Don’t Forget Venezuela

Venezuela continues to circle the drain.  Remember it has the largest oil reserves in the world.  In the last three months the price of oil (yes there are lots of prices but they move in tandem) has gone from $54.53 to $65.41.  Unfortunately, it is trying to apply socialism.  Scott B. MacDonald reports on the impact:

Venezuela is a mess. It clings on the edge of total debt default only thanks to the timely recent assistance of Russian money. At the same time, the economy has imploded—oil production and exports are struggling, inflation has zipped well above 2,000 percent (into the realm of hyperinflation), unemployment is in excess of 20 percent, and there are growing numbers of outbreaks of looting in the face of widespread shortages of food and basic goods. By one estimate, Venezuela’s economy has contracted by 40 percent in per capita terms from 2013 to 2017, while the country has one of the world’s highest homicide rates.

There is limited ability for the The Donald to have an impact here.  We can safely say that he will avoid his immediate predecessor’s “Mi amigo” moment.

Sidebar:  Reporting of Obama’s mi amigo doesn’t come up on Google’s first page.  There are two negative comments on it, one being the link, but there is no reporting of it.  Interesting.  End Sidebar.

Scott says it is up to Venezuela’s military because, like the Congo, Zimbabwe, and eastern Europe, the solution, or lack of a solution, is up to the folks in the country.  Scott says:

For change to occur it will have to come from within the ranks of the armed forces. While the top leadership has benefited from its close relationship with the Maduro gang, much of the rank and file is not immune to the ravages of socialist policymaking and mismanagement.

We hope for the best but much will have to go right to get from the current situation to a functioning country,  Good luck to the reformers and good luck to outsiders in identifying reformers.

 

Nope On Trade

We tend to agree with Larry Kudlow.  We believe that there are government policies that will awaken the growth fairy.  Per capita economic growth is critical to funding the government and providing for the people.  We generally agree with Larry’s article on The Donald and Davos.  America is open for business.  There was one part with which we strongly disagree:

In an illuminating interview with my friend and CNBC colleague Joe Kernan, Trump said he’s willing to deal on trade — including NAFTA, and perhaps the Trans-Pacific Partnership (TPP). But he correctly insisted on reciprocity. Barriers should be torn down by both sides. Arbitrations must protect America, not penalize it.

Arbitrations must protect America from what?  The answer would seem to be cheaper washing machines for consumers.  America first would mean the opposite.  We should tear down our barriers and not care about the barriers elsewhere.

Yes, it is more complicated than that.  America also benefits from free trade policies by other counties and we should encourage capitalism. Still, Larry should know that free trade is a good thing and surely he believes that raising taxes such as tariffs is a bad thing.

Three Trade Ideas

The Donald, Kevin Williamson, and Jonah Goldberg have put forth take ideas and actions recently.  It shows the difficulties of politics.  In politics we need to make priorities and often end up supporting the least worst solution, like The Donald.  Kevin and MWG are for unilateral tariff elimination.  We agree with Kevin that:

Which is why my preferred Plan B — unilateral free trade — is, politically speaking, a DOA proposition. I simply reject the notion that free people should have to ask the permission of, well, anybody before they can buy ordinary goods from whomever they like, including producers in China, India, Poland — or on Mars.

Well, we think of it more as tax policy than human rights but we are still on the same page.  Jonah is close to that and The Donald is very far away from us.  Let’s start with The Donald.  He recently gave a speech in Davos where the WSJ reported:

[The Donald] also echoed previous calls for “fair trade,” saying the U.S. would “no longer turn a blind eye to unfair economic practices.”

“We cannot have free and open trade if some countries exploit the system at the expense of others,” [The Donald] warned.
[snip]

The [Donald’s] administration drew criticism from abroad this week for its announcement Monday that it would impose steep tariffs aimed at protecting U.S. makers of solar panels and washing machines.

All three paragraphs represent foolishness of the first order.  Theresa May, in the same article, speaks for us when she says:

Free trade and the global rules-based system had together “delivered the greatest advances in prosperity we have ever known.”

The Donald had an excellent year in 2017.  This is a rocky start for 2018.

Sidebar One:A president does not and should not have control of the country such that, good or bad, it is all on him.  Events were such that The Donald had a banner year in 2017.  It was not all him.  End Sidebar One.

Jonah takes, and has always taken, our side in the trade issues:

[The Donald’s] administration is now moving to put some teeth on its promise to punish “unfair” trade from China and other countries. This week it imposed punitive tariffs on Chinese and South Korean manufacturers of washing machines and solar panels. The move is ill advised on its own, but you can be sure this is just the beginning of renewed debate over the benefits of free trade, with any number of once-passionate opponents of the government’s “picking winners and losers” rushing to defend the sagacity of “America first” economics.

Jonah is getting to be like Conrad Black.  Conrad can’t write an article without puffing up at least one of Nixon or FDR.  Jonah just has to fly his Never Trump flag but he does get to a good point in his conclusion:

Every form of statism — from absolute monarchy to socialism to fascism — involves the state forming an alliance with some faction or another and giving it preferential treatment. Protectionism is simply statism applied to trade.

Sidebar Two: Unlike Jonah, we are not convinced that folks have a hard time distinguishing between pro-business and pro-market.  He says: “But it is a rare corporate titan who favors a free market if doing so is bad for his or her bottom line.”  It is much more general than that as his quotes from Adam Smith indicate.  Neither businessmen nor workers want a free market.  Only consumers do.  End Sidebar Two

Jonah’s conclusion of protectionism as statism leads to Kevin’s idea that the left, where the statists dwell, might be the opportunity for free trade.

Capitalism isn’t what it used to be [the kinds of businesses].  And neither is free trade. Once largely an Anglo-American project, free trade today is a European project, a Canadian project, an Asian project, and a pan-Pacific and trans-Atlantic project, too. It is, properly understood, a global humanitarian project. For the moment, the leaders of that project are people such as Trudeau, Merkel, and Shinzo Abe. And Michelle Bachelet, too: The remarkable fact is that Chile’s socialist president is more pro-trade than is the nominally Republican president of the United States of America.

There is a big problem with Kevin’s analysis.  There is also a minor point in ignoring the UK and Theresa’s quote above.  His major example is the Trans-Pacific Partnership (TPP). Here is an an example of the big problem:

So far, the Democratic party has largely resisted efforts to purge members who supported TPP, fast-track negotiating authority for the president, and other pro-trade measures.

The problem is that Kevin opposed TPP as a free trader.  None of us, Jonah, Kevin, or MWG, were enamored with TPP and the thousands of pages it entails.

The problem is that our first preference is unilateral free trade.  Our second preference is one sentence free trade on a bilateral basis.  We are not interested in imposing thousands of pages interpreted by hoards of bureaucrats on ourselves or other countries.  The statists who Kevin hopes to work with are interested in such agreements.  We tend to favor negotiation but perhaps we need to move to free trade absolutism.  It is always the problem in politics.  Sometimes negotiation takes you so far from your goals that you lose more that you gain.

 

Waiting For Joy Is Worth It

Michael Rand is a sports writer in Minneapolis.  He is also a life-long Minnesota Vikings fan.  As it happens, his team is just a year younger than our team but because Michael just passed forty he is in a similar situation to us a couple of decades ago.  He writes about the Viking loss to the Eagles:

After the sting of Sunday wears off and the Super Bowl has come and gone, maybe we can appreciate this 2017 Vikings season for what it was: a good team that overachieved and gave us one amazing playoff finish before ending with one huge disappointment.

Maybe sometime in this lifetime the story will end differently.

We could have written much the same thing in the nineties.  We even matched up with him on wife and two kids.  Then came Bill in January 2000.  Now all the folks that had faux pity for us then have real envy now.

Michael is ahead of where we were twenty years ago because the Twins won a couple of World Series early in his life.  We were zero for ninety combining baseball and football.  Stick with your teams Michael and it will make it much more sweet when the ultimate success comes.  If you are a fan then believing is the only choice.

 

Quasi-Experimental Results

Some results are in on the quasi-experiment designed by the GOP.  The recently passed tax reform bill coincides with an Apple announcement in the WSJ that it:

would make a one-time tax payment of $38 billion on profits accumulated overseas and ramp up its spending in the U.S., as it seeks to emphasize its contributions to the American economy after years of taking criticism for outsourcing manufacturing to China.

An interesting part of the coverage is the difference between the WSJ reporting and the WSJ editorial page.  Here is more of the WSJ reporting cited above:

Apple said its one-time tax payment was the result of recent changes to U.S. tax law, under which companies must pay a one-time tax of 15.5% on overseas profits held in cash and other liquid assets. Profits held in other forms will be taxed at 8%. The company said in November that it had earmarked $36 billion to cover deferred taxes on its $252.3 billion in overseas cash holdings, assuming that it would eventually pay U.S. taxes on a portion of it by bringing it home.  [Emphasis added]

The news gives the new tax rate rather than the reduction, which would seem to be the interesting part, and suggests that the profits would have come home eventually anyway.  The details are not complete here but it looks like the news folks are confusing financial accounting and tax accounting.  The WSJ editorial page has a different take:

Apple said Wednesday that it will pay $38 billion in taxes on the $250 billion or so in cash the company holds overseas; that’s a lot of money for Social Security checks and food stamps. Apple also said it would invest or spend on purchases some $350 billion in the U.S. over five years and add 20,000 jobs.

Apple’s windfall for the U.S. Treasury is the result of the reform bill’s 15.5% “deemed” tax rate on profits previously earned overseas whether or not they are returned to the U.S. The old system featured a one-two punch of taxation abroad and than again at home at a punishing 35% rate if the money was repatriated.

Apple had no plans to return the money to the U.S. under that regime, and ditto for many other companies that together have some $2.5 trillion abroad. Republicans broke this logjam by lowering the top rate and creating a permanent system that taxes income where it’s earned. Now Apple can put this cash to whatever the company deems the highest use, without arbitrage from tax policy.

We can’t live out the other option of high corporate taxes and there is only one Apple so we can’t randomly assign anything.  We can’t make any statistical statements and there is some possibility of arguing cause and effect because it is only a quasi-experiment.  The results, however, seem robust to us because of the previous statements of corporate officials and the proximity of the tax change and the results.

Pensions, Careers, And Retirement

Pensions and careers have changed.  Ramesh Ponnuru thinks the retirement changes are for the better and we heartily agree.  We will give an example and explain why it matters.  Ramesh thinks Americans should stop mourning the loss of traditional (defined benefit) pensions concludes:

These are changes that would build on, rather than attempt to reverse, the last few decades of developments in the American retirement system. Those developments, especially the rise of the 401(k), have largely been for the better.

Sidebar One: Pensions can be divided into defined benefit and defined contribution.  In a defined benefit plan you typically get a pension equal to then number of years worked * highest salary over three years * a percentage.  So if you work 30 years and your percentage is 1.8 then you get 54 percent of your highest salary.  A 401 (k) is an example of a defined contribution plan where a defined amount is invested and you get the result at retirement.  We often think that the worker takes the risk in a defined contribution plan and the company takes the risk in a defined benefit plan.  That is only true if the worker retires from that employer.  We will show details later.  End Sidebar One.

Sidebar Two: Risk is both upside and downside.  If a worker spends his entire career with one employer then a defined contribution plan is more risky because he might get much more or much less than a defined benefit plan.  End Sidebar Two.

The big reason for changing pensions is that the nature of careers have changed.  Years ago it was bad to have a resume that indicated you were a job hopper.  Now career advice is:

If you are changing jobs less than every three years, you are in the minority.
You may need to have a well-prepared explanation when you front up to your next job interview.

It also true that employers come and go.  Both of these are reasons why we should cheer at the increasing number of defined contribution plans.

MWG has a defined benefit pension plan.  It worked very well for us although it limited our opportunities, as it was intended to do, in the time close to retirement.  It worked very well for us because we spent nearly 40 years with one employer.  Thus, our paltry year salaries in the seventies and eighties were irrelevant and only the years mattered in the computation of benefits.  If we had of switched employers it would have been bad for us because our salary was so low. Another benefit was sick days.  In our case sick days accumulate and can be used to pay for medical insurance after retirement.  The sick day benefit is based on your highest salary but you must retire in order to get it.  Thus, because of both sick days and defined benefit, as retirement approached it was financial suicide for us to leave before retiring.  When we became eligible for retirement, the sick days became a powerful incentive towards retirement because workers had to pay for part of the cost of health insurance but retirees, like us, with lots of sick days did not.

For us and our employer, the defined benefit plan worked.  We got a nice retirement and they got us to work for less than market prices late in our career.  We are not sure if the intent of the pension was to get us to retire.  It was effective at that too.  We retired because the tax on working was over 100 percent.  That is, we had more disposable income in the first year of retirement then we would have had if we worked that year.

Defined contribution was a fair deal for us in another era.  Even then we were a minority in staying with one organization so long.  Now we would be a micro-minority.  Defined contribution is the way to go in the new environment.  We need to find incentives to increase them.  We have three suggestions:

First make health insurance benefits taxable to the recipient.
Second, increase social security benefits for the needy by means testing benefits for high income individuals.
Third, increase the tax benefits of Roth IRAs.  Make the contribution tax deductible and keep the returns not taxable.

The first would help by producing a bit of government revenue and focusing both employer and employee on the retirement issue.  The second would provide a safety net to the really needy.  The third would reduce complexity at retirement because everyone would go Roth and there wouldn’t be any taxes having an impact on decision making.

As Ramesh says, let us build on the success of 401 (k) plans.  Folks are looking for freedom.  The right incentives will help them make good choices.

 

Those Countries

The Donald has put his foot in mouth again by describing certain countries as shitholes or perhaps some other scatological comparison.  We think some of the reactions are silly and some are overwrought.  Let’s look at two:

A Facebook comment:

My ancestors came from a shithole country, Ireland, looking for a sustainable life, escaping famine.  [Emphasis added]

A comment on Jim Geraghty in the Morning Jolt:

The message from the president – and the subsequent refusal to deny, retract, or disavow the comments – is clear: people from these places have no value.

Wikipedia takes care of the Facebook comment in one sentence:

The famine was a watershed in the history of Ireland,^[1] which was then part of the United Kingdom of Great Britain and Ireland.

So, in fact, those ancestors left the greatest economic and military power in the world to try an up and coming United States.  The folks in Ireland could have gone elsewhere but they were often looking to avoid the British who were near the height of their empire.

Jim’s comment might be more over the top than the one on Facebook.  Jim doesn’t like profanity and we would like to see less of it too but we can’t see how The Donald is saying people in those countries have no value.  He is denigrating the country rather than the people.  Denigrating the a country in a large meeting with both parties is not the height of wisdom.  Yet we do not want to end up as the overflow valve for failed countries.  We want countries to be able to verify their citizens for travel and other purposes.

We got the message.  It was poorly crafted.  It was especially poorly crafted considering the audience.  There is no need to try and create another message.

Income Inequality And Policy

We find income inequality a completely silly issue to be concerned about.   Economic growth, poverty rates, various measures of unemployment and employment and several others are interesting because if we find policies to ameliorate these problems then we can help people.  With income inequality there are three problems: First, changing income inequality won’t necessarily help anyone.  Second, we don’t have a goal.  What is the perfect Gini coefficient?  Third, we don’t know how to change income inequality.

We found evidence on the third issue recently.  A MWG double hat tip to Simon Constable and Instapundit.  They led us to Ugo Traiano’s [his first name drives spell-check crazy] working paper on the impact of taxes on income inequality.  Ugo is at the University of Michigan.  It is only a working paper which means that it hasn’t been fully peer reviewed.  Almost all working papers have some peer review and this one, like most, thanks a few folks so it is mildly reliable.  We are not suggesting that the paper is definitive.  Rather, we are suggesting if you really want to change income inequality you need a bucket-load of evidence to convince folks that some set of policies will lead to an outcome.

Ugo finds that increasing tax revenues leads to more income inequality.  He finds that the results are robust to measures of income inequality and econometrics.  Notice that Ugo did not use increasing tax rates but increasing tax revenues so it leaves some opportunity to argue that increased tax rates might have the opposite effect on income inequality.  After all, at some point, increasing tax rates leads to less tax revenue.

We don’t find income inequality an interesting statistic.  We don’t think that government policy should be looking to change it.  If you do then you need to have evidence that your policies will lead to the outcome and what the outcome is.  In addition we would like to know the impact of said policies on serious measures like economic growth.

If you support lower tax rates and not raising the minimum wage to reduce income inequality then we are all with you.  But it has nothing to do with income inequality.

Budget Math

We oppose a balance budget amendment (BBA) because of the accounting problems, the big impact, and the bad decisions that will flow from trying to balance the budget in the short term.  We recognize that we have an enormous problem but we don’t see BBA as a solution.

After we wrote that there would be a budget shortfall of a trillion dollars or so in fiscal 2019 we remembered the problem of budget math.  Our state has a biennial or two-year budget. It was always took some work to understand what the annual impact was.  Switching to the federal budget somebody might reply that we could fix the trillion dollar shortfall by eliminating the $1.51 trillion cost of tax reform.  The problem is that the tax reform score is over a ten-year period.  Eliminating tax reform would get you somewhere between a sixth and an eighth of the way there.

We need to work on entitlements. Other areas could help but that is where the money is.  The changes need to be gradual.  For example, we can start means testing on Social Security now but full implementation might come in 20 years. It also gives us time to fine-tune means testing because means testing is very tricky.

Say no to the BBA and always ask about the time frame on budget proposals.

Balanced Budget Amendment

George Will has come out again in support of a balanced budget amendment (BBA).  In fact, George thinks it should be job one for 2018:

We will discover that point [when debt influences growth]  the hard way, unless Congress promptly sends to the states for prompt ratification a constitutional amendment requiring balanced budgets. [Emphasis added]

He also has a explicit suggestion from Glenn Hubbard and Tim Kane on what it should be.  Hubbard and Kane’s proposal

would limit each year’s total spending to the median annual revenue of the previous seven years, allowing temporary deficits to be authorized in emergencies by congressional supermajorities.

We have lived under balanced budgets at the state level and found them particularly vexing because most spending is committed when the budget shortfall shows up and then you must cut where available.  It is not a system that leads to good decisions.  In addition, or perhaps related to the first problem, there are accounting problems.  In the states an obvious problem is pensions.  The WSJ highlights New Jersey recently.  New Jersey has a new governor, Democrat Phil Murphy.

As he takes office later this month, Mr. Murphy must confront the state’s biggest problem—a pension system that is about $90 billion short of what it needs to pay future benefits.

The federal government’s obvious accounting problem is entitlements.

We like the idea of a BBA but the problem of writing the amendment, bad budgeting decisions, and the accounting problem lead us to oppose a BBA.  The federal budget is such a disaster, however, we are willing to consider that the current circumstances are worse than a BBA.

Let’s assume that the BBA George suggests has passed by June 2018 and there are no supermajorities to substantially raise taxes.  We are already in fiscal 2018 so fiscal 2019 would be the first year it applies to.  FY 2019 has expected spending of $3.93 trillion.  The spending limit is trickier because it would seem reasonable to limit to actual data.  If so the limit would be $2.775 trillion.  If we include estimated years then the limit would be $3.021 trillion.  So there would be a need for cuts and tax increases from somewhere between just under a trillion dollars to $1.2 trillion.

Sidebar: We don’t see a solution in writing the amendment by making it effective in say, 2030.  Each party is aware of the problem.  There is little interest in fixing the problem as the last two presidential elections have shown.  End sidebar.

Neither party would want to pass such rule.  Spending GOP capital on a failure is a bad idea when they might do something useful in 2018.  We know that politicians always wimp out when the “out” years come.  That is they promise to make cuts later and never do.  Reforming entitlements gets harder every year.  We expect a disaster but see the BBA as an even bigger disaster.  Sorry George.