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Changes in Tax Codes Versus Changes in the Value of the Dollar: The Arithmetic of Competitiveness Print
Friday, 10 December 2010 05:29

The NYT tells us that cutting corporate taxes is:

"a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness."

Corporate profits are equal to about 16 percent of the value of output in the corporate sector. Businesses pay roughly a third of their profits in taxes, which means that taxes are equal to about 5 percent of the value of output. If taxes were reduced by 20 percent, a very large tax cut, then this would reduce the cost of doing business in the United States by 1 percent relative to foreign countries.

Suppose the dollar falls by 10 percent against other currencies. This would reduce the price of goods produced in the United States by 10 percent relative to goods produced elsewhere in the world, or ten times as much as the boost to competitiveness that businesses would receive from even a very large reduction in tax rates.

It is understandable that businesses would claim that cutting their taxes is important for U.S. competitiveness. People often make false claims in order to enrich themselves. However, newspapers are not supposed to simply accept such claims as being true and present them to their readers this way.

 
TARP Repayment and Legalized Counterfeiting Print
Thursday, 09 December 2010 06:07

The news outlets that insisted Congress approve TARP or the world will end have been anxiously touting the prospect of repayments and possible profits for the taxpayers from one-time basket cases like Citigroup and AIG. It is worth noting that the question of the government showing a profit or loss on its loans to these companies has little to do with whether the bailout was a net benefit to taxpayers.

Suppose the government uncovered a counterfeiting operation. Instead of shutting it down, suppose it allowed the counterfeiters to print $1 trillion in counterfeit money and buy up the stock of legitimate companies. The counterfeiters would then give ten percent of this stock, worth $100 billion, to the government and shut down their counterfeiting operations.

By the TARP accounting logic, the taxpayers made $100 billion on this deal. In reality, the counterfeiters were allowed to lay claim to $900 billion of the country's wealth based on their counterfeit currency.

The situation with the TARP is similar. Through the TARP and the much larger Fed lending operations, the Wall Street banks were able to borrow money at far below market interest rates. This allowed them to make substantial profits at the peak of the financial crisis. They are now using the profits made with government funds to repay the government with interest. However, the shareholders, creditors, and top executives of these banks are now far richer than they would be if they had not been given access to public money at below market rates.

To imply that this situation has profited the taxpaying public as a whole because the loans have been repaid is extremely misleading, just as it would be inaccurate to imply that the country had benefited by getting a cut of the counterfeiters' profits. 

 
China's Per Capita GDP is About $7,400 Print
Thursday, 09 December 2010 05:51

This is relevant because the Washington Post printed the assertion from Xie Zhenhua, China's chief negotiator at the climate talks in Cancun Mexico, that China's per capita income is $3,700. According to the CIA Factbook, China's per capita income in 2009 was $6,700 a year and it has grown by more than 10 percent over the last year.

Of course the rest of Mr. Xie's comments are accurate. China is a developing country that still has a per capita income that is less than one sixth that of the United States. It also did not play an important role in creating the problem, unlike the United States and wealthy European countries who have been spewing large amounts of carbon dioxide into the atmosphere for decades.

 
Thomas Friedman Advocates Higher Unemployment Print
Thursday, 09 December 2010 05:11

New York Times columnist Thomas Friedman apparently believes that higher unemployment will make the United States better able to compete with highly educated workers in China and India. This is the logical implication of his argument that the United States should stop accumulating debt.

If the United States reduced its deficit in the current downturn, it would reduce demand in the economy, thereby leading firms and/or governments to lay off more workers. Friedman does not indicate why he believes that higher unemployment will make U.S. workers more competitive internationally.

He seems to think that the government's debt poses a problem. Of course the Federal Reserve Board can simply buy and hold debt incurred in a downturn like the present. In this case the debt creates no interest burden since the interest would be paid to the Fed which then refunds it to the Treasury at the end of the year.

While this practice could lead to inflation in more normal times, this is not an issue at present, when a somewhat higher inflation rate would be desirable in any case. Japan's central bank holds an amount of debt that is close to the size of its GDP ($15 trillion in the case of the United States) and it is still experiencing deflation. The Fed could raise reserve requirements at some future point if inflation threatens to be a problem.

There is no good economic argument for wanting to see a lower deficit at present. Apparently Friedman has some other rationale for wanting a lower deficit.

 
The Washington Post Gives Its Readers a False Lesson to Push Its Deficit Agenda Print
Tuesday, 07 December 2010 16:48

In a news story the Post told readers:

"The fiscal crisis sweeping Europe, in which Ireland and Greece have already needed bailouts and Portugal, Spain, and Italy could come next, offers the United States a brutal lesson. By the time the bond market turns on a country - when investors demand higher interest rates or refuse to roll over debt at any price - policymakers have no good options left.

"When that day arrives, a government has little choice but to slash budgets or raise taxes if it wants to satisfy financial markets. But those actions make an already miserable economic situation worse and tend to be vastly unpopular, costing politicians their jobs. Just ask the Irish, who are in such a cycle now."

Actually this is not a story that the United States should ever face -- contrary to the Post's sanctimonious lesson for its readers. Unlike all the countries on its list, the United States has its own currency. This means that, in a worse case scenario, Congress could have the Fed buy government debt. This could create a problem of inflation, but it would not lead to a crisis of type that the article is describing.

The Post's misrepresentation here would be comparable to telling someone living in a steel high-rise that the fire in the straw house across the street shows what happens when you aren't careful with matches. While fire can also harm a steel high-rise, the nature of the risk is qualitatively different than the risk faced by someone living in a straw house. It is wrong to imply that the two risks are the same, as the Post asserts in this piece.

 
The Tax Deal and Stimulus Print
Tuesday, 07 December 2010 03:47

The NYT reported that the cost of the compromise on extending the Bush tax cuts will be approximately $800 billion over two years. It notes that this amount is similar to the cost of President Obama's stimulus package.

It is important to realize that most of the money in this package is maintaining tax cuts in place that were scheduled to expire. This will prevent tax increases from having a contractionary impact on the economy, however there is very little, if any, net stimulus in this package compared with current levels of taxation and spending.

 
Robert Samuelson Never Heard of Productivity Growth Print
Monday, 06 December 2010 05:59

That is what readers of his column today must conclude. He insists that the United States and European countries can no longer afford their current welfare states because of an aging population.

This might be true if there was no productivity growth. However, unless something incredibly bizarre happens, the economy will continue to see productivity growth in the neighborhood of 2.0 percent annually. This means that in 2045 output per worker would be almost twice as high for each hour of work as it is today. This rise in productivity would allow large increases in both the generosity of the benefits provided for retirees and also the living standard of the working population.

 

 
Does the Post Pay Its Staff to Use the Term "Free-Trade"? Print
Saturday, 04 December 2010 09:24

It seems that way since the Post used the term 8 times, including in the headline, in an article that reported on the proposed U.S.-Korea trade pact. (The NYT only found the need to use it once in its article.)

We know that newspapers ordinarily like to save space, which makes it hard to understand why they insist on using the term "free-trade" when they discuss trade agreements which increase protection in many areas. Specifically, deals like the U.S.-Korea trade pact currently in the news enhance protection for patents, copyrights, and other forms of intellectual property claims. They also do not free all trade, leaving in place most of the barriers that protect highly paid professionals (e.g. doctors, lawyers, and economists) from their lower paid counterparts in other countries.

For this reason, these trade deals cannot be accurately called "free-trade" pacts. It is true that these deals generally include the term "free-trade" in their name, but that is not a reason for neutral media outlets to adopt this favorable characterization. In the 1980s President Reagan dubbed the controversial MX missile system, the "Peacemaker." Media outlets did not follow his lead and begin referring to the missile with this term; there is similarly no reason why they should now be referring to trade agreements as "free-trade" agreements, when they clearly are not. 

 
The Jump in Temp Employment in November Print
Saturday, 04 December 2010 09:14
The NYT noted the increase in employment of temporary workers by 45,000 in November. This was by far the most rapid job growth in any sector. In attempting to interpret this rise it is important to keep in mind that temp employment rose by 107,000 last November. It seems as though many stores are opting to fill their seasonal demands for labor with temp employment rather than hiring workers who they may expect to keep on permanently after the holidays, however the pattern is less pronounced this year than last.
 
News of Falling House Prices Makes it to the NYT Print
Saturday, 04 December 2010 09:10
Floyd Norris has a nice piece reporting on the recent patterns in house prices. He notes that the sharpest run-up in prices occurred at the lower end of the market and that these houses have also seen the sharpest price declines and that this process is continuing now.
 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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