The president has launched a war on Americans' Second Amendment rights.Really? Because he wants to restore what Sarah Brady pushed for – effective background checks? That makes Barack Obama “the most radical man ever to occupy the Oval Office”? Did Ms. Cheney forget about how even Ronald Reagan supported the Brady Bill? Who knew the patron saint of conservatives was such a radical!
Tuesday, April 2, 2013
Doesn’t Liz Cheney Know That Reagan Supported the Brady Bill?
Liz Cheney wrote another rant, which has been ably critiqued by Jonathan Chait,
Aaron Carroll, and Paul Krugman. Much of their takedowns relate to Cheney’s batshit insane comments about ObamaCare but let’s also look at this:
Sunday, March 31, 2013
Mankiw’s Mistakes on the Long-Run Debt Issue
Greg Mankiw wants to lecture the President on fiscal sustainability. Alas, his op-ed is full of errors starting with:
Representative Paul D. Ryan, chairman of the House Budget Committee, has a plan to balance the federal budget in 10 years.Should we just fall out of our chairs laughing at such an incredibly absurd statement? Ryan wants to cut tax rates but assume a level of tax revenues that is over $500 billion a year above what many analysts suggest. And I have a plan to replace Tim Duncan as the center for the Spurs even though I’m only 5 feet 6 inches. And then we get these canards:
With the exception of a few years starting in the late 1990s, when the Internet bubble fueled an economic boom, goosed tax revenue and made President Clinton look like a miracle worker, the federal government has run a budget deficit consistently for the last 40 years.Internet bubble? Mankiw really seems to hate that the Clinton years, which started with the 1993 tax rates increases, had better economic performance that either the Reagan-Bush41 years or the Bush43 years. As far as the deficit being positive for all these other years, he should read what both Milton Friedman and Robert Barro were writing on the deficit back in 1979 and 1980 – that being that the debt in inflation adjusted terms was falling. Hey – I don’t mind a conservative economists lecturing the President on fiscal policy if he gets the facts right. This op-ed, however, fails to get a few key facts right.
Saturday, March 30, 2013
Trade Prospects for Cyprus
The question of what would happen if Cyprus were to leave the euro with a sharply devalued national currency has been much debated in recent days. Krugman and others arguing for it note that nations outside the euro such as Iceland recovered better from banking crises after a year or two lag than those tied to broader currencies. Argentina may have had a GDP decline of 10% the year it unhooked from the dollar with a massive devaluation, but grew well after that. For Cyprus to gain from a devaluation, although it looks likely Cyrpus will stick with the euro, its exports would need to surge.
As it is, Cyprus is a very open economy. Of its 24 billion euro GDP, nearly 40% is exports. Important sectors in this are refined petroleum products, agriculture, particularly citrus fruits and potatoes, semin-conductors, pharmaceuticals, and some textile products. However, Cyprus has traditionally run a trade deficit in most years. Greece has been by far the leading destination of exports as well as supplier of imports. Egypt and Germany are second and third as export destinations, with China and Israel second and third for import suppliers.
While it is not part of the trade account, important to the current account is tourism, which is about 10% of GDP and is the largest single sector of the Cypriot economy. Certainly a surge of tourism would be necessary to prop up the economy in the case of a devaluation. Russians, British, Germans, and Swedes are the top tourists, although Russians might be less inclined to come after being hit for uninsured deposits in Cyrpriot banks.
Further down the road is the prospect of natural gas production and exports. There are mixed accounts of how much natural gas there is, but it may be as much as $400 billion worth. However, there are several caveats. One is that this is not likely to get into production prior to about 2020. Another is that there are disputes over who owns portions of the large gas field of the Eastern Mediterranean, with this getting tangled up in international politics.
In particular, the matter of relations with Turkey are very important. Part of the problem is the ongoing split of Cyprus, with Turkish-dominated northern Cyprus claiming a portion of the fields. But there is also the matter of markets for the gas, particularly with rising production in the US. The obvious market is Turkey itself. That Turkey and Israel have recently made up does not help Cyprus in this either.
Indeed, there is a not-so subtle view that part of why the Eurozone leaders are being so hard on Cyprus has been in fact that Greek-dominated Cyprus is viewed as the holdout on resolving the long-running division of Cyprus that many in Europe would like to see resolved. It may well be, that whatever Cyprus does about the euro, it will need to make peace with Turkey and the northern part of itself if it wishes to fully develop and sell its natural gas down the road. Maybe peace in a part of the Eastern Mediterranean may well yet be one outcome of this financial crisis that has hit Cyprus so hard.
Barkley Rosser
As it is, Cyprus is a very open economy. Of its 24 billion euro GDP, nearly 40% is exports. Important sectors in this are refined petroleum products, agriculture, particularly citrus fruits and potatoes, semin-conductors, pharmaceuticals, and some textile products. However, Cyprus has traditionally run a trade deficit in most years. Greece has been by far the leading destination of exports as well as supplier of imports. Egypt and Germany are second and third as export destinations, with China and Israel second and third for import suppliers.
While it is not part of the trade account, important to the current account is tourism, which is about 10% of GDP and is the largest single sector of the Cypriot economy. Certainly a surge of tourism would be necessary to prop up the economy in the case of a devaluation. Russians, British, Germans, and Swedes are the top tourists, although Russians might be less inclined to come after being hit for uninsured deposits in Cyrpriot banks.
Further down the road is the prospect of natural gas production and exports. There are mixed accounts of how much natural gas there is, but it may be as much as $400 billion worth. However, there are several caveats. One is that this is not likely to get into production prior to about 2020. Another is that there are disputes over who owns portions of the large gas field of the Eastern Mediterranean, with this getting tangled up in international politics.
In particular, the matter of relations with Turkey are very important. Part of the problem is the ongoing split of Cyprus, with Turkish-dominated northern Cyprus claiming a portion of the fields. But there is also the matter of markets for the gas, particularly with rising production in the US. The obvious market is Turkey itself. That Turkey and Israel have recently made up does not help Cyprus in this either.
Indeed, there is a not-so subtle view that part of why the Eurozone leaders are being so hard on Cyprus has been in fact that Greek-dominated Cyprus is viewed as the holdout on resolving the long-running division of Cyprus that many in Europe would like to see resolved. It may well be, that whatever Cyprus does about the euro, it will need to make peace with Turkey and the northern part of itself if it wishes to fully develop and sell its natural gas down the road. Maybe peace in a part of the Eastern Mediterranean may well yet be one outcome of this financial crisis that has hit Cyprus so hard.
Barkley Rosser
Friday, March 29, 2013
The Washington Post Does Not Understand Effective Tax Rates
Darla Cameron and Jia Lynn Yang want to report on how US multinationals are shifting profits to foreign tax havens but their key statistic is the ratio of US tax expenses to worldwide profits:
A Washington Post analysis of data compiled by Capital IQ found that in the late 1960s and early 1970s, companies in the current Dow 30 routinely cited U.S. federal tax expenses that were up to half of their worldwide profits. Now, most are reporting less than half that amount. The reason? The slow but steady transformation of the American multinational after years of globalization. Companies now enjoy an unprecedented ability to move their capital around the world, and the corporate tax code has not kept up with the changes. Across industries, virtually every major U.S. firm has seen the rate of its tax contributions plummet, at least according to publicly available financial statements.Let’s consider two very different situations. Company A has mostly US activities but has shifted its intangible assets to a Cayman affiliate. If half of its profits are attributable to intangible assets, then not only has its US tax expenses dropped below 20%, its effective tax rate is also below 20%. Company B does not create much in the way of intangible profits but has half of its activity in high tax Europe. Its effective tax rate – calculated as worldwide tax obligations relative to worldwide income – is still high even though its US taxes are likely less than 20% of worldwide profits. Company A is involved with the kind of transfer pricing manipulation that the press should be complaining about. Company B is not. But this statistic cannot distinguish between the two very different situations.
Wednesday, March 27, 2013
Why Won't Cyprus Obey Krugman?
Longtime euro-critic, Paul Krugman tells Cyprus, "Leave the euro. Now." http://krugman.blogs.nytimes.com/2013/03/26/cyprus-seriously . He recognizes that it will probably not do so, but reasonably invoking the deep recession of neighboring Greece, he argues that they should leave before they end up like Greece. The question then arises, why are they not likely to do so, and for that matter, why has not Greece done so?
A lot of it of course is some sort of desire to "belong to Europe" and all that, which strongly influences both Greece and Cyprus, and continues to attract such possible joiners as Poland, which Krugman accurately notes did better than any other nation in Europe while not being in the euro during the Great Recession. Sweden also did well staying out, atlhough the UK is not such a great example. But, I think that there may be an economic fear that while probably overblown is not totally irrational. It is the fear of a possible major collapse in living standards from the likely massive devaluation that would arise if they were to get out (which as Krugman also notes, would not be all that easy to do).
The fact is that Cyprus is a very open economy, with imports running about 1/3 of GDP. A very major drop in the value of a new Cypriot currency would sharply increase the cost of living for Cypriots, and while the unemployment rate would certainly rise a lot, the entire citizenry would experience the potentially sharp decline in the standard of living. While this devaluation might make it easier for Cyprus to recover several years down the road, that recovery would indeed be several years down the road, and in the meantime there would be a lot of pain for the entire citizenry that will not happen if they stay with the euro.
The poster boy for this fear might be Argentina in 2001. The inflation rate went from actually negative just before the unpegging from the dollar to as high as 44% in 2002. The value of the peso fell to about 1/4 of what it was before, and while imports were only 22% of GDP, there was a massive short-term decline in living standards, with many middle class people at least temporarily thrown into poverty. That Cyprus would be moving off a long-in-place peg in a crisis environment suggests that it could experience a devaluation as bad as Argentina's or even worse.
OTOH, there is Iceland, a fave of Krugman's. Now they were floating, so not delinking from a longstanding peg. But in some ways they were arguably more vulnerable than Argentina or Cyprus, with imports running at 40-50% of GDP. After the 2008-09 financial collapse and banking crisis there, with many similarities to the Cyprus situation, their currency fell by more than half against both the dollar and the euro, but not by nearly as much as the Argentine peso fell. Inflation spiked from only around 2% to over 12% for two years in a row. They also had a recession, with the unemployment rate doubling, although that does not look all that much worse than what has happened in quite a few other European countries, and certainly not as bad as in Greece. But then, just as Argentina recovered after several years, so has Iceland's situation improved noticeably, although not all the way back to where it was before the crash.
Curiously, the more likely countries to see voters support an exit from the euro might well be some of the larger ones whose exit would be far more damaging to the euro itself (although some might disagree with that and say "good riddance"). The obvious case is Italy, where a majority of voters just supported candidates who at least criticized austerity policies imposed from outside, even if not necessarily supporting an exit from the euro (Grillo does, but Berlusconi has not so far). But such countries would probably not be hit as hard as Cyprus or Iceland or even Argentina for the simple reason that imports are smaller compared to GDP than in those smaller economies. A large devaluation, and it might not be as large anyway, would not impact the immediate cost of living as severely as happened in either Argentina or Iceland, or probably what would happen in either Greece or Cyprus.
Barkley Rosser
A lot of it of course is some sort of desire to "belong to Europe" and all that, which strongly influences both Greece and Cyprus, and continues to attract such possible joiners as Poland, which Krugman accurately notes did better than any other nation in Europe while not being in the euro during the Great Recession. Sweden also did well staying out, atlhough the UK is not such a great example. But, I think that there may be an economic fear that while probably overblown is not totally irrational. It is the fear of a possible major collapse in living standards from the likely massive devaluation that would arise if they were to get out (which as Krugman also notes, would not be all that easy to do).
The fact is that Cyprus is a very open economy, with imports running about 1/3 of GDP. A very major drop in the value of a new Cypriot currency would sharply increase the cost of living for Cypriots, and while the unemployment rate would certainly rise a lot, the entire citizenry would experience the potentially sharp decline in the standard of living. While this devaluation might make it easier for Cyprus to recover several years down the road, that recovery would indeed be several years down the road, and in the meantime there would be a lot of pain for the entire citizenry that will not happen if they stay with the euro.
The poster boy for this fear might be Argentina in 2001. The inflation rate went from actually negative just before the unpegging from the dollar to as high as 44% in 2002. The value of the peso fell to about 1/4 of what it was before, and while imports were only 22% of GDP, there was a massive short-term decline in living standards, with many middle class people at least temporarily thrown into poverty. That Cyprus would be moving off a long-in-place peg in a crisis environment suggests that it could experience a devaluation as bad as Argentina's or even worse.
OTOH, there is Iceland, a fave of Krugman's. Now they were floating, so not delinking from a longstanding peg. But in some ways they were arguably more vulnerable than Argentina or Cyprus, with imports running at 40-50% of GDP. After the 2008-09 financial collapse and banking crisis there, with many similarities to the Cyprus situation, their currency fell by more than half against both the dollar and the euro, but not by nearly as much as the Argentine peso fell. Inflation spiked from only around 2% to over 12% for two years in a row. They also had a recession, with the unemployment rate doubling, although that does not look all that much worse than what has happened in quite a few other European countries, and certainly not as bad as in Greece. But then, just as Argentina recovered after several years, so has Iceland's situation improved noticeably, although not all the way back to where it was before the crash.
Curiously, the more likely countries to see voters support an exit from the euro might well be some of the larger ones whose exit would be far more damaging to the euro itself (although some might disagree with that and say "good riddance"). The obvious case is Italy, where a majority of voters just supported candidates who at least criticized austerity policies imposed from outside, even if not necessarily supporting an exit from the euro (Grillo does, but Berlusconi has not so far). But such countries would probably not be hit as hard as Cyprus or Iceland or even Argentina for the simple reason that imports are smaller compared to GDP than in those smaller economies. A large devaluation, and it might not be as large anyway, would not impact the immediate cost of living as severely as happened in either Argentina or Iceland, or probably what would happen in either Greece or Cyprus.
Barkley Rosser
The Reason for Higher Education
Let me turn the microphone over to Adam Smith:
"A knowledge of science and philosophy is the great antidote to the poison of enthusiasm and superstition."
"A knowledge of science and philosophy is the great antidote to the poison of enthusiasm and superstition."
Tuesday, March 26, 2013
Dishonest Data, the Draghi Edition
The ability to be publicly, unashamedly dishonest is a great attribute. Most of us just assume that others will either be honest or will at least show embarrassment and remorse if they are unmasked. The few who are entirely without scruples, who don’t care whether others can see through their dishonesty or not, possess the key to power, since the normal constraints don’t work on them. They can go on doing and saying whatever they like until someone forcibly stops them. Have you noticed that a lot of politicians fit this description?
One who apparently follows this path is Mario Draghi, head of the ECB. We have it from Andrew Watt that il Draghi gave a presentation last week whose purpose was to show that the reason half the Eurozone is staring at a fiscal precipice is that they have been indulging their workers, giving them pay raises not justified by their productivity. Only “structural reforms” that clamp down on the pampered proletariat will do the job, he suggested.
The money graphic was this, which I have cribbed from Watt (and for which many thanks):
What does it seem to show? Portugal, France, Spain and Italy have runaway labor costs that have made them uncompetitive and are the source of their sorrows. Austria was doing fine until the financial crisis arrived and has suffered a reduction in discipline since. Only Germany is well behaved. According to news reports, Hollande attended this presentation and was struck dumb, unable to respond, as if such numbers couldn’t lie.
Of course they can, and it’s all very simple. Productivity is measured in these graphs in real terms, the market value of output per worker adjusted for changes in the price level, while compensation is nominal. Thus, a “normal” country in which wages are growing at the rate of productivity growth should show a gap between these two curves, and that pillar of rectitude, Germany, has long repressed wages below productivity growth, with drastic effects on inequality as well as price-cutting. In the distorted world of these statistics, “reform” means taking measures that will reduce labor’s share of the pie, as it has in Germany.
So what do you think? Is Draghi, who lives and breathes spreadsheets, aware of the subterfuge? And, for extra credit, do you think he cares whether this obvious fudge is found out? Will he apologize or retract anything?
Depending on your ranking of fools and knaves, Hollande does not come off very well either. How can the president of a country not know the difference between real and nominal data, or that there has not in fact been a massive shift in income from capital to labor?
Monday, March 25, 2013
The Euro Is Not Going Away: Deal With It, Folks
The eruption of crises on the eurozone periphery starting some time after the 2008 Minsky Moment led to a lot of whooping and jumping up and down by mostly US-based economists of varying ideologies who have forecast that the euro is doomed since before it was ever even adopted. They were right! It is no good! It is doomed! Among the most prominent of these are Martin Feldstein among more conservative voices and Paul Krugman among more liberal voices. But, they are wrong about it being doomed. It is not going away, and they need to deal with it.
Now, let us be clear. This does not mean that the euro is wonderful. Since 2008 we have had all kinds of examples of pain and suffering among the euro peripheral countries, the PIIGS, now to have Cyprus definitely added to their lot along with maybe Slovenia as well. Their crises have led to enforced austerity along with very high interest rates, the latter undoing the main source of gain that most of them got during the period of 2001-07 when things were more or less hunky-dory after the full introduction of the euro. Nations that had previously suffered from having high risk premia built into their interest rates saw those largely disappear. Many of the nations now suffering greatly saw substantial booms driven by easy credit during that period.
Also, the criticisms by Feldstein and Krugman and others that the Eurozone does not clearly constitute an optimum currency zone based on the longstanding literature on this topic have substantial validity. There is clearly not macroeconomic coordination. There is no unified or central fiscal policy, including a lack of zone-wide social safety nets that automatically redistribute funds from better off to worse off areas as we have in the US. Most importantly, despite the Schengen zone treaty, labor migration remains low due to linguistic and cultural barriers. The whole business is not helped by the lack of a central financial regulator as well, despite moves to make the ECB such an entity. And the outcome of all this has indeed been the pain and suffering of the deficit nations, unable to escape their recessions by devaluing.
However, for better or for worse, it is increasingly clear that the nations who use the euro are not at all likely to exit from the zone, and the leading nations and institutions of the zone are clearly set on doing what is needed to cut the deals needed to keep those who might be wanting to exit from doing so. The latest Cyprus deal is the clearest example yet, given that this tiny nation's exit from the euro probably would entail little damage to the rest of the zone. Cyprus is not Spain or Italy.
Nevertheless, those in charge of the euro have done it again, yet another muddle through, even if as is likely it will need further adjustment down the road, possibly quite soon. The trick of imposing much of the short term cost on Russians suspected of being criminals or at least shady has just made it all that much easier. Now, of course, there will almost certainly be a sharp decline in Cypriot GDP, just as in Greece and other victims. But Cyprus will not leave, and the euro will continue.
Oh, and for all those claiming that the Cypriot euro is now a different euro, that Cyprus has in effect "already left the eurozone," sorry, not so. Yes, sure, the capital controls mean that nobody in their right mind who is not a Cypriot will put any money into Cyrpiot banks. But, if one has a euro coin that was minted in Cyprus (and I note that one can identify the national origin of euro coins by the images on them), there will be no problem whatsoever in using it in Germany to buy goods there at full value. Cyprus is still on the euro, and will stay there, muddling through and all that.
Barkley Rosser
Now, let us be clear. This does not mean that the euro is wonderful. Since 2008 we have had all kinds of examples of pain and suffering among the euro peripheral countries, the PIIGS, now to have Cyprus definitely added to their lot along with maybe Slovenia as well. Their crises have led to enforced austerity along with very high interest rates, the latter undoing the main source of gain that most of them got during the period of 2001-07 when things were more or less hunky-dory after the full introduction of the euro. Nations that had previously suffered from having high risk premia built into their interest rates saw those largely disappear. Many of the nations now suffering greatly saw substantial booms driven by easy credit during that period.
Also, the criticisms by Feldstein and Krugman and others that the Eurozone does not clearly constitute an optimum currency zone based on the longstanding literature on this topic have substantial validity. There is clearly not macroeconomic coordination. There is no unified or central fiscal policy, including a lack of zone-wide social safety nets that automatically redistribute funds from better off to worse off areas as we have in the US. Most importantly, despite the Schengen zone treaty, labor migration remains low due to linguistic and cultural barriers. The whole business is not helped by the lack of a central financial regulator as well, despite moves to make the ECB such an entity. And the outcome of all this has indeed been the pain and suffering of the deficit nations, unable to escape their recessions by devaluing.
However, for better or for worse, it is increasingly clear that the nations who use the euro are not at all likely to exit from the zone, and the leading nations and institutions of the zone are clearly set on doing what is needed to cut the deals needed to keep those who might be wanting to exit from doing so. The latest Cyprus deal is the clearest example yet, given that this tiny nation's exit from the euro probably would entail little damage to the rest of the zone. Cyprus is not Spain or Italy.
Nevertheless, those in charge of the euro have done it again, yet another muddle through, even if as is likely it will need further adjustment down the road, possibly quite soon. The trick of imposing much of the short term cost on Russians suspected of being criminals or at least shady has just made it all that much easier. Now, of course, there will almost certainly be a sharp decline in Cypriot GDP, just as in Greece and other victims. But Cyprus will not leave, and the euro will continue.
Oh, and for all those claiming that the Cypriot euro is now a different euro, that Cyprus has in effect "already left the eurozone," sorry, not so. Yes, sure, the capital controls mean that nobody in their right mind who is not a Cypriot will put any money into Cyrpiot banks. But, if one has a euro coin that was minted in Cyprus (and I note that one can identify the national origin of euro coins by the images on them), there will be no problem whatsoever in using it in Germany to buy goods there at full value. Cyprus is still on the euro, and will stay there, muddling through and all that.
Barkley Rosser
The Moon Belongs to Everyone
Dorning Rasbotham, Esq., was a friend of the poor. Nay, from the bottom of his heart, he was a friend of the poor! He felt tenderly for the poor man and his family. After all, what would become of the rich if there were no poor people to till their fields, pay their rents and manufacture their goods?
Squire Rasbotham laid down the following principle in a pamphlet he published in 1780: "A cheap market will always be full of customers." Let's not waver from that principle as we consider the facts in the following table:
Squire Rasbotham laid down the following principle in a pamphlet he published in 1780: "A cheap market will always be full of customers." Let's not waver from that principle as we consider the facts in the following table:
Friday, March 22, 2013
Hours and Gases
A few years ago, the Sandwichman started wondering why nobody paid attention to the energy intensity of employment. People talk about "decoupling" GDP from energy consumption but not about decoupling work. I guess the explanation for that is that there are no half-full hourglasses there to crow about -- they're all more than half empty and getting emptier.Just yesterday I was headed to work and thinking about social accounting when the idea struck me of a "cap and trade" for hours of work. Without getting too pedantic the basic idea would be to set some aggregate "lump of labor" target, divide that figure by the adult population and then allocate the resulting number of hours credits to each adult.
Voila! Full employment! People who didn't want to work so many hours -- or at all -- could sell their hour credits to workaholics and so on. No need for a minimum wage because the price of the hour credits would set a floor for wages. Who would want to work for less than they could get by selling their hours credits to some high-paid person?
What would be the point? Getting back to the matter of the energy intensity of employment, the data show very little improvement for the U.S. over the last 30 years or so. Globally, the energy intensity of employment in 2006 was about 5% higher than it was in 1980. That means it takes about 5% more energy to power each job and of course the number of jobs has to increase roughly proportional to population. So things are not improving relatively, they're getting worse faster.
In terms of greenhouse gases, there has been a modest improvement in the U.S. over the last 20 years in emissions per hour of work. If I may put it crudely, in 2011, the average worker emitted about a ton of GHGs per week compared to about 1.12 tons in 1990. Of course the workers didn't emit the GHGs but when you look at the historical relationship between hours and emissions it's easy to get that impression. There is a very strong correlation between hours of work and GHG emission -- stronger than the correlation between population, labor force or GDP and emissions. Here's a little chart I cobbled together to illustrate:
What I see when I look at that picture is a red line (GHG emissions) that is more strongly attracted upward by the blue line (aggregate hours of work) than downward by the green line of emissions per dollar of GDP. In fact, I don't think it would be going out on a limb to say that greenhouse gas emissions are virtually yoked to hours of work.
David Rosnick of the Center for Economic Policy and Research wrote a report last month on Reduced Work Hours as a Means of Slowing Climate Change. David mentions the difficulty of reducing work hours "in an economy where inequality is high and/or growing." In his paper, he assumes that "the gains from productivity growth will be more broadly shared in the future..." and envisions taking more of those productivity gains as leisure rather than as increased consumption. He also, of course, assumes that there will be productivity gains to be taken as leisure.
Although I would agree with David's intention, his assumptions are wishful thinking. During World War II, the U.S. government rationed consumer goods. There is nothing unprecedented about the idea of rationing the privilege of emitting greenhouse gases into the atmosphere. It's just commons sense.
Overwhelming Senate Support Not to Tax Fat Profits
Sahil Kapur reports on more disappointing news from the U.S. Senate:
Thirty-four Democratic senators joined every Republican Thursday night in voting for a nonbinding budget amendment to repeal the law’s 2.3 percent sales tax on medical devices. It passed 79-20 — a victory for the powerful device industry, which has raised hell over the tax … While opponents of the fee contend that it’ll stifle innovation and cost jobs, supporters argue that it’ll have a minimal effect on employment or manufacturing, and that the device industry wasn’t singled out.I’ve seen those “studies” that claimed that the Medical Device Excise Tax (MDET) would stifle jobs. These studies were not even worth space over at the National Review. And I doubt the tax would affect employment or production that much. What it would likely do is to cut in the profits of companies like Medtronic and Johnson & Johnson. I just looked at both of their Annual Reports. Note MDET applies only to US sales and is a 2.3% on a constructive price which is tax law speak for the intercompany price between the manufacturing division and the wholesale distribution division. My guess is that the Big Four hacks representing the large medical device companies will argue that the constructive price = 50% of sales while the IRS will argue that it should equal 70% of sales. Not to get into the technicalities here but let’s assume they settle at 60% so the effective tax rate = 1.4% of sales. Medtronics had $16.2 billion in sales last year with $8.9 billion being domestic sales. So let’s assume they paid $125 million in MDET. Its profits before taxes were $4.1 billion of which they paid only 17.5% in income taxes (more transfer pricing games). So MDET represents an increase in taxes that is less than 3% of profits. Johnson & Johnson had about $12 billion in US sales of medical devices so its MDET would be around $170 million. Its profits before taxes were $13.8 billion of which they paid only 23% in income taxes. MDET represents an increase in taxes that is only 1.2% of taxes. But hey – the Senate will not stand for taxing the fat cats!
Wednesday, March 20, 2013
Cyprus, Taxes, and Russian Transfer Pricing
The Russian government is irate over the proposal to levy a tax that is almost 10 percent on Cyprus bank deposits:
For years, Russian firms -- both private and state-run -- have been using Cyprus as a tax haven. Attracted by a corporate tax rate of 10% -- half that of Russia's -- Russian investors have funneled money into Cyprus shell companies since the early 1990s. The money is then repatriated through investments in Russian ventures. Cyprus is actually the leading source of foreign investments into Russia, according to data from the Russian central bank. The tax-dodging scheme is similar to ones used by corporations and individuals from a host of nations in tax shelters worldwide.What is this tax dodge? Paul Krugman points us to a Financial Times post:
This link occurs through CIS [Commonwealth of Independent States] commodity-based shell companies that deposit transactional balances of their CIS-based legal subsidiaries engaged in oil, mineral, and metals exports, often involving transfer pricing and other tax minimization strategies.It’s interesting that some of the Big Four accounting firms had recent trainings on the new Russian transfer pricing rules Cyprus of all places. I noted a few years ago that transfer pricing related to Russian oil exports was a big deal. The Russian government has never been all that adapt at enforcing its transfer pricing rules so it is of no surprise that a lot of Russian companies have shifted income into Cyprus, which is a low tax jurisdiction. What this new tax effectively does is to raise the tax rate on these offshore funds. Russia should be less upset with this proposal and more aggressive at stopping this transfer pricing manipulation.
Who Got Iraq's Oil Ten Years After the War Started?
As of the 10th anniversary of the beginning of that war the answer is China, defnitely not the US, irony of ironies.
While the war was still in full swing, I used to post a lot about the details of what was going on in the oil sector in Iraq, possessor of the fifth largest oil reserves in the world. Most of those posts date back to when MaxSpeak was operating as the predecessor of this blog, with them unfortunately largely inaccessible, although I did sometimes here on Econospeak as well. In any case, this anniversary seems an appropriate time to revisit that issue. I shall strut a bit and note that most of what is true now, I called from soon after the war started and largely held to as the situation progressed, with a few minor amendments needed, mostly having to do with Kurdistan.
Many readers of this blog, and many very sophisticated and knowledgeable observers around the world, Juan Cole being just one example, argued from the beginning and occasionally still argue, that the war was "all about oil," or more precisely, the control of Iraqi oil. I argued that this was not the case at the proximate level, that it was about George W. Bush proving that he was more of a man, a Ronald Reagan even, than his father, who did not have the balls to go to Baghdad like Dick Cheney and other hawks wanted. But at a higher level, oil was very much the ultimate root of it because Bush, Sr. fought the first Gulf war due to there being so much oil there. He and the Saudis were afraid that Saddam was not going to stop in Kuwait, but was going to go for the whole oil well by rolling down the coast into Saudi Arabia to get al-Ghawar, by far the largest pool in the world. However, once Saddam was not only stopped from doing that, and was also pushed back from Kuwait and its large Burgan pool, there was no need to go to Baghdad since Saddam provided a useful balance to Iran, an argument made by the Saudis to both him and his son, although the son would ignore that advice, only to end up with a very pro-Iran regime in power after the war.
As it was, while there were neocons like Wolfowitz who seemed to be more concerned about Saddam's support for the Palestinians, and others who were worked up about possible links to al-Qaeda, and of course even more worked about the non-existent Weapons of Mass Destruction, there was at least one member of the administration who fit the image seen by those who thought that the war was really All About Oil, and immediate control of Iraqi oil by US oil companies. That would be then Vice President Dick Cheney, who also played on the fears about al-Qaeda. We still do not know what went on in the meeting Cheney had with oil company executives soon after the Bush administration came to power. Maybe they discussed Iraq; maybe they didn't. But Cheney clearly had in mind that US oil companies would get to make money in Iraq, and his own company Halliburton certainly made lots of money from the war, if not directly from the oil sector in Iraq. In any case, the fact that the US military went out of its way not to damage the Oil Ministry building in Baghdad in the initial invasion led many to think that this plot of Cheney's was what was key, although this was also consistent with the Paul Wolfowitz delusion that the Iraqis themselves would pay for the war like the Kuwaitis had for the first Gulf war out of their oil revenues, which most definitely did not transpire.
A curious thing at the time, despite this push by Cheney, is that the major US oil company executives did not in general join the war whooping that was going on then, and even expressed some cautious reservations. They foresaw disruption in the world oil markets and feared possible repercussions on their activities in other parts of the world. They were right about that, although it turned out that for quite a few years they made money from those disruptions, which included most significantly a major collapse of Iraqi oil production, which led to much higher oil prices and thus higher oil company profits. When I pointed all this out years ago, some commented that this proved that the conspiracy by them and Cheney was successful and that this is what they plotted. I do not know really what the oil company execs thought would happen, but I do not think this was what Cheney had in mind, who I am reasonably certain saw them at least getting preferential treatment on oil contracts, if not some more direct ownership or control of the Iraqi oil industry, none of which has remotely come to pass. And to the extent the oil motive was mentioned by anybody in the Bush administration, it was to "guarantee secure oil supplies" and thus to keep the price of oil down, not to push it up, thus harming voting American consumers.
So, more precisely, what has happened, and how do I need to modify my study and predictions about the oil sector in Iraqi Kurdistan? For what is the situation in the main non-Kurdish part of Iraq, let me quote from an article in yesterday's (March 18) Financial Times, "Hottest ticket in town cools for western groups," by Guy Chazan:
"When Iraq held its first round of postwar oil licensing in June 2009, groups such as ExxonMobil, Royal Dutch Shell and BP flocked to Baghdad for what was one of the most eagerly anticipated events in the oil industry calendar.
At the fourth round last May, none of them bid.
The poor attendance epitomizes a general disenchantment with Iraq's oil sector...the widely predicted bonanza for western oil companies in postwar Iraq has failed to materialize.
Political instability, poor contractual terms and infrastructure bottlenecks have sharply reduced the country's appeal to Big Oil. Many companies have shifted their attention to the semi-autonomous Kurdistan region, angering Baghdad."
Among those very recently has been ExxonMobil, the biggest of all the US oil companies, indeed, the biggest US company period.
In non-Kurdish Iraq, the biggest players by far are CNPC and PetroChina, both of China.
Which brings us to the question of Kurdistan. I am one who accurately warned of many of the bad things that happened in Iraq as a result of the invasion when it happened, although not all of them (not going to dredge through that whole list here). One item I did not forecast that has turned out to be more or less a good thing, and not much mentioned in the current discussions, is what happened in the Kurdish region. In contrast with the rest of Iraq, the Kurdish region is reasonably well governed and reasonably prosperous, and certainly in much better condition than when Saddam was oppressing and gassing its citizens, although there are problems and the ongoing possibility of the region getting into war with the rest of Iraq.
One of the sources of its prosperity is its growing oil industry. While all of this is declared to be illegal by the central Iraqi government, the Kurds have been arranging deals and contracts with foreign oil companies. In the beginning while the war was still going on, although largely finished in the Kurdish region, most companies stayed away due to the declarations from Baghdad. Small foreign companies made the deals, such as ones from Norway and Canada. The one US company in there was Hunt Oil, which raised some hackles at the time as one of the senior Hunts was on Bush's Foreign Intelligence Advisory Board, which led many to conclude that he was using inside information to decide that the US government was going to support the Kurds against Baghdad in the end, not something that was officially stated US policy at the time. Nevertheless the deals have continued.
Where I was wrong was that I did not foresee that eventually even Big Oil would follow, that the central Iraqi government simply never would get it together sufficiently to cut deals with western Big Oil, although some deals were made, with the large Rumaila field being co-developed by BP along with CNPC. But most, particularly the US majors, never really got in there.
As it is, most of the US majors are still not going into Kurdistan, but with ExxonMobil breaking the ice, I shall not be surprised if we now start to see some others getting in where they previously feared to tread, and Chevron is now joining the rush as well. There is no question that the Kurds are a lot easier to deal with than the bunglers in Baghdad. And other major companies and operators are in there as well, including companies that were operating in Iraq under Saddam from France and Russia, such as Total SA and Gazprom Neft.
So, there you have it. The big winners in the oil industry in Iraq are the Chinese, followed by the old Saddam era operators from France and Russia, along with upstarts from Norway and Canada. The US companies are only now beginning to get any pieces of the action, but not in the largest producing areas in the main parts of Iraq, but in the one part of Iraq that clearly can be said to be in better shape now than prior to the US invasion, the semi-autonomous Kurdish region of Iraq that was not on anybody's radar screen before as a major possible oil producing region. I am quite certain this is not what Cheney either expected or hoped for.
While the war was still in full swing, I used to post a lot about the details of what was going on in the oil sector in Iraq, possessor of the fifth largest oil reserves in the world. Most of those posts date back to when MaxSpeak was operating as the predecessor of this blog, with them unfortunately largely inaccessible, although I did sometimes here on Econospeak as well. In any case, this anniversary seems an appropriate time to revisit that issue. I shall strut a bit and note that most of what is true now, I called from soon after the war started and largely held to as the situation progressed, with a few minor amendments needed, mostly having to do with Kurdistan.
Many readers of this blog, and many very sophisticated and knowledgeable observers around the world, Juan Cole being just one example, argued from the beginning and occasionally still argue, that the war was "all about oil," or more precisely, the control of Iraqi oil. I argued that this was not the case at the proximate level, that it was about George W. Bush proving that he was more of a man, a Ronald Reagan even, than his father, who did not have the balls to go to Baghdad like Dick Cheney and other hawks wanted. But at a higher level, oil was very much the ultimate root of it because Bush, Sr. fought the first Gulf war due to there being so much oil there. He and the Saudis were afraid that Saddam was not going to stop in Kuwait, but was going to go for the whole oil well by rolling down the coast into Saudi Arabia to get al-Ghawar, by far the largest pool in the world. However, once Saddam was not only stopped from doing that, and was also pushed back from Kuwait and its large Burgan pool, there was no need to go to Baghdad since Saddam provided a useful balance to Iran, an argument made by the Saudis to both him and his son, although the son would ignore that advice, only to end up with a very pro-Iran regime in power after the war.
As it was, while there were neocons like Wolfowitz who seemed to be more concerned about Saddam's support for the Palestinians, and others who were worked up about possible links to al-Qaeda, and of course even more worked about the non-existent Weapons of Mass Destruction, there was at least one member of the administration who fit the image seen by those who thought that the war was really All About Oil, and immediate control of Iraqi oil by US oil companies. That would be then Vice President Dick Cheney, who also played on the fears about al-Qaeda. We still do not know what went on in the meeting Cheney had with oil company executives soon after the Bush administration came to power. Maybe they discussed Iraq; maybe they didn't. But Cheney clearly had in mind that US oil companies would get to make money in Iraq, and his own company Halliburton certainly made lots of money from the war, if not directly from the oil sector in Iraq. In any case, the fact that the US military went out of its way not to damage the Oil Ministry building in Baghdad in the initial invasion led many to think that this plot of Cheney's was what was key, although this was also consistent with the Paul Wolfowitz delusion that the Iraqis themselves would pay for the war like the Kuwaitis had for the first Gulf war out of their oil revenues, which most definitely did not transpire.
A curious thing at the time, despite this push by Cheney, is that the major US oil company executives did not in general join the war whooping that was going on then, and even expressed some cautious reservations. They foresaw disruption in the world oil markets and feared possible repercussions on their activities in other parts of the world. They were right about that, although it turned out that for quite a few years they made money from those disruptions, which included most significantly a major collapse of Iraqi oil production, which led to much higher oil prices and thus higher oil company profits. When I pointed all this out years ago, some commented that this proved that the conspiracy by them and Cheney was successful and that this is what they plotted. I do not know really what the oil company execs thought would happen, but I do not think this was what Cheney had in mind, who I am reasonably certain saw them at least getting preferential treatment on oil contracts, if not some more direct ownership or control of the Iraqi oil industry, none of which has remotely come to pass. And to the extent the oil motive was mentioned by anybody in the Bush administration, it was to "guarantee secure oil supplies" and thus to keep the price of oil down, not to push it up, thus harming voting American consumers.
So, more precisely, what has happened, and how do I need to modify my study and predictions about the oil sector in Iraqi Kurdistan? For what is the situation in the main non-Kurdish part of Iraq, let me quote from an article in yesterday's (March 18) Financial Times, "Hottest ticket in town cools for western groups," by Guy Chazan:
"When Iraq held its first round of postwar oil licensing in June 2009, groups such as ExxonMobil, Royal Dutch Shell and BP flocked to Baghdad for what was one of the most eagerly anticipated events in the oil industry calendar.
At the fourth round last May, none of them bid.
The poor attendance epitomizes a general disenchantment with Iraq's oil sector...the widely predicted bonanza for western oil companies in postwar Iraq has failed to materialize.
Political instability, poor contractual terms and infrastructure bottlenecks have sharply reduced the country's appeal to Big Oil. Many companies have shifted their attention to the semi-autonomous Kurdistan region, angering Baghdad."
Among those very recently has been ExxonMobil, the biggest of all the US oil companies, indeed, the biggest US company period.
In non-Kurdish Iraq, the biggest players by far are CNPC and PetroChina, both of China.
Which brings us to the question of Kurdistan. I am one who accurately warned of many of the bad things that happened in Iraq as a result of the invasion when it happened, although not all of them (not going to dredge through that whole list here). One item I did not forecast that has turned out to be more or less a good thing, and not much mentioned in the current discussions, is what happened in the Kurdish region. In contrast with the rest of Iraq, the Kurdish region is reasonably well governed and reasonably prosperous, and certainly in much better condition than when Saddam was oppressing and gassing its citizens, although there are problems and the ongoing possibility of the region getting into war with the rest of Iraq.
One of the sources of its prosperity is its growing oil industry. While all of this is declared to be illegal by the central Iraqi government, the Kurds have been arranging deals and contracts with foreign oil companies. In the beginning while the war was still going on, although largely finished in the Kurdish region, most companies stayed away due to the declarations from Baghdad. Small foreign companies made the deals, such as ones from Norway and Canada. The one US company in there was Hunt Oil, which raised some hackles at the time as one of the senior Hunts was on Bush's Foreign Intelligence Advisory Board, which led many to conclude that he was using inside information to decide that the US government was going to support the Kurds against Baghdad in the end, not something that was officially stated US policy at the time. Nevertheless the deals have continued.
Where I was wrong was that I did not foresee that eventually even Big Oil would follow, that the central Iraqi government simply never would get it together sufficiently to cut deals with western Big Oil, although some deals were made, with the large Rumaila field being co-developed by BP along with CNPC. But most, particularly the US majors, never really got in there.
As it is, most of the US majors are still not going into Kurdistan, but with ExxonMobil breaking the ice, I shall not be surprised if we now start to see some others getting in where they previously feared to tread, and Chevron is now joining the rush as well. There is no question that the Kurds are a lot easier to deal with than the bunglers in Baghdad. And other major companies and operators are in there as well, including companies that were operating in Iraq under Saddam from France and Russia, such as Total SA and Gazprom Neft.
So, there you have it. The big winners in the oil industry in Iraq are the Chinese, followed by the old Saddam era operators from France and Russia, along with upstarts from Norway and Canada. The US companies are only now beginning to get any pieces of the action, but not in the largest producing areas in the main parts of Iraq, but in the one part of Iraq that clearly can be said to be in better shape now than prior to the US invasion, the semi-autonomous Kurdish region of Iraq that was not on anybody's radar screen before as a major possible oil producing region. I am quite certain this is not what Cheney either expected or hoped for.
Tuesday, March 19, 2013
Income, GDP Growth and Double Counting
The last time I saw Jonathan Rowe was in October, 2010. I was on a writer's retreat at the Mesa Refuge in Point Reyes, California and Jonathan dropped by to borrow the pick-up truck. We got into one of those intense conversations you can only have with someone who has cared and thought long and deep about the things you have cared and thought long and deep about.
Jonathan died on March 20th of the following year. On a Saturday he came home from the gym with a fever. The fever got worse so he went the hospital. Sunday morning he died.
Last week, when I heard that Jonathan's book, Our Common Wealth, was out, I ordered a copy right away. Then I searched around on the web and pinched a galley proof so I wouldn't have to wait for the shipping. I was especially eager to read Chapter 12, "Accounting for Common Wealth" and Chapter 17, "Reallocating Time."
Back in 1995 Jonathan was one of the co-authors of an Atlantic Monthly article, "If the GDP is up, Why is America Down," a great riff on the title of Richard Fariña's novel, Been Down So Long, It Looks Like Up To Me. I don't usually hoard old magazines – in fact, I rarely even buy magazines. But I still have that October 1995 issue of the Atlantic.
Jonathan's article explained a lot of what's wrong with the economy and what's wrong with economics: "Once you start asking 'what' as well as 'how much' -- that is, about quality instead of just quantity -- the premise of the national accounts as an indicator of progress begins to disintegrate, and along with it much of the conventional economic reasoning on which those accounts are based."
Jonathan died on March 20th of the following year. On a Saturday he came home from the gym with a fever. The fever got worse so he went the hospital. Sunday morning he died.
Last week, when I heard that Jonathan's book, Our Common Wealth, was out, I ordered a copy right away. Then I searched around on the web and pinched a galley proof so I wouldn't have to wait for the shipping. I was especially eager to read Chapter 12, "Accounting for Common Wealth" and Chapter 17, "Reallocating Time."
Back in 1995 Jonathan was one of the co-authors of an Atlantic Monthly article, "If the GDP is up, Why is America Down," a great riff on the title of Richard Fariña's novel, Been Down So Long, It Looks Like Up To Me. I don't usually hoard old magazines – in fact, I rarely even buy magazines. But I still have that October 1995 issue of the Atlantic.
Jonathan's article explained a lot of what's wrong with the economy and what's wrong with economics: "Once you start asking 'what' as well as 'how much' -- that is, about quality instead of just quantity -- the premise of the national accounts as an indicator of progress begins to disintegrate, and along with it much of the conventional economic reasoning on which those accounts are based."
Sunday, March 17, 2013
Governor Christie Selling the New Jersey Lottery Off Cheap
John Celock reports on another controversy in New Jersey:
Organized labor is attacking New Jersey Gov. Chris Christie's plan to privatize the state lottery with a new ad that began airing statewide on Monday.I’ll let Governor shouts a lot do battle with this labor union as we focus on the long-run finances of this deal. The AP reports:
New Jersey is considering privatizing the state's lottery in a move that could bring the state $120 million up front….The contract to run the New Jersey Lottery, the 8th-largest in the country, would begin as early as March 2013 and last until 2029. It would be a gamble for the company. The more the lottery brings in, the higher percentage of the income the company would be able to keep. But if income projections are not met, the company would have to pay a penalty. The state estimates that a company could make more than $1 billion over the life of the contract. It's not clear how many of the New Jersey Lottery's 150 employees would lose their jobs. But the state estimated that expenses would drop to $13 million a year from the current $37 million.Another discussion notes:
The single bidder was a joint venture composed of GTECH and Scientific Games International — two lottery operating companies — and the Ontario Municipal Employees Retirement System, a large pension fund … Beginning in August, the Treasury sought proposals for a company to oversee the lottery’s sales and marketing operations. The winning company would have to pay $120 million up front and follow a state law that requires at least 30 percent of lottery revenues to be paid to the state’s social and educational programs. In exchange, the company could take as much as 5 percent of the lottery’s net income … The lottery took in $2.7 billion of revenue in the last fiscal year – about $313 for every resident of the state – with $950 million of that going to support state social and educational programs.$120 million up front is all the state government gets? $10 million per year for 17 years discounted at 4% is approximately $120 million. This is an exchange for a lottery program that generates $2.7 billion in revenue. OK – profits will be a lot less than revenues but these stories still suggest the joint venture may get $50 million a year in profits. Why does this remind me of the privatization of toll roads? A few years, I wrote about the Indiana plan to privatize its toll roads. I still think Daniel Gross got this controversy right:
What's in it for the foreign companies? Huge potential profits. Gigantic, steady profits. Toll roads are an incredible asset class … According to Cintra, the Indiana Toll Road generated $96 million in revenues in 2005, and Cintra expects a 12.5 percent internal rate of return on its investment. The heavy lifting has already been done: The state or federal governments have acquired the land and rights of way, built the roads and maintained them for years, and enacted toll increases. All the private companies have to do is deliver cash upfront, maintain the roads, and collect the windfall.The essence of his argument is that what the state received upfront from the private company that purchased these rights was far below the present value of future states receipts. Is Governor Christie playing the same fraudulent accounting with New Jersey taxpayers than Governor Daniels may have pulled in Indiana? Sure – the current state deficit falls but only at the expense of losing even more in future state revenues. And the beneficiaries will be the private companies that were allowed to rip the state off in these deals sanctioned by these Republican governors.
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