Tag Archive | "unemployment"

Are Taxes in the U.S. High or Low?


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The following article by Bruce Bartlett appeared in the Economix section of The New York Times here. Mr. Bartlett has served as an economic adviser in the White House, the Treasury Department and Congress.

Historically, the term “tax rate” has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product.

By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.

The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan’s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984.

In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010.

Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.

Just last week, House Republicans released a new plan to reduce unemployment. Its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent. No evidence was offered for the Republican argument that cutting taxes for the well-to-do and big corporations would reduce unemployment; it was simply asserted as self-evident.

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of G.D.P. in revenue this year, about a third of what it was in the 1950s.

The G.O.P. says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development.

Revenue Statistics of O.E.C.D. Member Countries, 2010
If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate, which is often manipulated to make it appear that rates are much higher than they really are.

For example, Stephen Moore of The Wall Street Journal recently asserted that Democrats were trying to raise the top income tax rate to 62 percent from 35 percent. But most of the difference between these two rates is the payroll tax and state taxes that are already in existence. The rest consists largely of assuming tax increases that no one has formally proposed and that would be politically impossible to enact at the present time.

Ryan Chittum, in Columbia Journalism Review, responded with a commentary that called the Moore analysis “deeply disingenuous.”

Nevertheless, one routinely hears variations of the Moore argument from conservative commentators. By contrast, one almost never hears that total revenues are at their lowest level in two or three generations as a share of G.D.P. or that corporate tax revenues as a share of G.D.P. are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.

The many adjustments to income permitted by the tax code, plus alternative tax rates on the largest sources of income of the wealthy, explain why the average federal income tax rate on the 400 richest people in America was 18.11 percent in 2008, according to the Internal Revenue Service, down from 26.38 percent when these data were first calculated in 1992. Among the top 400, 7.5 percent had an average tax rate of less than 10 percent, 25 percent paid between 10 and 15 percent, and 28 percent paid between 15 and 20 percent.

The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.


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Morici: 4.15.11: Consumer Price Surge, Inflation Highlights Fed and G20 Impotence


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The following article was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Inflation Moves to Center Stage, Highlights Fed and G20 Impotence

Today, the Labor Department reported consumer prices were up 0.5 percent in March, driven by 3.5 and 0.8 percent jumps in energy and food prices.

This is the fourth straight month of large gains in consumer prices. While food and energy prices may be volatile, international conditions indicate commodity prices will continue surging, and the Fed’s emphasis on core inflation is absolutely misplaced.

With inflation running at 6 percent a year, it will be tough for the Federal Reserve to deny inflation and continue quantitative easing and low interest rates generally. Similarly, with unemployment likely to remain above 8 percent for the balance of the year, the Fed will find it tough to raise interest rates too much.

The U.S. economy is headed for stagflation thanks to failed banking and international economic policies that lie largely beyond the Fed’s control.

At the heart of the Great Recession and now stagflation are two dysfunctions—problems in U.S. banking, and China’s currency policy and Germany’s privileged position in the EU. For different reasons, but with the same effect, China and Germany enjoy undervalued currencies and protected domestic markets, and are creating imbalances in demand for goods, services and workers globally.

Recent banking reforms have not changed how Wall Street does business—the emphasis is still on trading instead of making sound loans. Whereas before the recession banks made reckless loans—based on the shady practice of pushing loan-backed securities on unwitting investors—now they are starving small and medium-sized businesses for the credit needed to create jobs.

Also, Beijing subsidizes imports of oil and other commodities with the dollars it obtains selling yuan to keep its value low. In the case of oil, it gives to refineries dollars it obtains selling yuan to offset the high price of imported oil. That pushes up oil and other commodity prices globally. Simply, China’s currency policy is a global inflation machine.

In combination, China’s currency policy starves its trading partners of demand for goods, services and workers with subsidized exports of consumer goods and pushes up inflation in those economies by elevating oil and other commodity prices. That makes China’s currency policy a global stagflation machine too.

This week the G20 Finance Ministers, representing the largest developed and developing countries, are meeting in Washington. And again China and Germany block progress. Instead, they prefer to lecture other countries about the genius of their policies, when those policies are nothing more than beggar thy neighbor protectionism, exporting unemployment and fiscal crisis to their trading partners.

The Obama Administration needs to give up on failed multilateral groups and lead concerted action with a few other major nations in responding directly, or as necessarily, act unilaterally to respond to Chinese and German protectionism. If not, Americans can look forward to high unemployment, damaging inflation, falling real incomes, and continuing economic woes.

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Morici: 1.21.11: Post Mortem on the U.S.-China Summit and House Republicans Health Care Repeal


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The following was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

This week President Obama made big news meeting with China’s President Hu, as did House Republicans passing legislation to repeal the recent health care reform law. Both accomplished little for the history books.

U.S.-China Summit

The summit joint-communiqué indicated the two leaders and their governments agreed to continue their relationship as it has been these last several years, and not to tackle difficult conflicts in the realms of economics (e.g., the undervalued yuan, Chinese discrimination against U.S. companies operating in China, and U.S. export prohibitions on civilian technologies with potential defense applications), human rights (e.g., political prisoners and censorship), and security (e.g., China’s air and naval buildup and the American naval near China).

That said, the summit was a big success for the two leaders. The moderate path toward China adopted by President Obama and President Hu’s meeting with U.S. CEOs shored up President Obama’s efforts to present himself to voters as moving toward the center (Americans don’t like confrontation) and as becoming more business-friendly. President Hu got the recognition China has been seeking as a world power and equal to the United States in the Pacific and on a wider global stage.

Regarding economic issues, President Obama squandered a key opportunity. Most folks that understand economics recognize China’s undervalued currency is slowing U.S. growth and contributing to U.S. unemployment and wage stagnation-the chorus includes liberals like Nobel Laureate Paul Krugman, conservatives like Ben Bernanke, moderates like Peterson Institute Director Fred Bergsten, and myself.

Over the last two years, Krugman and Bergsten have joined me in recommending offsetting U.S. actions-some kind of tax on imports or currency conversion, or currency market intervention. Bernanke cannot suggest policy responses as Chairman of the Federal Reserve-exchange rates are a Treasury issue.

The President has publically stated the United States has options if China won’t revalue its currency. Also, the United States could mirror China’s procurement and technology policies that discriminate against U.S. exports into China and sales of U.S. firms operating in China.

In the past, presidents have been politically constrained against taking action by a basic divide in the business community-U.S. firms facing import competition from China want direct U.S. action but U.S. firms established in China were satisfied enough not to want to upset Beijing with provocative U.S. initiatives.

This year matters came to a head-both groups are complaining loudly about China. President Obama could have taken a much harder line with President Hu, and carried through on actions to offset Chinese protectionism if China does not move substantially on U.S. concerns.

Instead, President Obama continued to rely on failed tactics of the past-he asked President Hu to act, and President Hu said no. President Obama facilitated a meeting between U.S. exporters and firms operating in China with President Hu, while those U.S. firms competing with imports from China got stiffed. In doing so, he helped President Hu, once again, divide the U.S. business community, but President Obama accomplished little to change China’s policies.

President Obama even let pass rather provocative statements by President Hu regarding the dollar’s status as a reserve currency. President Hu was ungracious in those comments, especially considering the treatment and help he received from President Obama.

Most of the announced new deals for U.S. exports into China were going to happen anyway and do not amount to a lot against a one trillion dollar bilateral trade deficit over the next three or four years.

On human rights, President Obama did get a small victory. For the first time, President Hu mentioned universal human rights-that concept implies sovereign governments are accountable to international norms. That is something Chinese leaders and the Communist Party have viewed as a direct affront to China’s sovereignty.  Whether President Hu acknowledging this concept results in substantive changes in Chinese behavior is another story. China’s internal treatment of dissidents goes to the heart of the Communist Party’s strategy of permitting criticism with prescribed boundaries but squelching dissent it views as destabilizing.

The summit was great theater but accomplished little for the United States, but it score political points domestically for both presidents.

Health Care

House Republicans passed a health care reform repeal bill with no meaning. It is dead on arrival in the Senate. Republicans do have the opportunity to offer amendments to the new law by attaching more modest revisions to appropriations bills or by offering more narrow legislation to Senate but they really don’t have any great ideas to offer.

Nothing the Republicans talk about really deals with the two most fundamental problems-the lack of health insurance coverage for 50 million Americans and the much higher cost of health care in the United States than in Europe. Germany and Holland, for example, have private health insurance, universal coverage and spend 12 percent of GDP on health care, while the United States has huge coverage gaps and spends 18 percent. Simply, those countries have tackled the tough cost problems-health care bureaucracies, hospital management, overuse of services, the high cost of drugs, and civil litigation. Neither the President’s new law nor what the Republicans propose to replace it effectively addresses those cost issues.

Proposals offered by Republicans come down to retreads of old failed ideas of the past-medical savings accounts, vouchers to buy health insurance, etc.

The Republicans are squandering their mandate by putting on a big show and accomplishing little.

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Morici: 1.7.11: Another Disappointing Jobs Report


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The following was written by Peter Morici, professor at the Smith School of Business, University of Maryland School.

The economy added 103,000 jobs in December. Unemployment fell to 9.4 percent, largely because 260,000 adults dropped out of the labor force and are no longer counted as unemployed by the government.

The President’s $800 billion dollar stimulus package gave the economy a lift and additional tax cuts in 2011 will help too, but those did not address structural problems holding back jobs creation—principal among those is the huge trade deficit.

Since July 2009, spending by consumers, businesses, and federal and state governments has increased at a 3.8 percent annual pace, but imports and the trade deficit have jumped 17 and 37 percent. Simply, too many stimulus dollars are being spent on goods from China, and too few of those dollars return to purchase U.S. exports.

The growing trade deficit is a tax on domestic demand that offsets much of the benefits of stimulus spending and tax cuts. Consequently, the U.S. economy is expanding at a 2.9 percent annual pace, which is not enough to dent unemployment.

Since December 2009, the private sector has added 112,000 jobs per month, but most of those have been in government subsidized health care and social services, and temporary business services. Netting those out, core private sector jobs creation has been a paltry 58,000 per month—that comes to 18 per county as compared to more than 5000 job seekers per county.

oming out of a recession, temporary jobs appear first, but 18 months into the expansion the pace of permanent, non-government subsidized jobs creation should be accelerating. Instead, core private sector jobs rose only 60,000 in December—the same as the monthly pace for 2010, and only about one-sixth of what is needed to get unemployment down to 6 percent by the end of 2013.

By the end of 2013, about 13 million private sector jobs must be added to bring unemployment down to 6 percent, and current policies are not creating conditions for businesses to hire 350,000 workers each month.

The President and new Republican majority in the House agree the budget deficit must be slashed, but whether accomplished through higher taxes or less spending, a significantly smaller budget deficit will reduce domestic demand, kill the economic recovery and push unemployment well above 10 percent, unless the trade deficit is slashed by a like amount.

Beijing’s intervention in currency markets and undervalued yuan creates a 35 percent subsidy on Chinese exports into the U.S. market. Together with high tariffs and other barriers to U.S. sales in the Middle Kingdom, the undervalued yuan is responsible for about half the U.S. trade deficit and high unemployment in the United States.

Diplomacy has failed to end China’s currency market intervention and aggressive mercantilism, and more assertive action toward China protectionism is needed to bring down the trade deficit while reducing the federal budget deficit.

Imposing a tax on the conversion of U.S. dollars into yuan in proportion to Beijing’s currency market intervention—either for the purpose of importing Chinese products or investing in China—would offset the effects of China’s currency market intervention on the U.S. economy. Such a tax would significantly rebalance trade, instigate more investment and jobs creation in the United States, and reduce federal and state budget shortfalls by increasing GDP and tax receipts.

Whatever the merits of free trade internationally and laissez faire domestically, trade with China is hardly free now. Chinese mercantilism and a U.S. government that has not answered it are victimizing too many unemployed Americans.

Imposing such a tax is a tough choice for a president who views himself a liberal internationalist, and for Republicans in Congress who view themselves as champions of free markets, but these are extraordinary times. America needs pragmatic leadership, not blind allegiance to lofty principles, textbook theories and ideology.

We must address the world as we find it, not as we believe it should be.

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How Germany got it right on the economy


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The following article by Harold Meyerson appeared in the Washington Post here.I

It may be turkey week in America, but it’s goose month in Germany. In many restaurants, you can get goose in your salad and goose in your soup to go with your goose entree. Diners fairly honk their way through November.

But then, Germans have something to honk about. Germany’s economy is the strongest in the world. Its trade balance – the value of its exports over its imports – is second only to China’s, which is all the more remarkable since Germany is home to just 82 million people. Its 7.5 percent unemployment rate – two percentage points below ours – is lower than at any time since right after reunification. Growth is robust, and real wages are rising.

It’s quite a turnabout for an economy that American and British bankers and economists derided for years as the sick man of Europe. German banks, they insisted, were too cautious and locally focused, while the German economy needed to slim down its manufacturing sector and beef up finance.

Wisely, the Germans declined the advice. Manufacturing still accounts for nearly a quarter of the German economy; it is just 11 percent of the British and U.S. economies (one reason the United States and Britain are struggling to boost their exports). Nor have German firms been slashing wages and off-shoring – the American way of keeping competitive – to maintain profits.

One key to Germany’s miracle is the mittelstand, as the family-owned small and mid-size manufacturing firms that dominate the economy are known. Last week, I visited AWS Achslagerwerk, a factory of one such firm, in the farmlands of Saxony-Anhalt, about two hours west of Berlin. As in many such companies, this factory turns out specialized products: axle-box housings for Chinese and German high-speed trains, machine tools requiring climate-controlled precision measurement. With annual revenue of 24 million euros, the factory has won a significant share of the world market, though it employs only 175 production workers.

The workers at AWS Achslagerwerk are highly skilled, and most stay with the firm for decades. When the downturn hit Germany in late 2008, manufacturing firms’ business declined the most, but subsidies from a government program called kurzarbeit allowed firms to keep their workers part time rather than lay them off. “Fifteen to 20 percent of our workers were on kurzarbeit,” Klaas Hubner, a former member of the German parliament and owner of the mittelstand company that includes AWS Achslagerwerk, told me. By keeping their skilled workers, companies like Hubner’s were able to rev up production quickly when China’s stimulus boosted the market for their products in 2009.

In America, alas, firms like Hubner’s are increasingly hard to find. The mittelstand remains blissfully immune to many pressures that share-price-oriented financial markets inflict on their American counterparts. “We don’t have short-term strategies, only long-term strategies,” says Hubner. Mittelstand companies are not publicly traded, and they benefit from an extensive system of vocational education and a sector of municipally owned savings banks that work solely with local businesses. Roughly two-thirds of German small and mid-size businesses get their loans from these banks. “Over the past decade, banking largely became a self-fulfilling activity,” says Patrick Steinpass, chief economist for the national organization of savings banks. “But our banks are restricted to doing business in their regions; they have to concentrate on the real economy.” Through such radical notions has Germany thrived.

Germany’s large manufacturers – Volkswagen, Siemens, BMW – surely feel market pressures, but they, unlike a growing number of their American counterparts, still invest quite profitably at home. In large part, that’s due to Germany’s system of co-determination, which places an equal number of union and management members on corporate boards. The German metal workers union, IG Metall, has been working with automakers to train workers, for instance, to mass-produce electric cars. “Our goal is to really retain high-value-added manufacturing in Germany,” says Martin Allespach, the union’s policy director. It’s hard to identify any group with real input into corporate conduct that’s pursuing such a goal in the United States.

Mixing social democratic values with Jimmy Stewart localism, Germany’s economy is running rings around America’s. “What we have here is stakeholder capitalism, not shareholder capitalism,” says Hubner. And like most mittelstand owners, he adds: “I live where my company is located. I want a good image in the town I live in.”

They know how to goose an economy, those Germans. Ours, by contrast, seems more and more a turkey.

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Bernanke’s `Cheap Money’ Stimulus Spurs Corporate Investment Outside U.S.


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The following article by David J. Lynch appeared at Bloomberg here.

Southern Copper Corp., a Phoenix- based mining company that boasts some of the industry’s largest copper reserves, plans to invest $800 million this year in projects such as a new smelter and a more efficient natural-gas furnace.

Such spending sounds like just what the Federal Reserve had in mind in 2008 when it cut interest rates to near zero and started buying $1.7 trillion in securities to spur job growth. Yet Southern Copper, which raised $1.5 billion in an April debt offering, will use that money at its mines in Mexico and Peru, not the U.S., said Juan Rebolledo, spokesman for parent Grupo Mexico SAB de CV of Mexico City.

Southern Copper’s plans illustrate why the Fed’s second round of bond buying may not reduce unemployment, which has stalled near a 26-year high. Chairman Ben S. Bernanke and his colleagues appear to be fueling a foreign-investment surge, underscoring the difficulty of stimulating the economy through monetary policy with interest rates already near record lows.

“You’re seeing leakage from quantitative easing,” said Stephen Wood, chief market strategist for Russell Investments in New York, which has $140 billion under management. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-U.S. opportunities.”

U.S. corporations have issued more than $1.07 trillion in debt so far this year, according to data compiled by Bloomberg. Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007, before the Fed cut the overnight bank-lending rate to a range of zero to 0.25 percent.

Korea, Chinese Companies

Sinochem Group, the Beijing-based petroleum, fertilizer and chemicals producer, sold $2 billion of 10- and 30-year bonds on Nov. 4. Two days earlier, state-owned Korea National Oil Corp., based south of Seoul in Gyeonggi, sold $700 million of five-year senior unsecured notes, according to data compiled by Bloomberg.

Corporate cash sloshing across U.S. borders is an unavoidable consequence of the Fed’s low-rate strategy, Wood said. Export Development Canada, the government agency that provides financing help for Canadian exporters, last month tapped the U.S. market for $1 billion in 1.25 percent notes. Those funds also will be available to support companies’ domestic activities, following a two-year expansion of the agency’s mission in 2009 to help businesses navigate the credit crunch.

“I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an Oct. 19 speech.

Falling Yields

Average yields on corporate bonds in the U.S. fell to 4.4 percent on Nov. 4, the lowest on record, from 10.6 percent two years ago, according to Bank of America Merrill Lynch index data.

Fisher said “far too many” large corporations told him that “the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad.” He didn’t name the companies.

Cliffs Natural Resources Inc., North America’s largest iron-ore producer, said in March that it would use part of a $400 million offering to repay debt associated with a Brazilian mining project. The Cleveland-based company owns 30 percent of the Amapa iron-ore mine in northern Brazil.

Finance Merger

PepsiCo Inc., the world’s largest snack-food maker, raised $4.25 billion in a four-part January debt offering to finance a merger with its two largest bottlers. The Purchase, N.Y.,-based multinational acquired the outstanding stock it didn’t already own in Pepsi Bottling Group Inc., which has operations in the U.S. and six other countries, and PepsiAmericas Inc., which in 2009 had more than 30 percent of its assets in Eastern Europe.

The deals were “primarily about strengthening our beverage business in North America rather than overseas expansion,” said Jeff Dahncke, a Pepsico spokesman. Even so, the company plans to invest some of this year’s anticipated $125 million to $150 million pretax savings from the transactions in “high-growth emerging markets,” according to a March 1 press release.

U.S. corporations’ overseas investment in the first half of 2010 exceeded the amount that foreign firms spent in the U.S. on factories and acquisitions at an annual rate of almost $220 billion, according to the Commerce Department. In the first half of 2006, the last year before the financial crisis, the net flow favored the U.S. at an annual rate of about $30 billion.

Outbound Investment

More than half of outbound investment this year landed in Europe, Commerce data show. In April, Valmont Industries Inc., which manufactures light poles and communication towers, issued $300 million in 10-year notes. The Omaha-based company said it would use the proceeds to help fund its $439 million acquisition of Delta PLC, a London-based maker of similar products.

The acquisition would add “highly complementary businesses to our existing businesses and significantly expand our footprint outside the United States, in fast-growing Asian markets and Australia’s strong, resource-driven economy,” Valmont said in a regulatory filing.

Such capital flows may help the U.S. economy over time by weakening the dollar and boosting exports, according to Richard DeKaser, an economist with the Parthenon Group, a Boston-based consulting firm.

“This is not unusual,” he said. “It’s not weird. It’s an integral part of monetary policy.”

Matthew Slaughter, a management professor at Dartmouth University’s Tuck School of Business in Hanover, N.H., agrees that overseas investment may contribute to growth.

‘Support or Complement’

“When U.S. companies expand abroad, that tends to support or complement what they do in the U.S.,” said Slaughter, who served on the White House Council of Economic Advisers from 2005 until 2007.

“Our focus is on domestic policy,” Eric Rosengren, president of the Boston Fed, said in a Nov. 16 interview. “Maybe on the margins, some companies are going to borrow in the United States and decide to invest elsewhere, but I’m not sure that would be my primary concern.”

There’s no mystery behind corporations’ interest in foreign markets. As the U.S. struggles to recover from the deepest recession since World War II, business prospects in other countries are brighter. The International Monetary Fund predicts the U.S. economy will grow at an annual rate of 2.3 percent next year, compared with 9.6 percent in China, 8.4 percent in India and 6 percent in Chile.

‘We’re Excited’

Dell Inc., the world’s third-largest maker of personal computers, said in August that second-quarter revenue from the four so-called BRIC countries — Brazil, China, India and Russia — rose 52 percent, compared with a 22 percent overall increase. The company anticipates spending more than $100 billion in China during the next decade, and “we’re excited about our strategic investments” there, Chief Executive Officer Michael Dell said Sept. 16.

Plans include building a manufacturing and customer-support center in Chengdu, China, and expanding Dell’s existing operation in Xiamen, the company said. The Chengdu site, scheduled to open in 2011, could grow to 3,000 workers, and as many as 500 jobs may be added in the Xiamen office.

Nine days before announcing the Chinese expansion, Dell sold $1.5 billion in 3-, 5- and 30-year notes. In regulatory filings, the Round Rock, Texas-based company said it planned to use the proceeds for “capital expenditures, advancements to or investments in our subsidiaries, and acquisitions of companies and assets.”

Company spokesman David Frink said none of the proceeds would be spent on the new Chinese facility.

“We don’t have plans to use the cash outside the U.S.,” he said.

Growth Opportunities

Stanley Black & Decker Inc., the biggest U.S. toolmaker, also is emphasizing growth opportunities overseas. In August, the company raised $400 million in 30-year bonds and said it would use the proceeds to reduce debt and for general corporate purposes. Stanley declined to elaborate, spokesman Tim Perra said.

Chief Financial Officer Donald Allan told an investor conference Aug. 31 the New Britain, Connecticut-based company would build its security business through mergers and acquisitions in Europe and Asia and saw a “great geographic expansion opportunity” in Latin America.

Issuers aren’t required to disclose where they plan to spend the proceeds from such sales. Wal-Mart Stores Inc., the world’s largest retailer, raised $5 billion last month and said it would use the money to pay off existing short-term debt and for general corporate purposes. A spokesman for the Bentonville, Arkansas-based company didn’t respond to an e-mailed question about planned investment locations.

Refinancing, Reinvesting

Tim Hoyle, vice president for research at Haverford Investments in Radnor, Pa., which manages $6 billion, said Wal- Mart is among several corporations he follows that are refinancing existing debt and reinvesting the proceeds.

“In Wal-Mart’s case, all of the reinvestment is happening in overseas markets,” he said.

That phenomenon illustrates the challenge confronting Bernanke.

“All the Fed can do is create liquidity,” Hoyle said. “What Fisher is saying is correct: The Fed has no control over how that liquidity is used.”

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Morici: 11.23.10: Third Quarter GDP Growth at 2.5 Percent: Trade Deficit Taxes Growth, Keeps Unemployment High


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The following is an article by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Today, the Commerce Department announced third quarter GDP growth was 2.5 percent. Burdened by a rapidly growing trade deficit, U.S. growth remains too slow to bring down unemployment.

Growth is too slow and unemployment is kept unacceptably high by surging imports, especially from China and Germany, which enjoy undervalued currencies.

U.S. unemployment will stay near 10 percent until governments in China and elsewhere end policies that purposely undervalue their currencies to boost exports, growth and employment by imposing slow growth and unemployment on the United States and other economies. Alternatively, Washington and others could take measures to offset their currency manipulation.

Since June 2009, the U.S. economy has expanded at a 2.9 percent annual rate. Annual growth in the range of three percent is needed just to keep the U.S. unemployment rate steady—one percentage point to accommodate labor force growth and two percentage points to offset productivity growth. Four or five percent growth is needed to pull down unemployment by one or two percentage points each year.

More than a year into the recovery, the economy should be expanding at about a 5 percent annual rate; however, growth is dragging along below 3 percent, because of the surging in imports from countries whose governments engineer undervalued currencies.

Consumer and businesses are spending again, adding 1.4 and 2.3 percentage points to the 2.9 annual growth rate. Increases in government purchases of goods and services added another 0.3 percentage points. However, too much of what consumers and businesses spend goes into imports from countries with undervalued currencies, and the growing U.S. trade deficit subtracts 1.0 percentage points from growth.

But for the growth in the trade deficit, U.S. employment would be 8.2 percent instead of 9.6 percent. Were the trade deficit cut in half, it would fall to 6 percent or less.

U.S. imports and unemployment are kept high by a dollar that is overvalued against the currencies of big exporters. These currencies are kept cheap, not by private investment in the United States financed by foreign private savings, but by purposeful government intervention in currency markets designed to bolster domestic growth at the expense of the United States and other free traders.

The worst malefactors are China and Germany. China spends 35 percent of its export revenues buying U.S. dollars to keep its yuan, and this subsidizes its sales into the United States by a like amount. This unfair advantage far exceeds the benefits bestowed by its cheap labor.

Germany benefits from an undervalued euro for its economy by being grouped with Spain, Portugal, Ireland, Greece and perhaps Italy, whose fiscal woes pull down the euro.

Were Germany on an independent Deutsche Mark, its currency would trade much higher against the dollar than the euro, Germany’s trade surpluses with the United States and its southern neighbors would be much smaller, and the fiscal woes of those southern countries would be much more manageable.

Overall, without currency realignments—especially a stronger yuan and currency reform in Europe—the U.S. economy cannot grow at the pace that will pull down unemployment and the nations of southern Europe and Ireland will need perpetual bailouts or face default on sovereign debt.

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Globalization and the Destruction of Wealth


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The following piece was posted to The Viable Energy Now Blog here.

Over the last two decades “outsourcing” has been the operative word for U.S. multi-nationals. The word stands for moving industrial production, be it manufacturing or associated services, from the U.S. to “lower cost” locations. These facilities are increasingly concentrated in China.

This practice has resulted in large U.S. trade deficits, as imports from the outsourced plants replace domestic production. These deficits have an adverse impact on our Gross Domestic Product and on the value of the dollar. They have also contributed to the rise in U.S. unemployment.

The export of American jobs abroad has been well documented and is currently becoming a focus of political activity. Much less understood is another negative impact, which can be described as the shrinkage of our national asset base, or more directly as “the destruction of wealth”.

To explain this, let us take as example a U.S. manufacturing plant, employing six hundred persons, and located in a midsize American town. The plant’s output could be domestic appliances, electronic components or car parts.

If the plant is of relatively recent vintage, it will be equipped with highly automated, energy efficient production machinery, including robots and production control computers. It will have work safety equipment per U.S. government regulations. All effluent and emissions will be treated according to environmental rules. Amenities such as air conditioning, cafeterias, showers and toilets will be up to U.S standards, which are among the highest in the world.

All the above, including the land the plant is built on represents considerable invested capital. But this is only part of the economic equation.

The plant is surrounded by “satellite” assets and activities, supported by the wages and salaries it generates. This includes housing for the employees; businesses servicing the plant; restaurants and motels; doctors’ offices, law firms, real estate agencies and shops of all kinds; schools, clinics, city administration, and firemen and police with their own buildings and equipment.
Now one day production is moved to China. The plant closes.

Both the plant and the “satellite” assets lose their value. Stores close, house prices crash, professionals, skilled workers and shop owners move out.

The Chinese plant that replaces it, built with cheap labor on land acquired at low cost, is far less valuable, and its sale value is questionable in China’s state controlled economy. Because environmental and safety rules are much looser, the associated equipment is rudimentary. So are amenities and facilities for the employees.

The same holds true for all “satellite” assets: housing, stores, administration, and services. In the process of moving the plant from America to China maybe half of the total value of the assets concerned has disappeared.

Now multiply this by the thousands of facilities that have been moved from the U.S. to “low-cost” locations. These American domestic assets have vanished, but equivalent ones have not been created elsewhere. The transfer may have lowered costs for the corporation involved, but the overall result is negative.

After the transaction the employees involved receive lower wages, live in smaller quarters, and are more at risk of work accidents. More energy is consumed per unit of output and more pollutants discharged into the atmosphere.

Wealth has been destroyed, whether that wealth is counted as individual possessions or as natural resources. China has gained some, but the U.S. has lost more. Global living standards have been brought down a notch, and the total wealth of humanity is now a bit less.

Outsourcing our national economy, while it may temporarily enrich some, in the end makes us all poorer in the aggregate. It generates less wealth for fewer people. It is not progress, but a slow, painful trip to the bottom.

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“Free Trade Under Fire” is Irresponsibly Written


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The following is a book review written by Dr. Alec Feinberg that appeared at EconomyInCrisis.org here. Dr. Feinberg is the founder of Citizens for Equal Trade and a member of the Coalition for a Prosperous America.

Free Trade Under Fire written by Douglas Irwin, Prof. of Economics at Dartmouth College, is in my humble opinion, an irresponsible biased work and a deterrent to responsible balanced trade reform. First and foremost, the title is incorrect; it is not Free Trade that is under fire by trade reformists [1, 9], rather its fundamental failure mode, the Trade Deficit and its consequences. Douglas, a supposedly leading expert on his subject matter, knows that you cannot have Free Trade without a Trade Deficit in the U.S. Therefore, as a reader, I was disappointed that Douglas skirts the issue of how large yearly trade deficits could impact the U.S. economy’s reliability over time. I would think that as a professor teaching Economics 101 he of course understands that no country can long sustain large yearly trade deficits without putting its economy at risk [2].

I am baffled as to why Douglas, a leading economists on Trade Policy, disregards key facts such as 1) these large trade deficits have now substantially increased the national debt due to constant tax losses primarily from job losses, outsourcing, and offshoring [3, 4, 5]. Such constant tax losses add to the U.S. debt burdening our citizens. This is a huge U.S. reverse tariff [4]. Yet Douglas opposes any tariffs. So left unanswered is this fact that, not only do we have massive job losses, but ordinary citizens are forced to subsidize free trade’s failures paying for these layoffs through the huge tax losses! 2) He also overlooks the fact that foreigners now own between 15 and 20% of all U.S. businesses but only employ about 3.5% of the workforce [2]. 3) This is the result of the enormous cumulative U.S. trade deficit where foreigners now own $7.85 trillion [3] more of us than we do of them, another key fact he chooses not to discuss. 4) Foreign business in the U.S. also end up paying less tax [2,4] which he does not divulge. 5) We also note that contrary to his original unemployment thesis, statistical data now available shows that countries with higher trade deficits tend to have higher unemployment [6]. 6) Overlooked is the unreliability of Free Trade. Citizens have only one life to live; they do not wish to constantly have to start over with their education process. 7) As well, unemployment government sponsored education programs add to the national debt that he fails to mention. 8) Finally, he displays total disregard for real root cause analysis, which is basic to Reliability Economics [5].

As a trade reformist and a Reliability Economist [5], I have sent emails to Dr. Douglas on many of these facts and have received no response. I have spoken to him recently on the radio [7] about the trade deficit and he suggests that Americans should save more. This in my modest opinion is akin to no answer to what America’s number one problem is [2] and what his book should be about.

The key difference between Irwin Douglas and his admired Adam Smith and David Ricardo, free trade originators, is that Dr. Douglas now has mounds of modern data that I think he is too biased to study and see more clearly how these large cumulative U.S. trade deficits are taking their toll on the reliability of the U.S. economy. Like a piece of metal that is bent back and forth, the cumulative damage will eventually show up and cause the metal to break. The economy is interrelated; Dr. Douglas disregard these long term trade deficit consequences such as increases in the national debt, greater separation of wealth, foreign ownership, America for sale, mortgage delinquencies related to outsourced job losses, etc.. All these issues he leaves behind [2] apparently choosing ideology over data.

It is a mystery why, he misleads the reader on Smoot-Hawley’s 1930 tariff failure which he does not point out was implemented at a time when the U.S. had a trade surplus even though he has now apparently written possibly a misguided book on the subject, entitled Peddling Protectionism: Smoot-Hawley and the Great Depression [8]! Tariffs are known to be most effective to balance trade when a country has some clout as a valued customer. He also feels that Smoot-Hawley Act was somewhat of a contributor to the Great Depression even though he knows most economists claim this is a myth [9]. Eager to persuade the reader, this and other comments are not put into proper perspective; rather he chooses to bias his arguments against protectionism. Still, if we agree, it does not answer the question … how to get rid of these enormous yearly trade deficits.

And what protects Americans now against cheating. WTO safeguards are not as effective as he suggests. Free trade policy actually encourages foreigners to cheat as every country wants to export America to death. Honestly, contrary to free trade theory, America is at a “Comparative Disadvantage”. Well known is unethical trade deficit problems [10] related to: Currency Manipulation, Excessive Job Outsourcing, Foreign Product Subsidies, Non tariff Trade Barriers, Lack of Intellectual Property Rights Protection, and Product Counterfeiting. Douglas knows this but seems to perpetuate the WTO as the best we can do rather than own up to the failure of “Comparative Advantage”. In my modest opinion, a good trade policy should protect American citizens. I was disappointed that he did not step outside the box and even consider the benefits of something like a balance trade policy [11], which Douglas quickly dismisses with an 18th century old Adam Smith’s ideological comment rather than look at today’s cumulative trade deficit failure data and how it is depressing our entire economy. From my point of view, Balance Trade would of course eliminate the trade deficit, not violate WTO policy, and would discourage cheating.

In my humble opinion, Dr. Douglas misses the boat on exploring the full cumulative reliability effects of the now $7.85 trillion U.S trade deficit. I doubt that even Adam Smith or David Ricardo ever really intended their theories would properly apply in the extreme case of today’s U.S. massive trade deficits, (with 59% now going to communist China in 2009). Douglas an obviously expert on Free Trade and a leading economists, should know all these facts but has chosen to write a bias ideological work wittingly misleading the public and irresponsibly perpetuating America’s destructive trade policy path.

1. Trade Reform Organizations all fighting to reduce the trade deficit: www.CitizensForEqualTrade.org, http://www.americaneconomicalert.com, http://www.prosperousamerica.org/, www.citizenstrade.org
2. Biggest Threat to America’s Future –The U.S. Trade Deficit http://economyincrisis.org/content/biggest-threat-americas-future-us-fre…
3. Trade Deficit’s Reverse Tariff Increased the U.S. National Debt – an 84% Correlation! http://economyincrisis.org/content/trade-deficit%E2%80%99s-reverse-tarif…
4. Reverse Tariff – Economic Crisis Due to Free Trade’s Flaw http://economyincrisis.org/content/reverse-tariff-economic-crisis-due-fr…
5. Feinberg, Alec. The Truth of the Modern Recession, Root Causes and Reliable Solutions, Introducing Reliability Economics. WE-Economy Press, 2009
6. Trade Deficit Countries Have Higher Unemployment-Balanced Trade is Needed

http://economyincrisis.org/content/trade-deficit-countries-have-higher-unemployment-rates–balanced-trade-needed

7. Irwin Douglas, Guest Speaker on Bob Brinker, Money Talk, 2010.
8. Douglas, Irwin, “Peddling Protectionism: Smoot-Hawley and the Great Depression”
Princeton University Press, 2011
9. Fletcher, Ian. “Free Trade Doesn’t Work”, 2010
10. Trade Deficit is Illegal, Unconstitutional, Unethical, and Violates the WTO

http://www.economyincrisis.org/content/trade-deficit-illegal-unconstitut…

11. Proposed Balance of Trade Restoration Act 2006, http://en.wikipedia.org/wiki/Balanced_trade

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Ohio Bans Use of Public Funds for Offshore Outsourcing


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The following was submitted by Robert Oak and raises an interesting question.

The governor of Ohio issued an executive order prohibiting use of public funds for outsourcing. Seems like a no brainer right? Don’t use our taxpayer dollars to offshore outsource our jobs? Believe this or not, use of our money to offshore outsource our jobs happens every day, from food stamp and unemployment support to large software design projects. Yet as a result of an investigative journalism piece, Ohio, finally, does the right thing.

Columbus, Ohio–Ohio Governor Ted Strickland today issued an executive order that prohibits the expenditure of public funds for services provided offshore.

“Outsourcing jobs does not reflect Ohio values,” Strickland said. “Ohioans have been among the hardest hit by more than a decade of unfair trade agreements and the trickle-down economic policies that promoted offshoring jobs at the expense of Ohioans who work for a living. We must do everything within our power to prevent outsourcing jobs because it undermines our economic development objectives, slows our recovery and deprives Ohioans and other Americans of employment opportunities.”

“Ohio’s policy has been–and must continue to be–that public funds should not be spent on services provided offshore,” Strickland says in the order. “Throughout my Administration, procurement procedures have been in place that restrict the purchase of offshore services. Despite these requirements, federal stimulus funds were recently used to purchase services from a domestic company which ultimately provided some of those services offshore. This incident was unacceptable and has caused me to redouble my commitment to ensure that public funds are not expended for offshore services.”

Seems the State awarded a stimulus contract to support the appliance rebate program. As a result the contractor hired a bunch of El Salvadorians who also were gathering personal, sensitive financial data from Ohioans.

In March, the Department of Development awarded a $357,300 contract to Parago Inc. of Texas to administer the $11 million rebate program, which rewarded consumers with federal stimulus dollars when they bought energy-efficient appliances.

Parago never told the state that it would use a foreign call center, and the state did not require the information with bids. State officials learned about the call center from an Ohio resident who asked a call center employee where the operation was.

The video report from local Columbus Ohio station is here:

Any local news could find state contracts where the jobs are offshore outsourced by skimming the surface of the public records. That’s if they bothered.

While this is one, just how much of Stimulus dollars alone, never mind the routine offshore outsourcing of other state and federal contracts, have been creating jobs…in other countries instead of in the United States?

More importantly, why are not other states banning the use of public funds for offshore outsourcing?

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