radiologists in his extended take on the "outsourcing" of jobs overseas.
"Outsourcing is just a new way of doing international trade," he told reporters. "More things are tradable than were tradable in the past, and that's a good thing."
But administration officials admit that so far, it has been a good thing mainly for Democrats.
Too verbose, and missing a major Republican gaffe, the administration is, apparently, intentionally, keeping crude prices extremely high. I don't have internal sources as to why they are doing it, so my only rational answer is the influence of Chenney and his connection with the "energy complex" (Haliburton, Enron, Exxon etc.). That might be the "why". How do they keep crude artificially high? Quite simple, they are filling the national strategic crude reserve (which is close to 90% full already) by buying crude when prices are at the peak here just under $40. The Dems should point out that when they were "in charge" they filled the reserve when prices were in the teens and low 20' but sold from the reserve as prices got to the high $20'. That sound rational, even though, it hurts the pockets of the likes of our "friendly" Saudis, Exxon and Haliburton... Why Congress is not investigating this? I don't know. Maybe the task force investigating the "energy strategy" early in the Bush administration, in which some 8 out of 9 policy suggestions made by Enron were adopted, will find out that strategy included selling our strategic reserves if the prices gets under $20 and buying into the strategic reserves if the price goes above $35....
03/13: (217487) (*COMMENT*) Buffet about corporate taxes in his recent letter to shareholders:
Taxes
On May 20, 2003, The Washington Post ran an op-ed piece by me that was critical of the Bush tax proposals. Thirteen days later, Pamela Olson, Assistant Secretary for Tax Policy at the U.S. Treasury, delivered a speech about the new tax legislation saying, "That means a certain midwestern oracle, who, it must be noted, has played the tax code like a fiddle, is still safe retaining all his earnings." I think she was talking about me.
Alas, my "fiddle playing" will not get me to Carnegie Hall -- or even to a high school recital. Berkshire, on your behalf and mine, will send the Treasury $3.3 billion for tax on its 2003 income, a sum equaling 2=% of the total income tax paid by all U.S. corporations in fiscal 2003. (In contrast, Berkshire's market valuation is about 1% of the value of all American corporations.) Our payment will almost certainly place us among our country's top ten taxpayers. Indeed, if only 540 taxpayers paid the amount Berkshire will pay, no other individual or corporation would have to pay anything to Uncle Sam. That's right: 290 million Americans and all other businesses would not have to pay a dime in income, social security, excise or estate taxes to the federal government. (Here's the math: Federal tax receipts, including social security receipts, in fiscal 2003 totaled $1.782 trillion and 540 "Berkshires," each paying $3.3 billion, would deliver the same $1.782 trillion.)
Our federal tax return for 2002 (2003 is not finalized), when we paid $1.75 billion, covered a mere 8,905 pages. As is required, we dutifully filed two copies of this return, creating a pile of paper seven feet tall. At World Headquarters, our small band of 15.8, though exhausted, momentarily flushed with pride: Berkshire, we felt, was surely pulling its share of our country's fiscal load.
But Ms. Olson sees things otherwise. And if that means Charlie and I need to try harder, we are ready to do so.
I do wish, however, that Ms. Olson would give me some credit for the progress I've already made. In 1944, I filed my first 1040, reporting my income as a thirteen-year-old newspaper carrier. The return covered three pages. After I claimed the appropriate business deductions, such as $35 for a bicycle, my tax bill was $7. I sent my check to the Treasury and it -- without comment -- promptly cashed it. We lived in peace.
I can understand why the Treasury is now frustrated with corporate America and prone to outbursts. But it should look to Congress and the Administration for redress, not to Berkshire.
Corporate income taxes in fiscal 2003 accounted for 7.4% of all federal tax receipts, down from a post-war peak of 32% in 1952. With one exception (1983), last year's percentage is the lowest recorded since data was first published in 1934.
Even so, tax breaks for corporations (and their investors, particularly large ones) were a major part of the Administration's 2002 and 2003 initiatives. If class warfare is being waged in America, my class is clearly winning. Today, many large corporations -- run by CEOs whose fiddle-playing talents make your Chairman look like he is all thumbs -- pay nothing close to the stated federal tax rate of 35%.
In 1985, Berkshire paid $132 million in federal income taxes, and all corporations paid $61 billion. The comparable amounts in 1995 were $286 million and $157 billion respectively. And, as mentioned, we will pay about $3.3 billion for 2003, a year when all corporations paid $132 billion. We hope our taxes continue to rise in the future -- it will mean we are prospering -- but we also hope that the rest of Corporate America antes up along with us. This might be a project for Ms. Olson to work on. (*END*)
Kudo to Buffet, he makes a lot of sense, and those claiming that corporates and corporate chieftains are paying their "fair share" are simply "full of it.". Buffet should volunteer to make the Dems taxation case, but I think, like me, he is too much of a Republican to follow his libertarian instinct. Where have we Republican gone wrong, when did we surrender our soul to a group of power mongers that economically keep raping the retirees, widows and orphans? Why should the middle cass be weighed down with a 50% marginal tax rate while Gates (and yes, Buffet too) pay a marginal tax rate in the 10% to 20%?
03/13: (217488) (*COMMENT*) Hi Zeev:
In general most dividends received by a US corporation have an effective Federal income tax rate of 10.5%. There is a 70% exclusion from income. Example 100 dividend, less 70% is 30 times the 35% tax rate.
Interest income has no such exclusion.
Never a simple answer and there are exceptions to the above. (*END*)
I believe that is true only if the Recipient corporation owns at least 65% of the equity of the dividend paying entity (in essence dividends from "subsidiaries"), but I am no tax expert, the last time I looked at that was some 20 years back and things might have changed.
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