US Economy and Permanent Job Losses

Great Debates
121

Do you know what will happen if you tax corporations more? Four things:

  1. Those corporations that pay dividends will lower them. Many of the people who hold stock in large corporations are employees and institutional investors like Mutual funds and retirement fund managers. So you will in essence be pushing the cost of the tax onto the people holding stock.

  2. Corporations will raise their prices. Do you know what the average profit margin is for corporations across the U.S.? Something like 3%. There’s no room to ‘take it out of profits’, so they money has to come from somewhere.

  3. You will push investment money away from equities and into bonds and other forms of investment. It will be harder to raise capital, and this will slow down growth. You’ll also see an instant drop in the stock market.

  4. Companies will relocate to countries with friendlier tax regimes, accelerating the very problem you’re trying to stop.

A much better argument could be made that corporations should pay NO taxes. After all, if the money is disbursed out of the corporation to individuals, they have to pay tax on it. Cutting corporate tax rates would stimulate investment and saving. Another argument that some make (and this may be Buffet’s opinion - I’m not sure) is that the corporate rate should match the individual rate, to avoid distorting the market by favoring one over the other. The problem with this is that individual rates are all over the map. Set up a flat tax with the same rate for everyone, and we can put the corporate rate there too.

What do you think ‘the wealthy’ do with their money? Put it under a rock? They invest it. And as a group, they are financially smarter than anyone else (or they wouldn’t be wealthy). They make better investment decisions (meaning they help fund the most successful, useful companies). Many of ‘the wealthy’ are small business owners who reinvest in their own companies.

And for anyone suggesting that we just fund all of our wish-list items on the backs of the ‘wealthy’, I’d like to know this: How much is enough? Is there ever a point at which you’d say, “You know, I think we’re already taking enough of the money from the wealthy”? What might that number be? Be specific, please. Should the top 1% pay 10% of the taxes of the country? 20%? 30%? 100%? What do you think is fair?

122

Y’know, one man’s ‘loophole’ is another man’s ‘tax incentive’. John Kerry is particularly enamored of tax incentives. He wants to complicate the tax code greatly because creating whole new classes of tax incentives to push businesses in the directions he thinks they need to go. So are you against all of his tax incentives on the grounds that the tax code needs to be simpler so it can’t be gamed?

123

A fair question deserving a fair answer. Unfortunately, the best I can do is say I am not sure. I am not convinced that Corporations are avoiding all taxes or evn most taxes. While some certainly do, sometimes they do so in very understandable ways (as sam suggested). I agree that there are loopholes in the tax code. But I believe that fixing them is more complicated than simply makeing certain practices illegal. The difficulty is that we have accepted the idea that taxing certain behaviors differently than others is the norm, and so it becomes very difficult to distinguish between incentives and loopholes.

Also, I would like to note that corporations are not additional citizens. They are simply arrangements of capital owned by citizens. Most of whom do pay taxes, and quite a bit of taxes BTW.

I suppose my position would simply be that taxing businesses much more is a bad idea. Such a plan will simply curtail business activities which is the opposite of what we need right now.

As I suggested, I am much more in favor of the government assisting by improving the re education infrastructure than by paying people to get training.

124

My bad.

Steve Landsburg called this the Iowa Car Crop. And I must have misunderstood you.

I agree. If I made a factory that produced Chee-a Buddies inexpensively and forced the Chia Pet people to be on the defensive, I would be an innovater and a leader. If I did the same thing with cheap, Canadian labor, then I’d be a villanous corporate outsourcer.

Good question. My example is going to get uglier, but I hope I can make the idea clear even though technical errors may be pandemic.

Let’s suppose that our island’s volcano has a patron god, why not?, and that she sees one of us starving while the other thrives. We’re operating efficiently, but the distribution offends her. For whatever reasons that only a god can understand, she feels that the socially optimal distribution of welfare is the one that maximizes the geometric mean; i.e. the more unequal the distribution, the lower the social welfare is. Being a god, she decides to meddle in mortal affairs. IIRC, we can divide her options into two broad classes of actions.

The first option is to attach a ball and chain to the leg of the richer of the two of us. This increases the cost of catching rats, since that person has to lug around the ball & chain. This arbitrary, for lack of a better word, handicap is a distortion to the market and it lowers the total island wealth. That this is so is because the marginal cost schedule has changed for one of us islanders. Before we optimized at 16 rats when our marginal costs were equal; but, with the ball and chain, now one of our marginal costs hit 96 (per my previous post) at only 6 rats instead of 8. You and I will still optimize given this new distortion, but one of our optimimums has changed because of the ball and chain and the island now only enjoys 14 rats instead of 16 rats.

The second option is to just take two rats from the richer person and give them to the poorer, regardless of what the richer person does. Here both our marginal cost schedules haven’t changed and we produce as well as we can possibly do, consuming a total of 16 rats. Suppose that no matter what I do, the first two rats I catch will be given to you. I still will catch rats until my marginal cost is equal to my marginal benefit; it would be stupid of me to do otherwise because I am still going to want to maximize my profits even if I think the volcano god is unfair.

In the first option, the volcano god is creating a distortion that alters our optimum. In the second case, there is no distortion and our optimum remains unchanged. Skeletal and simplistic, yes; but, I hope it illustrates the idea of the distinction. Both options may reduce inequality; however one option actually lowers the island’s total wellfare while the other doesn’t.

Let me know if that makes no sense & I’ll give it another whirl.

Yes, that is right. To be more complete, we should add

3 - when we redistribute the gains from trade, we should do so in a way that doesn’t distort the markets by changing the incentives. Forcing customer service companies to stop outsourcing is like putting a ball & chain on the consumers to benefit American phone jockeys—under the pretense that being in Maine makes one more qualified to help me with a computer glitch than some guy in India, perhaps—which lowers our overall welfare. Instead, programs to help displaced phone jockeys in Americal should be as non-distortionary as possible.

(In reality, there will always be some distortion invovled when the state tries to aim for a more ethical welfare distribution. Suppose every software buyer paid an extra dime to create a fund to disburse money to displaced customer-service phone operators. Well, that extra dime is a distortion and, while it may seem like a small bit to add to a software package, it is a wrinkle that may just have to be put up with. However, that wrinkle is no excuse for outrageous programs like first-world farm subsidies.)

125

js_africanus, if I may be so bold: do any of my ideas about how the currency manipulations of the East are affecting this situation hold water with you guys? I would dearly love to know the answer to this question.
I.e., let us say that the cost differential for operating a call center in India as opposed to the US, net of all the stuff that would go into it, is 20%. Let us further stipulate that the rupee has risen by less than the euro by that same 20% against the dollar, while the Indian central bank has been buying dollars like mad in an admitted effort to keep the rupee from rising relative to the dollar. Would that be prima facie evidence of a market distortion similar to that dime on the software?

126

All wonderful in theory. But we’re still left with the same question. How do the bills get paid (both Federal & State)? Somebody’s got to pay. If it isn’t the corporations and “wealthy” individuals, then it is you and I through higher taxes (assuming we are employed or participating in an income generating activity).

Again, as Buffet says, most corporations are not paying their fair share. And you want to further cut what they pay, still hoping that they will “invest” this money in something positive for the economy? Despite the tax cuts, according to many reports, corporations are not “investing” in capital spending and clearly are not creating jobs (at least in the USA). Instead they are allocating their savings to proping up their stock price and continued high levels of executive compensation.

Some cites for consideration:

And

Do you have any cites to back up this statement? The informations I have seen indicate that most wealthy people put most of their free money into investments like the stock & bond market and real estate. While there is indirect benefit to the economy through these actions, it is not the direct and active investment that will create many, if any, new jobs. In other words, few are starting new businesses and hiring more people with their gains.

Enough is their fair share. Since I have seen a figure that, on average, people pay 23% of their income to Federal taxes, how about 23% + says 5%? I don’t know.

127

Okay. I’m scared.

Right now it looks to me like no-one is arguing Aeschines’ points. And his points were quite frightening.

Aside from all the arguing about what to do regarding the current situation, I’m wondering if anyone will argue against the following statements:

The need for workers in the US is not keeping pace with the availability of workers.

If the current employment trends continue, there will be more and more qualified and willing workers who are unable to find gainful employment.

Barring the creation of a new, labor-intensive industry that is based in the US and cannot be ousourced easily, these employment trends are going to continue.

I’m really, really hoping that someone will come by with a totally logical reason that I am full of bull.

Otherwise, I propose that we start a new thread, entitled something like:
What happens when there just aren’t enough jobs to support the population?

128

Aeschines is, far as I can tell, completely correct. Personally, I figure we have one more good business cycle to go before we get a really bad crisis. Like I said above, given that business cycles appear to be getting longer and longer, it could be quite a while before all hell breaks loose.
So, if I’m right and you still have a job, you’ve got about a decade to prepare for the inevitable. If you have children, as I do, you do have to worry what their going to do with their idle time once they get out of college, which is rather inconvenient.

129

Why couldn’t that statement have been made any time in the past as well? The future always looks scary because you can’t predict it. Who would have foreseen the IT explosion (even with the dotcom bust, there has still been an explosion) in 1960?

Also, why is the US unique in this aspect among the industrialized nations?

130

Debt.
It’s a long road to Buenos Aires, but not so long that we can’t get there. See
The Disappearance of the Bond Vigilantes for some decent data on our debt situation.
Now, I figure that you have to take that 300% debt level, and lop off a third for the redundant debt of the financial sector. Please don’t ask.
That leaves us with 200%. Fernand Braudel, French historian who wrote, among other excellent books, The Structures of Everyday Life, once figured out that a country’s goose was pretty much cooked when debt got to 300% of GDP. So, if you believe Bill Gross, we’re already there. Me, I figure we’ve got another 100% of GDP to go.
See? I’m actually optimistic. You want the Voice of Doom, go see Aeschines.

131

No it isn’t.

Is it? There is a lot of dispute over this point. You should not state it as fact. If there was a universal consensus that the market was overpriced, you’d see massive capital flight. In fact, capital is moving the other way, into the market.

WAS. Which is why it has undergone a decline recently. What makes you think it is still over-valued?

Okay, to some degree, in some areas. And record consumer debt. And record mortgage debt. None of which is a surprise - when interest rates are low, people borrow more. Interest rates are currently at historic lows. It should be no surprise that debt is at historic levels. When interest rates rise, as they will inevitably due, there will be a correction.

This statement bugs me. A lot. Because I hear it so much. To hear the Democrats tell it, half the country is unemployed.

Let’s go over the number again: The unemployment rate in the U.S. is at 5.6%. That number used to be considered ‘full employment’, meaning it was about as low as unemployment could go before you had labor shortages and wage inflation.

Here in Alberta, we have one of the best economies in the world. If Alberta were a country, it would rank only behind a couple of small countries like Luxembourg for standard of living, low unemployment, and per-capita income. We’re rich. About as good as it gets. You know what our unemployment rate is? 5.2%. Which is probably where the U.S. unemployment rate will be around election time.

Have a look at this chart of U.S. unemployment rates between 1960 and 1992: Historical Unemployment Rates. Notice something? In only 6 of those 32 years was the unemployment rate below 6%. And in only three years did it dip below 5%. The rate is currently at 5.6%. At a time when we’ve had a bubble burst, a recession, and a terrorist attack that wiped out over a trillion dollars of wealth.

I have to wonder how old are those of you who think this is the worst economy you’ve ever seen? Because I’m 40, and this is one of the best economies I’ve ever seen. Sure, it was better in the late 1990’s, but that was in the middle of an artificial boom. Go back just a little before that, to 1992, and have a look at the situation: Unemployment was 7.5%. Interest rates were at 8%. Inflation was around 6%, if I recall correctly. And the deficit was almost TWICE the size of the current one. The Japanese were ‘taking offer’ and were the bogeyman of the day.

And that was considered a mild recession at the time. Let’s go back to the previous trough in the business cycle in 1982. Interest rates were SIXTEEN percent. Inflation was in double digits. Economic growth was almost zero. (‘Stagflation’). The manufacturing industry was in decline. People were talking about losing manufacturing jobs to South Korea, Taiwan, and other Asian countries.

Today, interest rates are around 3% (fed funds rate 1.06%). Inflation is almost zero. Unemployment is 5.6%. GDP growth was almost 5% last year, and is forecast to be over 5% this year. The deficit is peaking at about 3.5% of GDP, and is forecast to drop in half within five years.

This gloom and doom about the economy just doesn’t wash. But we’re going to hear more and more of it this year, because it’s the only way the Democrats can hope to be elected. So they’ll demagogue over this issue. But keep these numbers in mind when you hear people tell you how horrible it is - because it isn’t.
Let’s, for now, call a fct situation a fct situation.

[/quote]

132

Oops. The Japanese weren’t ‘taking offer’, they were ‘taking over’.

iamme99 said:

Well, you could try cutting spending. You could means-test social security and medicare. You could get rid of all the stupid tax incentives and other market distorting government intrusions. You could put the kibosh on farm subsidies, drug handouts to old people, and all the other crap that’s been added to the budget in the last three years. You could shrink the size of government by 10%, and you’d have all the money you need.

And you could resist the impulse to have the federal government fund day care, health care, public housing, and the myriad other new things John Kerry wants the government to pay for.

<whole bunch of stuff about corporations paying no tax>

I’m not that familiar with U.S. tax policy, not being a U.S. citizen. But I imagine corporations are allowed to carry forward previous years’ losses against current profits? We just came out of a recession. Business was hurt badly by that recession. So it’s fully expected that in the first couple of years immediately thereafter you would have lower corporate tax revenues.

133

js_africanus,

Thanks for the previous reply. I’ll try to keep this relatively brief so as not to anger the computer gods :slight_smile:

I enjoyed your examples, and I would agree in principle that the First and Second Theorems you outlined are theoretical/mathematically flawless. However, in practice, how often does the First Theorem (and as a consequence, the Second Theorom) actually hold? What I’m getting at is this - A free market is a good thing if and only if it is economically competitive, but 1) how is this determined (that is, what defines a truly competitive market)? and 2) how does one achieve true competitiveness (or in other words, who sets the parameters that allows the free market to A) be established and B) allows said free market to achieve true competitiveness)?

While I don’t wish to get into a long, draw-out discussion on economic theory (where my background is lacking), I do think it is important not to underestimate the importance of underlying assumptions when discussing economics (and especially as it pertains to the free market). Becaue while in theory much of economic theory is sound, the simple fact is that there has never been a situation where there has been a truly competitive free market. In other words, the free market, in practice, has distortions built into it from the get go. That’s because it is the government that has allowed the establishment (and functioning) of the free market in the first place. Granted, the distortions can be reduced but they can never be eliminated.

Also (and maybe I should start another thread on this), I’ve always been curious about the rationality assumption that economists rely on in their development of explanations/theories/models of economic behavior. For the most part, the logic underlying the rationality assumption is persuasive. However, I’ve always have had a nagging suspicion that there’s something not quite right. For starters - what exactly is meant by rationality? On what basis is a given activity (never mind economic activity) considered to be rational? Mighten some activities be rational in one context and irrational in another? And how does the rationality assumption fit within a framework where sub-optimal outcomes are the norm or desirable?

I should point out that the last paragraph isn’t necessarily directed at you js_africanus for some kind of response (others may chime in if they wish). It’s more along the lines of a public musing on my part. As I said, I may start another thread regarding the concept of rationality.

Final Note: pantom - keep a running tab on the Krispy Kreme account. I may just have to pony-up to it sometime in the near future. :wink: Oh, and nice reference to Braudel - I really like his stuff as well (been a while since I last read him, though).

134

But you see I think you have confused total rat consumption with individual rat consumpsion. If you lose the first 2 rats you catch doesn’t the cost of feeding yourself go up? How does this not change the market?

Also, why complicate things this way. If one person can catch more rats than the other, why don’t I simply offer to kep your hut in good order in exchange for some rats. Or perhaps I could exchange fish, or coconuts, or I could sharpen your extra spear. It seems unescessarily complicated to introduce some omnipotent god to move resources around this way.

135

Yes, it is. Which is why Bush is going to get his ass kicked in the next election. I must say, for a non-U.S. citizen living up in Canada, you certainly seem to have some strong opinions regarding our politics and economy! Unfortunately, many of them are based on insufficient facts, heresy, media headlines and/or rumor. For instance, did you take the time to read the link I provided previously to Pervert on how the employment numbers are manipulated? If you did, then you wouldn’t be able to contend that the 5.6% number you quote has much meaning.

I’d suggest that you can fill in some of the blanks about our economy by taking some time to read the articles here. Of course, if you’d rather just continue shooting from the hip…

136

No, it isn’t.

Let’s not go there shall we?

Odd, given the gesticulating I’ve seen in this thread, I was going to accuse you and a couple others of the same thing. I refrained from doing so until now.

Well, I did. I asked you a simple question about it and you have not answered. If there anre literally millions of people who have fallen off of the civilian work force over the last several decades, where are they? Shouldn’t we have teeming millions starving in the streets?

137

Voters here and therefore Congress, don’t like to cut spending. We won’t do it until there isn’t any other option. Although California is running the biggest deficit a state has ever seen, voters here, fearing spending cuts, recently okayed even more debt by approving a 15 billion bond issue (25-30 billion to paid it back) and 12 billion school bond (20-25 billion to pay back) rather than entertain immediate cuts in the budget.

As to your comment about corporate tax loss carry forwards, yes they can do that. However, most of the companies that lost a lot of money are no longer in business. And due to the mess of a tax code that the U.S. has, corporations can make a profit and yet like Hollywood with films, make it look like they lost money. So the recession excuse you provide is of no value. The point is, as the charts and links I provided show, corporations are paying taxes at nearly the lowest number since the 1930’s. For fiscal years (ending Oct 1), corporate taxes were only 1.2% of the economy (see http://www.ctj.org/html/corp1003.htm).

And here’s an interesting chart comparing the taxes the average family of 4 making 30k pays vs. 10 large corporations - http://www.pbs.org/now/politics/taxes_pop/index.html

I’m curious, since you live in Canada, what percent of your economy is paid for by corporate taxes?

138

I think I have taken the time to fairly and honestly try to answer most everything you’ve posted. But this question, IMO, was meaningless, shrug. I don’t know where you live or what you may be seeing in your area.

However, there are a lot of people, like myself, living on our savings and IRA’s, losing their houses and moving in with friends & family or worse living out of their cars or a shopping cart. Then there are many people who are only able to find part-time or low paying work and while not out on the streets, are living below the poverty level. Every business magazine has written stories on this. There are many links available on the web covering this subject. The local papers here regularly run stories on this. If you choose to live in your own private reality and not read the stories written, there isn’t anything I can do about that.

139

iamme99 said:

But I just gave you a whole bunch of hard data, backed with cites, which shows that by any historical measure we have the economy is actually doing pretty well. Sure, there are problems. There always are. Twenty years ago the domestic auto industry was in collapse, and Japan’s real estate bubble was producing so much cash that they were buying up real estate and other U.S. capital at remarkable rates. That stuff corrected itself. Before that, there was stagflation, double digit interest rates, and a long period of low growth. Every era has its economic problems. Historically speaking, the ones we currently face are not that bad.

That doesn’t mean that we shouldn’t worry or plan for the future. Specifically, we’re headed for a fiscal melt-down when the baby boomers retire. But again, it’s a problem that can be dealt with.

The U.S. is the goliath that affects us all, so we all have opinions about it. Peter Jennings is a Candian. Mark Steyn is Canadian. Christopher Hitchens is a brit. There is no shortage of non-Americans commenting on and trying to influence American policy. If you feel strongly about Canadian policy, I welcome your input.

Heresy? Just what opinions have I offered are heretical? Is there a stoning in my future?

I’ve been backing up my statements with solid cites. My arguments come from accepted economic fundamentals. Yours on the other hand, seem to be based on insufficient facts, media headlines, and/or democratic spin.

Yes, I have. And that accusation has been flying around for as long as there have been employment numbers. And it cuts both ways. For example, the household survey that shows a lot of people not looking for work can mean several things. One is that a lot of people have decided to go back to school. In fact, there is good evidence that this is the case - after a few years in decline, college enrollments are starting to pick up.

Another possible factor in the household survey gap is that the grey and black markets are growing. I personally know two people who are making a living selling stuff on eBay. Another person I know makes a living doing web design on a casual basis and supplementing that income with things like ebay sales. He’s one of those people that would show up as someone who has ‘given up’ looking for work.

In any event, the gap between the two numbers isn’t THAT big. Even if we counted all those who stopped looking for work in the traditional job market as unemployed, it would only push the number up by a small amount.

Here’s a thought: How about we try to standardize the measurement of unemployment rate across numerous countries to see how they stack up against each other? The OECD does that. And if you’ll notice, the U.S. is WAY lower than the Euro area, and much lower than the average for all 30 OECD member nations. The U.S rate at 5.6% is lower than Canada’s 7.4%, and Germany and France are hovering up near 10%! And look at the rate of change: The U.S. drop in unemployment of .2% over the past year is double the OECD average, and the Euro zone has actually seen unemployment get worse.

Or have a look at this GDP data. Notice something? GDP growth in the United States is outstripping 29 of the 30 OECD member states.

This is not the kind of data that should evoke gloom-and-doom scenarios. But I can undertand how you might get that impression if you read the Democratic press - they have a vested interest in making things look as bad as possible, because the only way they can be elected is to show that Bush is a failure. So if you want the real picture, I suggest you read something a little less biased.

140

And do you realize that the ‘poverty rate’ in the U.S. is over twice the world average income? That’s the effect of that golden goose again.