I really liked both articles, so I am going to respond to Billy's post. Jim we can discuss more over making some calzones, and Bean we can discuss more when I come up to the Great Northeast.
I just wanted to clarify why the government gives tax breaks to U.S. companies that locate overseas. At first it seems like some horrible Republican scheme to make the rich richer; it seems like some way to promote the corporate greed that is strangling the poor and American culture.
I know this is what it sounds like, but there is what I think a logical explanation for it; although Barak and Hillary would like the people of Ohio to think this is why they have lost their jobs. The explanation is that at some point it became popular for American companies to repatriate to foreign countries to take advantage of both cheap labor and lower tax rates. Many developing countries like Vietnam were able to experience high economic growth rates by creating Export Processing Zones (EPZs) or Free Trade Zones (FTZs) which are areas of the country that are designated as trade barrier free and tax free. So American companies could move there and pay no corporate taxes and could import intermediate products without paying any tariffs. In other words, they are areas of the country that literally practice free trade. As my uncle Jim pointed out, in the U.S. and all other countries, we don't really practice free trade.
The U.S. suffered not only from job losses, but also started losing a significant amount of income in the form of lost income taxes. So, the U.S. wanted to devise a way to keep these companies from repatriating. In other words, the U.S. wanted to let companies move elsewhere and still tax them. The solution was to offer them a lower corporate tax rate- i.e. give them a tax break. The idea being if we don't do this we lose their taxes and so we might as well accept less taxes rather than none.
I was not aware of Barak Obama's plan to give tax breaks to companies that stay here. In general I don't see why you wouldn't just lower the corporate tax rate to make it more attractive for companies to locate here. Part of it is that I am not a believer in all these amendments to our tax system, and am in favor of simplifying things.
But what does this mean for the strength of the dollar? Well, anything that makes it more attractive to invest in U.S. companies means that would strengthen the dollar. More prosperous U.S. companies means more foreigners want to invest in the U.S. and to do this they need U.S. dollars. This increase in demand for U.S. dollars increases the value of the dollar. I am not really sure if this answers your question.
I don't know what the impact on exports would be on more companies locating here, because the dollar may strengthen hurting exports, but we are also producing more; so I don't know what the net effect is.
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4 comments:
Starting from positive to negative:
1. Mark your calendar: Sunday April 6 it's the 5k Race for the cure (breast cancer). It's a huge event at Reid Park and it's a lot of fun, I've been twice though never running. This year, if Steve Manos runs there, I might kick my lazy butt and try to do it.
2. To make the transition to the heartless world of economics I recommend you (and all the others reading the blog) the new Freakonomics in town: Predictably Irrational by Dan Ariely (MIT) a behavioral economists describing his and others' experiments showing people making consistent mistakes. If you don't wanna spend money on it I can lend it to you.
3. My opinion about the current state of economy is that unless we're creating quickly a new bubble along the lines of "green economy" or something Hollywoodian in nature to fool the rest of the world and ourselves we will contemplate a nice deflation of the huge balloon that the US economy is, a balloon that was inflated not just by Greenspan and Bernanke but by politicians like FDR (Social Security, government backed mortgage institutions and FDIC balloon number 1), Johnson (Medicare, Fannie Mae and the other GSEs, start of the budget deficit balloon number 2), Nixon (decoupling the dollar from gold and so green light for the printing machine balloon number 3) and the list can continue, I think everybody frenetically worked for THE BALLOON, including the present president under whose watch we had nice economic growth based on people getting mortgages they don;t afford. Macroeconomists pretended they learned the lessons of Great Depression until Japan experienced the 90s (Nikkei is today 13,000, in 1990 it was 39,000! - this is one of the greatest economy of the world not some African country) Now the same macroeconomists pretend they learned both the Great Depression and Japanese lessons and so they put as much liquidity in the system as possible (lower interest rates, tax rebates, increase in Fannie Mae's limits and probably some other interesting ideas down the road) hoping to prompt the value of houses, the value of stocks and at the same time hoping that the oil, gold, food will stay unchanged and the all over in debt consumers will be able to continue their spending behavior. You need to be in Disneyland for that to happen but some macroeconomists will keep saying it's possible. My mom is paying in Romania through higher prices of gas and food Americans' living beyond means for decades mentality. It's the rest of the world that keeps interest rates high now to counteract the liquidity that the US central bank is desperately throwing into the system. It's foreign central banks and governments (usually not democracies!) that keep the balloon, not private foreign investors. No wonder the dollar is going down and it should go down much more, prices of houses should go down much more (we trumpet the beauty of markets and the demand and supply bla bla story only when prices are going up??), prices of stocks ibidem until America leaves the Fantasy land and join the rest of the world (don;t have to necessarily be the nominal prices but surely will be the real prices). That definitely means lower economic growth for everybody. I hope I am the most stupid economist in the world and my gloom picture will not become a reality. But if I am right than the Obama-Clinton-McCain is just a show, a pretty good one I admit.
One more thing: the cover of The Economist few months ago had a pic with a gun and it said: Made in America. The issue was about the current financial world problems...
Steve, when you're going to be on the market, the smart economists will be even better paid than now because it will be a huge demand for smart ideas. The check might come from Abu Dhabi or Beijing but who cares?
Hope your recovery is going well.
Some ideas (probably even more stupid than the ones you currently hear):
1. Bring 10 million of foreigners (18-40 years old) over the next 5 years that want to migrate to US, have at least high school diploma and have at least $30,000, $20,000 of which they need to spend as downpayment on housing in the US in the first 6 months from their arrival to maintain their legal status. (what would the world think if such a program would be announced?? a: Man, they are really in deep s**t if they need us so desperately)
2. "Export" retired persons. We promised you guys a happy life but we didn't mention that will be in US. So how about Uncle Sam making a deal with Abu Dhabi and Beijing: we send you some millions of people that will contribute to your economy through their demand for health care and everything else, Abu Dhabi and Beijing agree to a discount in the US debt and Uncle Sam cuts the pensions because it;s cheaper to live in China (not sure about Saudi Arabia though). A kind of deal similar with the buyouts of employees at GM. Not sure about technical details but I can foresee Citi bank being involved. It's owned more and more by Abu Dhabi anyhow.
3. Encourage even more foreigners to come and study in US and encourage them to stay here after that. That will create positive spillover effects for the ADD US generation. Move your a***s or otherwise you will have a nice job in Mongolia! Incentives matter. Or it's more sorting? See Adrian Stoian's paper:-) But what will happen with the video games market? We solve the Japan-US trade imbalance with that. Two birds shot at the same time!
4. Ask Bill, Melinda, Warren and all the others to voluntarily increase their financial contributions to NGOs and alike that focus on the US and its competitiveness in the world economy. If they don't do it than just confiscate. Uncle Sam will need to do it sooner or later anyhow. And watch out if you have gold! FDR confiscated it, who says it will not happen again?
5. To go to war or not? Greenspan said Iraq was about oil. He forgot to mention it was about the dollar too. Imagine a world in which we would import zero oil from Abu Dhabi, that world we so much dream about. Who would then buy Uncle Sam's worthless sheets of paper than? Not Americans who see their equity in the house going down at the speed of light... Or if we somehow have a collective hypnosis and we don;t wish plasmas in our bathrooms anymore? Would Beijing paint their wall with our nice green sheets of paper that happen to have some pics with presidents on them anymore? So keep the world as it is, it's a pretty good deal. We're either going to work for them or we're going to show them our middle finger. Guess which option I recommend?
Here's my question/comment. From an economic/survival of the fittest standard, it seems clear that in order to compete, businesses should go wherever they can to be the most efficient/profitbale. The argument then is that the increase in profitablity will go to the shareholders. In fact,when NAFTA was first introduced, some/most democrats were opposed to it, because they saw a loss in low and middle income jobs. Also, from a social responsibility view, they feared that border towns in Mexico would be severly hurt due to the fact all of the real money would go back to America and there would be no long term growth/sustainability of the Mexican economy. Moreover, as soon as a new country became more attractive, these towns would be become ghost towns. (Same as Walmart has done in US towns). I am not sure about this argument as China and Mexico seem to be doing better, although I guess its early. My real problem/question is the argument that the increased profits of these companies that go offshore will magically make there way down to the middle and lower class. How long does this "trickle" take? From my standpoint, it seems that when these big Multi-national Corps move offshore the corresponding increase in wealth goes to a relatively few numnber of people (i.e. executive officers, shareholders, etc.). I get that they then spend the money on lawn service, maid service, etc. and thus the lower and the middle class benefit, but I am not sure how much the wealth is actually transferred, as the disparity between the upper and lower classes seems to have widened. If I was more confident in our education system moving these corporations offshore would not bother me as much, because these jobs are generally low level jobs (manufacuring, assembly, etc.), and if educated, the US workforce could make the shift to a largely service/managerial based economy, but generally these jobs require some education.
There are some 200 million people in America. A large percentage of them need to work. The system works well when there are different types of jobs. When we are making Fords, TVs, growing corn, suing people, building houses, healing people. You get the idea. Our system works best when there is a mix of jobs, service, manufacturing, professional, agricultural. When there are various jobs then educated people and those who have a difficult time surviving in school can all make a reasonable living.But when we lose one sector, manufacturing for example, those who cannot get a college degree see their choices and chances at a comfortable life diminish. Whereas they were making $25/hour putting door hinges on Pintos, they have to settle on $10/hour keeping the grounds at your local Comfort Suites. Meanwhile, Toyota pays its workers the $25/hour equivalent in Japan, which amazingly enough is where they spend that $25. The autoworker turned custodian is now spending $15 less than he was. He can no longer afford to shop at Target and begins to shop at Wal-Mart. The guy who was making $15 at Target is now working at Wal-Mart for $7.
What has happened is really not that complicated. We have lost what were high paying manufacturing jobs to Japan,China, India etc. We are left with lower paying service jobs. The result is a much more distinct bifurcation of the wealth in America. The doctors, lawyers, investment bankers are still making their big bucks. But the blue collar worker is struggling. As long as construction was booming, they were ok. But when that house of cards inevitably failed, our country takes a hard right into high unemployent (65,000 jobs lost in February) and a much bigger chasm between the haves and the have nots. In steps the government who tries to make everyone feel good with what is way less than a bandaid. If you are losing your house to a foreclosure, $600, $1200 or whatever is not going to make you any happier in two months. On the other side of the fence, the Fed keeps lowering interst rates to make Wall Street feel better, and that has no long term affect on anything. What can we do that is not just window dressing?
Nothing. What we need to do is nothing. We need to live through the hard times as the hard times are all that will cure hard times. As the dollar weakens, all of sudden manufacturing in America makes sense. But we need to get better at what we do. We need to build the cars the American public wants. Honda has been building basically the same car for 40 years, and has been very successful. Ford for some reason cannot figure that out. And the unions have to help out. If we are going to be competitive, we cannot expect Ford to have to pay the medical bills of all its retirees from now until they die. Which means we have to fix health care. And to fix that, sorry Greg, it is going to take some sort of tort reform. And it is going to take, sorry Steven, more regulation of the insurance industry.
The problem is not simple. It is not curable by lowering the corporate tax rate. It cannot be cured by feel good, political moves like the rebate. Americans are going to have to start saving. They cannot expect their government to live within its means if they won't. And vice-versa. Everyone is going to have to make some sacrifices. Environmentalists will have to make some concessiosn. We might have to open the Alaskan preserve but only if we get a real commitment to developing alternatitive fuels. And only if Detroit starts turning out cars that get realsitic miles per gallon. Pharmaceuticals will have to lower the cost of their goods, but only if attornies agree to back off unreasonable suits. And most important, government has to quit padding its nest with graft, below board transactions that benefit croonies and governing for the benefit of their own and start working for all Americans. Our government was set up to look out for everyone, rich and poor, powerful and powerless. But how long has it been since we had a president like that? Maybe FDR.
The answer is not simple and then again maybe it is. Put the greed in the closet. Corporate greed, personal greed, government greed. We cannot all get everything we want. We need to compromise for the better good.
A little long-winded, but my back hurts like he!! and I cannot get out of this chair to do anything else.
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