WHAT'S IN IT FOR ME?

The broadcast media seem to have only heard the part of Obama's State Of The Union speech dealing with fairness on taxes. Briefly they said he missed an important thing of "What's In It For Me?" for the average voter. While tax fairness for both individuals and business was an important part; however, he did deal with the question "What's in it for me?" He spent a good deal of the speech talking about in sourcing of jobs and challenging business to find ways of finding more ways to increase jobs in the U.S. He also commented on his pledge to double exports in five years and said it was ahead of schedule. All this dealt with jobs, seemingly missed by the news media. Was it missed by the workers also?

It has always seemed unfair to me that unearned income (e.g. capital gains, dividends, carried interest, etc.) gets tax breaks, and the burden of taxes comes on earned income. I've always felt it should be the other way around. But he who has the gold rules, as they say on a twist of the Golden Rule, so the wealthy have skewed the the tax code in their favor and I'm sure most wealthy feel they deserve it.

WHATEVER HAPPENED TO JOBS, JOBS, JOBS?

The current Democratic administration has been severely criticized for spending so much time on the Obamacare legislation instead of creating jobs. Of course, President Obama campaigned on getting a health care bill passed and he did. So now that the Republicans have taken over the House of Representatives, what are they doing to create jobs?

Well first they read the constitution out loud (HR 5). Well, they read most of it, eliminating the parts about slavery, for example. Their first bill (passed unanimously) was to get the Government Printing Office to stop printing so many copies of bills and resolutions that can be read online, saving maybe $6 million (only $1.3 trillion to go). What’s more, this legislation will probably eliminate some jobs, not increase them. Oh well, it will save some trees.

Then of course, we had the vote to repeal Obamacare (HR 2). Everyone knew this piece of legislation was going nowhere so, even though Obamacare was billed as a jobs killing bill by the Republicans, this vote of principal created no jobs.

I believe the next piece of legislation in the House will be to make sure that there is no government funding of abortions (HR 3). President Obama has already given an executive order to stop any Federal money that might go to abortions, but I guess the House wants redundancy. Lack of government money to fund abortions will probably decrease jobs somewhat (surgeons, nurses, etc.), but it is the principal of the thing.

Also high on the list is the Small Business Paperwork Mandate Elimination Act (HR 4) which has 254 cosponsors and is currently in committee. My first thought is that eliminating paperwork will cause some job loss because the people won’t be needed to fill out the paperwork, but then it may be neutral because the people that would do the paperwork may be replaced by others doing more productive work. My guess is that the bill will be passed, possibly unanimously.

Also to be addressed is HR 5 which is the New House Rules and, of course, doesn’t deal with jobs.

So when will the house start to deal with jobs?

JOBS: THE DISCONNECT BETWEEN BUSINESS AND GOVERNMENT

There is a disconnect between companies and politics in bad times. The business of companies is to provide profits (not jobs) whereas the voting public demands that the government provide jobs and will change the Federal management political party when they cannot do so.


Under the present situation, the government is further to provide jobs at no cost to the taxpayer, a very difficult thing to do. There are those who wish to stimulate the economy by lowering personal income taxes; however, this is a very inefficient way to stimulate the economy as I have said elsewhere.*


During good times, everything is fine, companies will tend to provide jobs to increase profits, even more, the politicians get a growing workforce, and nearly everyone is happy (“nearly” because some are always left behind).


Now there are companies that will keep their workforce during bad times, at least for a while, because they feel that the training costs and startup costs outweigh the savings from letting the workforce go and shutting down some of all of their facilities, either selectively or en masse.


There are even a few companies that will keep their workforce for moral reasons and not business reasons.


The workforce is the elastic dimension of capitalism, even though many companies do all they can to minimize the size of the workforce through all sorts of automation. They will also minimize the size of their domestic workforce if they can find cheaper labor elsewhere through outsourcing. Still, it is by increasing and decreasing the workforce that companies mainly regulate their expenses.


A good example of automation eliminating jobs was when the cotton gin was invented which eliminated the need for all sorts of northern slaves to work at picking the seeds out of cotton but an increased need for slaves on plantations growing increased amounts of cotton. Thus the more difficult ones were shipped down the Ohio and Mississippi rivers to Natchez to work at growing cotton. This is where the saying sold down the river came from* * At one time, Natchez was a thriving community but is now just a small tourist town with no other industry to speak of.


There is a move again to cut the taxes on profits from foreign operations that are repatriated into the U.S. (e.g. John Chambers of Cisco).*** Right now companies must pay the difference between taxes paid to the foreign government and the taxes that would be paid if the profits were obtained domestically. It is felt that money would be brought back if the taxes in doing so were eased to the low single digits. I (who, of course, have no influence what so ever) would like to try a 5% tax on bringing foreign earnings back into the country. The danger of leaving this money overseas is that the companies will start wanting to do something with it and build factories and labs overseas rather than in this country. (The fear with encouraging the money to be repatriated is that companies would use the money to buy back stock and increase dividends, neither of which is productive and even more phonier acts. This is what happened the last time this was done in 2005 as a result of the “Homeland Investment Act”.****)


But easing the corporate tax burden on returning profits could enhance the prospect of building factories and labs in this country instead of overseas and thereby encourage some hiring if companies would cooperate. This the government could not only do at no cost to the American taxpayer, but bring in some tax revenue as well. It is felt that there is something like one or two trillion dollars of corporate profits overseas so at 5% we might be talking about $50 to $100 billion dollars of tax revenue. True this is only a baby step regarding our Federal deficit, but I think the solution is to take many baby steps and do so gradually so our system can adjust. And there could be a multiplier as well through construction of factories and labs (both of which involve labor) plus staffing such as mentioned above.


* http://stopcontinentaldrift.blogspot.com/2010/05/effectiveness-of-taxes.html
**http://www.bigsiteofamazingfacts.com/what-does-the-expression-sold-down-the-river-mean-and-how-did-the-phrase-originate
*** http://www.msnbc.msn.com/id/39173765/ns/business-personal_finance/
**** http://www.nytimes.com/2009/06/05/business/05norris.html

BEST ONE-TERM PRESIDENT EVER?

Barack Obama's record is very impressive particularly considering the opposition he has faced to almost everything. It started with the Stimulus Package, Cash for Clunkers, Health Care Reform bill, the BP oil spill fund and dividend discontinuation, GM & Chrysler rescue, and what has come to be called FinReg, among others. Though people tend to "blame" Obama for TARP, it was actually a George W. Bush initiative. Since it will eventually turn a profit and only one major financial institution failed (Lehman Bros.), how can one say it was not successful? Obama's real problem is unemployment.

Stimulus Package While it is probably true that the Stimulus Package has not created many permanent jobs, it has saved for awhile thousands of teachers, firemen, and police jobs. If these people had been put out on the street, certainly the economy would be in worse shape today. And the amount of highway construction going on is immense. It is the nature of construction jobs that they are not permanent, but thousands of workers must have been hired for these highway jobs.

Cash For Clunkers The claim was made on Cash for Clunkers, that it "just" advanced the sale of automobiles that would have been bought anyway. That does not seem to be the case in that the automobile companies continue to sell a lot of autos and are turning nice profits, even GM and Ford. The purpose of Cash For Clunkers was to get some low mileage cars off the road and that it certainly did.

Healthcare Of course I wish the Healthcare bill was a cleaner bill rather than the 2,040 page monstrosity it became, but in modern America, you seem to have to buy all sorts of extraneous things in major legislation to get it passed. And after that some important things weren't in the bill like single payer, Public Option,* tort reform, and completely getting rid of Medicare Advantage which costs 15% more than regular Medicare. At that, the Health Care bill, for example, has 788 amendments of which 161 were by members of the GOP (http://www.slate.com/id/2223023/). But finally after decades we have something nearly universal that we can start with. Obama said he would get a Health Care bill when he was campaigning for President, and he got it in spite of massive opposition. In our own extended family, the provision to increase the age at which children may be covered by the parents health care plan to 26 has been very important for a partly employed graduate student. It may well be that health plans will cost somewhat more, but there is more than just "me" in morality, and , finally, the right thing has been done or at least begun by covering some 30 million people that are currently uninsured. Many Presidents in the last 70 years have tried to get a Healthcare bill passed and failed. Obama succeeded.

FinReg (also known as Dodd-Frank) At 848 pages, the FinReg bill was comparatively brief; yet who knows what is in such a monstrosity? It took two years to write and get passed. The financial crisis we were in was so severe that I am really surprised that more Republicans didn't feel compelled to vote for it. Of course the financial industry got it watered down, but it seems to me that most analysts that seem objective feel it will do good. For example, Henry Paulson who was Bush-43's Treasury Secretary is pleased with the bill.** Other advances include placing "... derivatives on exchanges and clearinghouses, by creating a systemic risk council, by forcing banks to provide "funeral plans" that explain how to unwind them in the event of a failure, by creating an Office of Financial Research to collect daily data and provide quick analysis on transactions, there's much less chance that a financial crisis would leave regulators totally confused about what's going on, and who owes what to whom."* For more see the Ezra Klein article.** It is true that much is yet to be worked out on implementing the bill as is the case to some extent in the Healthcare bill too. For these reasons, it is probably best to slow down and work out these two major bills before taking up others like energy policy. That is a pity but is needed.

BP Dividend Elimination and Remediation Fund I have covered this item elsewhere: http://stopcontinentaldrift.blogspot.com/2010/06/if-it-wasnt-so-tragic-it-would-be-funny.html. In brief, first people laughed at Obama to think he could get a huge company to eliminate its dividend (said to be too important) and set up a $20 billion fund to reimburse damage done to businesses and individuals. When, in fact, BP voluntarily complied, the cry went up that he was too strong a president. Do we want a strong president or don't we in times of disaster? Well, I'm very impressed. Readers may also wish to take a look at a related item on BP: http://stopcontinentaldrift.blogspot.com/2010/06/its-only-matter-of-time-before-we-hear.html.

Unemployment Unfortunately for President Obama, the single most important statistic for reelection is the unemployment picture. When the voters perceive increasing unemployment on election day (whether it is true or not), the incumbent loses. This was the case with Jimmy Carter and George H.W. Bush. Of course in the next 26 months, the current dismal unemployment picture could turn around, as it did for President Reagan, but our current economic picture is much more severe than it was in the early 1980s and a vigorous growing employment picture seems unlikely. Therefore I feel that President Obama probably will be a one-term president no matter his other outstanding accomplishments; however, we have learned that it is dangerous to count out The Comeback Kid.

Notes added For 2011: Obama's accomplishments continue. His orders led to the killing of Osama Bin Laden on May 2, 2011. More controversial is the killing of the American trader Anwar Al Awlaki in Yemen on September 30, 2011.*** Got the new Start Treaty ratified by congress (Surprising opposition to this is what makes it so significant.); it went into effect on February 5, 2011. Lifted restrictions on stem cell research on March 9, 2011. Eliminated Don't Ask, Don't Tell on September 20, 2011, over strong congressional opposition.

*http://en.wikipedia.org/wiki/Single-payer_health_care; http://en.wikipedia.org/wiki/Public_health_insurance_option

**"We would have loved to have this for Lehman Bros.," Henry Paulson told Andrew Ross Sorkin: http://voices.washingtonpost.com/ezra-klein/2010/07/what_finreg_does.html

*** http://www.nytimes.com/2011/10/12/opinion/justifying-the-killing-of-an-american.html

DID THE STIMULUS INCREASE UNEMPLOYMENT?

The general consensus is that the Federal stimulus plan at least preserved employment, at least temporarily, over what it might have been if the stimulus plan had not been passed. There are, however, the contrary views. In a paper by Louis Woodhill (http://www.realclearmarkets.com/articles/2010/07/12/what_if_stimulus_advocates_were_half_right_98569.html:)

he states:

In "The Job Impact of the American Recovery and Reinvestment Plan" dated January 9, 2009, Christina Romer and Jared Bernstein outlined the rationale for, and the expected results from, President Obama's "stimulus" program. Their report included the now-famous graph that warned that without action, unemployment would rise from 7.4% in December 2008 to 9.0% in mid-2010, after which it would begin to decline.

...........................

If Romer and Bernstein were right about the base case, then, rather than creating jobs, stimulus actually destroyed them. By June 2010, stimulus was supposed to have "created or saved" 2.8 million jobs, on its way to a total of 3.7 million by the end of 2010. However, total employment in June 2010 was actually 3.2 million less than what Romer and Bernstein projected it would have been without stimulus.

...............................

It makes sense that stimulus (government borrowing and spending) would destroy jobs. Government bonds are bought with investment dollars. If there is no change in incentives to call forth more output, then if the government sells more bonds, other forms of capital must be liquidated in order to buy them. Without tools (capital), workers can produce nothing and their jobs disappear.

The above is an interesting canard. The reason for the above statements is that Woodhill claims that money borrowed by the Federal government has taken away from money that could have been borrowed by the private sector (e.g. businesses). At least one problem with the hypothesis is that corporations are hoarding cash. Why shouldn't they when their plants are operating far below capacity? Why would they add more capacity in such a situation? In addition banks aren't lending. The banks have the money to lend but they claim demand is not only low but finding credit worthy candidates is difficult. So there is ample money available for funding the government debt. AND we have not taken into account above of the willingness of foreigners to buy our Federal debt (e.g China and Japan). Every graph I have seen shows overall borrowing declining, not staying the same as the article suggests (i.e., borrowing is a zero sum game. If A increases, then B must decrease).

I believe others, including some conservative economists, that the stimulus did save jobs and added some, but they tended to be overwhelmingly saving and creating jobs temporarily, such as highway construction, teachers, police, and firemen. Particularly among teachers, police, and firemen, this year these jobs that were propped up are now being lost; however, my impression is that stumulus construction jobs are increasing now that that there has been time for planning.

(Much of the above appeared as post #63572 (15 June 2010) in the Industry Discussions/Real Estate Investment Trusts: REITs board of Motley Fool.)