Miscellany: 7/10/10

The IMF's Rx For US Fiscal Budget Crisis Is a Good Start

As a professional problem solver, as I look at the status quo, some things are very clear:

• A "soak-the-rich" strategy is unsustainable in dealing with a structural massive deficit. Furthermore, we cannot resolve this under a system where half of wage earners do not contribute to financing federal obligations; the system is too progressive and fraught with moral hazard.
• The intrinsic difficulty of the tax code violates the very concept of the rule of law where one is not clear of how to act in the current economic environment. We need to simplify the tax system, including income deductions, including a sacred cow of American politics--like mortgage interest deductibility. 
• We must be globally competitive. Among other things, we cannot maintain uncompetitive high business tax brackets, and we have to have an environment where there is more of an equilibrium between savings and consumption. 
• I have been continually criticizing the Obama/progressive Dem cherry-picking stimulus; if you are going to have a stimulus plan, it should be broad-based, e.g., both business and individuals and across businesses and individuals. In particular, Obama has been using this magic 95/5 dichotomy for tax policy. But the same criticisms can also be made on the spending side. The President and the GOP have essentially agreed to take defense spending and entitlements (social security and Medicare/Medicaid) off the table. You already have a growing part of the budget that is untouchable--i.e., the interest payments on a $13T debt! This means, to be fair, an across-the-board spending cut, and we need to act with integrity--no more lip service by simply cutting annual budget increases. If business can learn to increase worker productivity, so must the federal government. I do NOT take defense off the table despite ongoing operations in Iraq and Afghanistan. We need to operate more efficiently in those theaters and not simply subsidize the costs of the Iraq and Afghan governments.

The IMF notes that we have a potential second generation real estate day of reckoning involving commercial real estate, which has been been crippled by the Bush/Obama era economy; they note that the Obama Administration plans to halve the deficit by 2013 is insufficient, with at least another $350B in tax increases and spending cuts, and suggest, like the other developed nations, raising the retirement age for social security. In terms of tax increases, it suggests aiming at one of the largest tax breaks for higher-income people, mortgage interest deduction (I haven't researched policy suggestions, but one idea might be a flat deduction or capping the deduction, deferring delta interest for deductions in subsequent tax years), which has the affect of raising gross income and tax revenues; the other prominent suggestion is the idea of the VAT or consumption/sales tax. Progressives hate the tax because it can be regressive, and many conservatives (e.g., Glenn Beck) also see it as a stealth tax that can be raised to cover deficits of inflated government budgets without demanding efficient management of federal resources. But the fact is that US consumers have been overspending, much of it on imports from countries with VAT's in place, and we cannot indefinitely operate a structural trade deficit. Sooner or later, that's going to end badly, with a resulting reduced standard of living for Americans.

The bottom line is that we need serious economic medicine. Even a tough fiscal conservative like Governor Chris Christie (R-NJ) is not going to resolve a $1.4T federal deficit by spending cuts; we already see the results of austerity budgets on the streets of Athens. We need to find federal revenue, and it's unlikely in a tough global economy that we are going to be able to easily grow ourselves out of the hole. There's also not enough assets by upper-income people to make up the difference in the long run, a key vulnerability of the Obama "economic policy". Watching Dems and Republicans approach the middle-class, each side not being the first one to blink and call for a tax increase, is painful. I don't think the American people are stupid; I think the American people are prepared for SHARED SACRIFICE and for leaders WHOM WILL STOP THEIR POLITICAL SPIN AND BE STRAIGHT FOR ONCE and not tell the American people what the politicians THINK taxpayers want to hear.  We have got to stop politicians promising a chicken in every pot, but putting it on their grandchildren's tab.

The Chinese Growth Machine

What is interesting in the latest report on the Chinese economy is that exports have risen 35% over a year ago, and are higher than exports two years ago, i.e., before the economic tsunami, despite the sluggish growth of its biggest trading partner, the European Union, and the United States. Exports to the US jumped about 28%, with just under an $18B trade surplus. So where is China making up the difference? Clearly the smaller developing economies; for example, Chinese exports to Brazil have more than doubled over the past year and to Russia are up by almost 60%.

Interestingly enough, the surplus with the US accounts for almost all of the net surplus for the Chinese in June, with other aggregate exports and imports roughly equal. Most of the Chinese imports are in terms of raw materials for the slowing Chinese real estate/infrastructure buildout. The Chinese have kept their much-criticized peg to the dollar to mitigate the impact of the global recession, where slumping foreign demand caused thousands of Chinese thin-margin factories (commodity consumer products like shoes, toys, etc.)  to close and the jobs of millions of factory workers. The ironic aspect to the peg is that the Chinese have able to maintain their peg through purchases of US debt. The Chinese promised before the recent G20 to gradually eliminate the peg, with no singular currency event.

There are a few notable points here. First, as much as Schumer (D-NY) and other progressive populists like to use the China peg policy as a whipping boy, progressive Democratic $1.4T fiscal year deficits makes for a lot of T-bills to stabilize the peg. Second, if Chinese won't need T-bills to stabilize their currency peg, where are the Democrats going to find investors to buy up the T-bills underwriting Obama's massive spending sprees? HINT: Might it be necessary to raise interest rates? And guess what raising interest rates does for the economy? Third, let's briefly point to a couple of interesting statistics: although the US enjoys a healthy trade relationship with Brazil, its export increases have increased (in January through April) roughly a third year over year, not doubled. And if we want to look at a key component of our deficit which the progressives would prefer to ignore (their "solution", of course, is no petroleum products, easier said than done; we have stabilized consumption to about 20 million barrels daily), we could make a real impact by robust domestic oil and gas exploration policies using today's technology:

Political Cartoon

Donna Barstow is likely making reference to certain recently released Arizona-relevant studies.These studies reference the new 4-hour block English Language Development curriculum for the 15% of Arizona (vs. 10% nationwide) students whom are English learners; the bottom line is that English-learning students find themselves even further behind relative to the regular curriculum. My grandparents (on both sides of the family) were born in Massachusetts, but both generations were raised bilingual (English and French). French was my dominant language when I started kindergarten; my parents responded to the initial problem by making English the dominant language in the household. (My 6 younger siblings still blame me...) There are some interesting ethnic differences; for example, many Asian immigrants also adapt fairly quickly, and some individuals on a Washington Post webpage  posted similar anecdotal observations on Middle East immigrants. I don't mean to suggest this as anything more than an interesting observation, but many of the immigrant groups just described were entrepreneurial; for example, my maternal great-grandfather and grandfather owned and ran small businesses.

Of course I shouldn't need to revisit the example of Miguel Estrada, an outstanding jurist and Bush  appellate court nominee filibustered by Democrats whom feared that Bush was grooming him for the Supreme Court and preempting the eventual nomination of a Latina, Sonia Sotomayor; Mr. Estrada, a Honduran immigrant at the age of 17, could barely speak English, 5 years later graduated magna cum laude from Columbia, the same 3 years later from Harvard Law School where he also served as an editor of the law review. Except for Estrada's superior academic honors, his educational credentials parallel those of a certain prominent American politician--what's his name? Barack Hussein Obama.

Quote of the Day

Talent hits a target no one else can hit; Genius hits a target no one else can see.
Arthur Schopenhauer

Musical Interlude: Chart Hits of 1990

Phil Collins, "Another Day in Paradise"



Billy Joel, "We Didn't Start the Fire"



Sinead O'Connor, "Nothing Compares to U"



Linda Ronstadt & Aaron Neville, "Don't Know Much"



Wilson Phillips, "Hold On"