The Deficits--Trade and Federal

We have American Consumers who insist on purchasing Imports much in excess of Exports. We feel warmed by a Congress and President whom believe financing by Debt stands far preferable to taxation. No one can precisely define what the Government deficits will be, day-to-day, because Our administration keeps selecting items to be taken off-Budget, because the items may cost too much to align with Projections of Government spending. Richard Cooper thinks the Government deficit is both sustainable and logical. Peter G. Peterson states the United States is currently absorbing two-thirds of the total current surpluses of the entire World. He says We are importing $4 billion of foreign capital per day. Brad Setser asserts Japan has ceased to acquire Dollar stocks, and Korea may have made its last intervention to support the Dollar.

Almost all Economists worry about the effect all of the Above will have on Interest rates. They tend to be insulated within their own framework and World. Their fear consists of high Interest rates cooling off the Economy, leading to a Recession. There may be an even worse scenario!

American Consumers do not actually produce, and they consume more than Anyone else. They support a Government which does not tax, but spends far more than any other Government in the world. George W. Bush proposes more and more programs, with less and less taxation, and a deep desire to vastly increase the Federal deficit. There is absolutely no attempt to curtail American consumption.

China is preparing to create a South Asian Union, along lines of the EU. The industrialized East--Japan, S. Korea, and Taiwan--are showing marginal desires to transfer from Dollars to Euros. The EU is pursuing policies to integrate their markets, and independent provision of resources and Trade partners in the Third World. OPEC nations are raising Dollar value of Energy prices, clearly conscious of the devaluating Dollar.

George W. Bush may like his agenda, but he will realistically find the World unwilling to underwrite his agenda. The World already finds his 'less taxation' agenda to be a wild denial of reality. The World will not like the added 'floated' Dollars for the Proscription Drug law, nor will it find the bill for 'privatization of Social Security' amusing. But what is the Author trying to say, Some may ask. The answer will be that Treasuries subscriptions may not be filled at any price, leaving the U.S. Government only two Options: cut Spending, or simply print more Money. This may come about with Walmart offering foreign Imports on Sale, at three times their current price. lgl

What China is Doing

There has been great debate on the purchase of U.S. Treasuries by Asian central banks over the past year. Brad Setser claims: "in 2003, the world added roughly $60 billion in euro and yen reserves, and $440 billion in dollar reserves. Since China accounted for about a quarter of the overall increase in the world's reserve, it seems likely that its reserve acquisition did not deviate too much from the global breakdown of roughly 90% dollars/ 10% other currencies." China poses a problem for a lot of Economists, as "The Economist this week estimated that 80% of China’s $515 billion in reserves are in dollars, which works out to $412 billion. China’s recorded holdings of Treasuries are around $175 billion. That leaves around $240 billion in other dollar assets." Brad Setser asks the question, "So what is China doing with the remaining $210 billion of reserves assets that it has added over the past two years?"

This Author's answer differs from that of most Economists. The answer can be found in the signing of a Trade treaty with Southeast Asian nations (10) for the purpose of eliminating all Tariffs by 2010. Every indication coming from the meeting in Vientenne expresses Chinese desire to create a South Asian form of the EU. This Author holds the view that China fully intends to fund the new SAU with American Dollar reserves held. These Dollars in Reserve, whether Treasuries or Dollars, will pay the Costs to individual nations of elimination of Tariffs, serve as a Development Fund for integration of Economies, and cancel need for Trade credits with the World by member nations. lgl

State of the American Military

An article in the NYTimes today comments on events in Iraq bringing back imagery of the Vietnam conflict, what with river boat raids and sweeps through swamp and groves. What startles this Author contained in the Iraqi co-command response to American troops, expressing the same lackidasial attitude and resentment of American once observed in ARVIN forces in Vietnam. No one mentions it, but the day-to-day attrition of both American troops and Iraqi Army and Security personnel most reminds of Vietnam.


Is the Iraq war sapping America's military power?
Cautionary data and perspectives
Carl Conetta, Charles Knight, Melissa Murphy
Project on Defense Alternatives 22 October 2004

Only about 60 percent of American military personnel belong to warfighting units and are considered "expeditionary"; most of the rest constitute infrastructure support. Most of the troops stationed or deployed overseas belong to the expeditionary segment, and this implies that America currently has deployed overseas about 45 percent of its combat personnel.

Turning to the National Guard and Reserves: the proportion of their available strength currently employed overseas is unprecedented since the Korean war. In September 2004 a total of 170,000 reserve component troops were on active duty. More than 75,000 of these were deployed overseas, mostly in Iraq and Afghanistan where they constituted approximately 40 percent of all deployed forces. These are not included in the numbers given above for active component forces deployed overseas.

combat assignments for Army troops have been extended from six months to a year or more, and average time between deployments has been cut. Guard and reserve tours have been extended, too.

Recent practice raises the prospect of two types of problems: first, a near-term decline in force cohesion and combat effectiveness while the military is still engaged in current operations; and, second, a long period of force recovery after current operations conclude. During this strategic "reset period" the capacity for large-scale military operations would be lower -perhaps significantly lower - than it was during the pre-war period.


Army Forces for
Homeland Security
Lynn E. Davis, David E. Mosher, Richard R. Brennan,
Michael D. Greenberg, K. Scott McMahon, Charles W. Yost
Prepared for the United States Army
Approved


National Guard is not adequately prepared, because of focus on conventional wars
Improve National Guard’s HLS capabilities by providing DoD Title 32 funding and improved sharing of state assets. Active-duty component (AC) is not available quickly enough or adequately trained to respond to large-scale domestic .emergencies

Dedicate brigade for rapid reaction, rotating between AC and National Guard (3,600 soldiers)

Law enforcement combined with available Army counterterrorism capabilities cannot
meet demands of future terrorist attacks. Create rapidly deployable and dedicated AC combating terrorism force (6,200 soldiers). AC cannot respond adequately to largescale
domestic emergencies, because significant numbers are deployed overseas.

Give National Guard primary responsibility for HLS activities by creating dedicated rapid-response regional civil support battalions (8,900 soldiers). Units critical for HLS in U.S. Army Reserve (USAR) are not available because they are deployed overseas, not ready quickly
enough, and prohibited by statute from conducting all missions.


Running on Empty: How the Democratic and Republican Parties Are Bankrupting
Our Future and What Americans Can Do About It
by Peter G. Peterson http://www.iie.com/publications/papers/peterson0804.pdf
2004 * 242 pp. * New York: Farrar, Straus and Giroux * $24.00
Presentation of the book and discussion at the Institute for International Economics,
August 9, 2004

a billion dollars a week for just two divisions in Iraq conducting "stability operations".
Some quick factoids. The CBO, which is after all under Republican control, has
looked at our budget estimates for the next 10 years for defense and said they should be
at least 18 percent higher or a trillion dollars more than the official estimates. And they
remind us that the official budgets have no provisions for any wars. They also have no
provision for additional troops, which 54 out of 61 members of the House Armed
Services Committee have proposed. Were we to meet the criticism of having a tendivision
army to meet our 12 decision priorities, the personnel-related expenses alone
would come to about $40 billion annually.

=================================
Our Military is being fragmented and demoralized by all the Mission Objectives assigned to it, especially the war in Iraq. National Guard and Reserve troops are deployed upon emergency, not turned into Regular Force complement at the whim of Politicians. Such troops lose life-long chosen occupations from the continual deployments, while the Threat level and resultant Stress injures family life.

It all costs too much, but refusing to expand the regular complements to assure adequate rotation stands as the height of irresponsibility. Civilians cannot be expected to perform indefinitely as regular troops, nor can they be expected to perform domestic and foreign deployment roles at the same time. We need to establish Priorities, and the highest Priority must be exit from Iraq. lgl

Trade v. The Dollar

Josh Bivens, http://www.epinet.org/briefingpapers/140/bp140.pdf, presents the primary thesis that the Dollar must devalue to cut the Trade deficit. (Thanks to Tyler Cowen for the link.)

Quotes of Use:

In 2002, this deficit reached $488 billion, meaning that the United States imported (consumed) $488 billion more than it exported (produced). This represents almost 5% of total U.S. GDP.

A conservative measure of this debt service burden predicts that, absent improvement in the trade balance, almost 2% of GDP annually will be devoted to foreign debt service.

This more comprehensive measure of the dollar’s value (the Federal Reserve's trade-weighted index) declined by 9.1% from its peak in February 2002 to July 2003.

To date, the euro and the Canadian dollar have seen the largest climb against the U.S. dollar. The euro has appreciated by over 20% against the U.S. dollar, while the Canadian currency has gained around 15% (adjusted for inflation). The Japanese yen and Mexican peso have appreciated by 12% and 9%, respectively. . . .This is a far from optimal pattern of adjustment. The euro area is one of the slowest growing economic areas in the world, yet it will bear much of the burden of relieving the pressure of U.S. trade deficits. This will deprive the euro area of demand for domestic products at a time when such demand is necessary to forestall a full-blown recession.
===================
The Paper is very competent, but does not enter into realities which will affect Trade dispersals:

1) The euro and Canadian dollar are both backed by economies highly volitile to Unemployment, and retractive policies (Government subsidies of domestic employment) will not allow normal Trade adjustment.
2) China, India, Malaysia, Taiwan, and S. Korea will not free their Currencies from the Dollar, no matter the dollar devaluation, for necessary Trade adjustments.
3) The matrix of U.S. Trade exports is too specialized (sectored) to provide normal adjustment of the current Trade deficit, even with dollar devaluation. The foreign markets simply do not exist.
4) U.S. Imports must be curtailed, to cancel the Trade deficit. This will require a broad-based lateral expanision of American manufacturing into domestic sales. lgl

Capital Tax Rate--Zero?

Two Studies have come out, both proposing the establisment of a one-rate Income tax:

A Research Program on the Interplay Between Entrepreneurial Activity and Tax Policy
by Norbert J. Michel, Ph.D., and Ralph A. Rector, Ph.D.Center for Data Analysis Report #04-16
November 24, 2004 ,
http://www.heritage.org/Research/Taxes/cda04-16.cfm

and,

Tax Incidence, Tax Burden, and Tax Shifting: Who Really Pays the Tax?
by Stephen J. Entin, Center for Data Analysis Report #04-12
November 5, 2004
http://www.heritage.org/Research/Taxes/cda04-12.cfm

Entin and the previous Paper do not specifically state, but imply a one-rate Income tax should replace the current tax system. The Authors of both Papers, though, obviously desire to maintain one fiction of the current tax system: the concept that the return on Capital is not Income, at least, not labor Income. Income utilized to engage in economic participation is Income, commonly-held fallacies nonwithstanding. This Author sponsors a one-rate Income tax assessed on all economic participants, simply because they have some source of income however derived, and use it to fund their economic participation and lifestyle (the Bush claim of 'double taxtion' stands as equal fallacy, due to the economic participation of all entities).

Entin puts it quite accurately himself, "The true measure of the burden of a tax is the change in people’s economic situations as a result of the tax. The changes should be measured as the effects on everyone’s net-of-tax income after all economic adjustments have run their courses. The burden measure should include not only changes in people’s after-tax incomes in a single year, but the lifetime consequences of the tax change as well. " The lifetime expansion of wealth for the upper Tenth of Income-Earners in this Country cannot be expression of their real contribution to the Economy, not with the incredible speed of expansion. There is a true lack of tax burden, as well as a tax burden, and all Authors should ask where that lack of tax burden falls.

Entin goes on to say, "The differences in the elasticities of supply and demand for labor and capital suggest that a tax imposed evenly on labor and capital income will reduce the stock of capital by more than the quantity of labor supplied. (Compare Charts 3 and 4.) Such a tax is more distorting of economic behavior than a tax imposed chiefly on labor income." True Capitalization finance comes from modern banking systems and organized financial organizations, rather than expanision of Corporate Stock, Bonds, or unsheltered liabilities. These organizations and their Return could and should be considered Labor income, rather than Capital income. The real element of importance here lies in the fact modern banking systems, and most financial institutions, do not rely on the Savings ratios of Individuals, but upon Demand Deposits temporarily held combined with the Money generation of using Reserve ratios. Individual Savings, therefore, are not vital for economic performance capitalization.

Entin's suggestion: "It is well understood in the economics profession that the current tax system imposes heavier taxes on income used for saving and investment, and on the formation of human capital, than on income used for consumption. Today, most economists would agree that these tax disincentives to save and invest, to work and take risk, have consequences. They lead people to undersave and overconsume and to work less and play more. These modern advances in economic understanding strongly urge us to dispose of the current income tax structure and replace it with a flat rate tax that is neutral in its treatment of saving and consumption." The above statement is not claearly understood. Capital aggregation is not affected by the current taxation, due to the financial system, and does not impact actual Capitalization of productive processes. Consumption is already heavily-taxed, what with Sales taxes of real revenues, while tax rates on Capital returns are basically nominal, i.e., non-real tax revenues. There is insufficient evidence to claim people either undersave or overconsume, given the higher Standard of Living and the steady aggregation of Household assets--even if only by the upper Half of Income-Earners.

This Author believe in a Flat-Rate Income tax, but one where all economic participatory Income is taxed in equal amount: the Author suggest a tax rate of 17%. He would like a revenue-neutral form of tax, as the above Papers claim, but a genuine neutrality which does not favor certain Households because of already established Assets. lgl

Taxes--How High?

Peter Burn examines the New Tax System in Austrailia,
http://www.cbo.gov/showdoc.cfm?index=1065&sequence=0, and finds "personal income tax turns out to be 34 per cent higher here than the OECD weighted average, and our tax on company incomes is 117 per cent higher." This with addition to the introduction of Consumption Taxes with the Goods and Services tax. The actual amount of Austrailian taxation is surprising "Relative to the weighted average on the GDP basis, Australia’s overall level of taxation was 19% higher (16% higher on a TWI basis) than the OECD Americas sub group. " This propels a relevant question: How can Austrailia remain competitive with its major Trading partners?

There is absolutely no question that Austrailia suffers from over-taxation. There stands the fact Austrailia provides far less subsidization of Trade than does the United States. Exports, on the other hand, probably exceeds Our percentage of GDP, while they do not suffer near the significant Trade imbalance We do. Austrailia also significantly does not run the huge Government Trade deficits current within the United States. Is there a Case for stating Americans are under-taxed? lgl

The numbers remain fairly consistent across time and place. Economies do not operate well inside an environment of violence and crime. Reuters reports:

Crime Hits Foreign Investment in Latam
Brazilian foreign direct investment inflows fell to their lowest level since 1995, dropping 39 percent from $16.6 billion in 2002 to $10.1 billion in 2003. Mexican FDI inflows have declined from an all-time high of $26.8 billion in 2001 to $10.8 billion by 2003, the lowest level since 1996, A.T. Kearney said.

while the World Bank states:


Four Years – Intifada, Closures and
Palestinian Economic Crisis
An Assessment
World Bank, October 2004
In 2003, the Palestinian economy stabilized after two years of sharp contraction. The World Bank estimates that per capita Gross Domestic Product increased about one percent in 2003. The stabilization occurred against a backdrop of a modest decline in violence. Moreover, there were fewer curfews (the most extreme form of closure) and the Government of Israel’s transfer of previously withheld tax revenues produced a short-acting .scal stimulus. However, neither of these stimuli was continued into 2004; the economy is stagnant once again. After almost four years of the con.ict, average Palestinian incomes have declined by more than one third and one-quarter of the workforce is unemployed. Nearly one-half of all Palestinians live below the poverty line.More than 600,000 people (16 percent of the population) cannot afford even the basic necessities for subsistence. The precipitator of this economic crisis has been ‘closure,’ a multi-faceted system of restrictions on the movement of Palestinian people and goods, which the Government of Israel argues is essential to protect Israelis in Israel and in the settlements. Closures, including the Separation Barrier, prevent the free .ow of Palestinian economic transactions; they raise the cost of doing business and disrupt the predictability needed for orderly economic life. Without major changes in the closure regime and signi.cant progress in the Palestinian reform program to improve the climate for private investors, there is no prospect of a sustained recovery of the Palestinian economy. . .
average incomes in 2003 were some 36 percent lower than their pre-intifada levels.

Violence is bad for Business, Crime is even worse. Latin America potentially possesses a better Wage Base, more resources, less Climate disadvantages, greater Energy resources and Generation potential than any Asian nation, while Labor skills are not substandard to those found in Asia (they are per Thousand, but not in the location of Skilled Labor). Palistinian labor is accustomed to working in the advanced economy of Israel. Terrorists and Criminals do far worse than blow up buildings. lgl

The Weak Dollar

The Dollar weakened against most of the World's Currencies this week.

The euro (EUR-) pushed past $1.33 temporarily, hitting a record high for the fourth successive day, before sliding back to around $1.3235.

The dollar touched a 4-1/2 year low of 102.12 yenbefore pulling back to just around 103 yen.

Sterling (GBP-) rose to within a cent of a 12-year high at $1.9040 after Bank of England chief economist Charles Bean warned that the dollar slide could have further to run, but faded to around $1.8910 in afternoon trade. (Italics all quotes from Reuters, lgl)

The weak Dollar may seem like a Trade advantage to American Business and the Federal Government, but there are complications forestalling Trade advantage. The matrix of Production materials necessary for output may be advancing in Cost faster than American Product are becoming cheaper in foreign markets:

The price of OPEC's basket of crudes has held above its target of $22-$28 for the whole of this year, but if the basket is converted into euros, it has largely stayed within range.

The Above quote simply states that Production Costs (at least as far as energy) are not going up for the EU. A similar pattern could possibly be found in the raw materials arena. Stasis here would mean that the EU is not just holding it's own, but actually gaining in Trade advantage against the United States, when nominal financial charges are added into the matrix. The fact would seem equally true against the Asian Currencies, as the Japanese Yen matched the Euro in response to the weak Dollar. lgl

Immigration

http://www.cis.org/articles/2004/back1204.pdf


Economy Slowed, But Immigration Didn’t
The Foreign-Born Population, 2000-2004
By Steven A. Camarota

The 34.24 million immigrants (legal and illegal) now living in the country is the highest number ever recorded in American history and a 4.3 million increase since 2000.

Of the 4.3 million growth, almost half, or two million, is estimated to be from illegal immigration.

The same data also show that in the years between 2000 and 2004 nearly 6.1 million new immigrants (legal and illegal) arrived from abroad. New arrivals are offset by deaths and return migration among the existing immigrant population so that the net total increased by 4.3 million.

Since 2000, 6.1 million new immigrants have arrived, compared to the 5.5 million who arrived between 1996 and 2000, during the economic expansion.

The record pace of immigration is so surprising because unemployment among immigrants increased from 4.4 to 6.1 percent and the total number unemployed grew by 43 percent.

In contrast to current immigration, evidence indicates that economic downturns in the nineteenth and early twentieth centuries did have a very significant impact on immigration levels.

Immigrants now account for nearly 12 percent of the nation’s total population, the highest percentage in over 80 years.

There is more debate about the size of outmigration.
But the Census Bureau has estimated that
about 280,000 immigrants living here return home
each year.5 It should also be remembered that like any
survey, there exists sampling variability in the CPS.
The margin of error, using a 90-percent confidence
interval, for the foreign born is between 640,000 and
700,000 for data from 1996 to 2001 and between
520,000 and 530,00 for 2002 through 2004 data.
Thus one could say that in 2004 the immigrant
population was 34.24 million plus or minus 530,000.
Because of sampling error, even seemingly large yearto-
year changes may not be meaningful. When looking
for trends it is much better to compare differences over
several years.
==============================
Steven A. Camarota seems to express some bias against immigration, but his numbers seem relatively solid except for an insufficient Sampling size--though it matches Y2000 Census procedure. The numbers do trouble, especially the publication from Oct. 2004
===============================

A Jobless Recovery?Immigrant Gains and Native Losses
October 2004
By Steven A. Camarota
Between March of 2000 and 2004, the number of unemployed adult natives increased by 2.3 million, while the number of employed adult immigrants increased by 2.3 million. Half of the 2.3 million increase in immigrant employment since 2000 is estimated to be from illegal immigration.In addition to a growth in unemployment, the number of working age (18 to 64) natives who left the labor force entirely has increased by four million since 2000.Even over the last year the same general pattern holds. Of the 900,000 net increase in jobs between March 2003 and 2004, two-thirds went to immigrant workers, even though they account for only 15 percent of all adult workers. In just the last year, 1.2 million working-age natives left the labor force, and say that they are not even trying to find a job. Immigrant job gains have occurred throughout the labor market, with more than two-thirds of their employment gains among workers who have at least a high school degree.There is little evidence that immigrants take only jobs Americans don’t want. Even those occupations with the highest concentrations of new immigrants still employ millions of native-born workers. The decline in native employment was most pronounced in states where immigrants increased their share of workers the most.Occupations with the largest immigrant influx tended to have the highest unemployment rates among natives. ..........
the number of employed natives was 500,000 fewer in 2004 than in 2000. In contrast, there was a net increase of 2.3 million in the number of foreign-born workers holding jobs over this same time period. Put another way, there was a net increase of 1.7 million in the total number of adults working in the United States, but all of that increase went to foreign-born workers.
Between 2000 and 2004, the number of natives not working increased by nearly four million, from 30.8 million to 34.8 million. Thus, not only are 500,000 fewer natives working and 2.3 million more unemployed, fewer natives are even in the labor force at all. If we focus just on the four occupations with the largest number of newly arrived immigrants (construction, food preparation, cleaning and maintenance, and production workers) we again find that there are 21.4 million natives employed in these occupations. In these four occupations there were 1.4 million newly arrived immigrants, and there were more than two million unemployed natives. This does not mean that immigrants caused the unemployment of natives, though that is a possibility. But it does mean that the idea that there are no American workers available to fill these lower-skilled jobs is not supported by available data. 2.9 million immigrants in 2004 who said that they arrived in 2000 or later. We know this because the CPS asks immigrants what year they came to stay in the United States. The net increase in the number of immigrants holding jobs was 2.3 million. Therefore, all of the net growth in immigrant employment is due to new immigrants arriving from aboard. It should be noted that the reason the number of adult immigrant workers did not grow by 2.9 million is that some immigrants here in 2000 had died, gone home, or left the labor force by 2004. Thus 2.3 million represents the net increase in immigrant employment. ....
We find some direct evidence that immigration has adversely impacted natives. Areas of the country with the largest increase in immigrant workers were, in many cases, areas that saw the most significant job losses for natives. Immigrant occupations with the largest immigrant influx tended to have the highest unemployment rates among natives. This certainly raises the very real possibility that immigration has adversely affected native employment.
(all Bold the work of lgl)

Integration of FICA taxes into Income Taxes

Why integrate FICA taxes into the Income tax? Eliminate the profusion of taxes, use a simple Tax outline to fully fund Social Security, and get rid of huge amounts of excess Paperwork. A simple law could state there is to be no FICA tax, only that a set amount($) quantity should be subtracted first from Individual Withholding to be paid into the Social Security Fund. Business Payment of Income Tax must first contribute an amount equal to all Employees' payments in the Social Security Fund, before the residue is transferred to the General Federal Budget. We cancel any need to talk about Employee contribution, Employer contribution, and lose need to find and fund individual deductions, exemptions, and exceptions to the Income Tax law itself.

Certain things must occur, though, before such alteration can be implemented. Social Security benefits cannot be allowed to vary, though contributions to the Social Security Fund continue on this course; variations in Benefits will lead to a snarl of Claims desiring higher preferment. A living monthly Benefit can be devised, and higher Beneficaries current can be grandfathered in by eliminating COLAs for this Group, until their benefits are in line with the Standard devised Benefit. Medicare and Medicade benefits can be limited to $30,000per year, but with adoption of unused Benefits of three previous years to a total limit of $120,000 per four year period.

The conflict between mandatory and variable taxation is eliminated, so the way is open to cut all form of tax loopholes from the tax system; the Tax Code has suddenly become a unified system, which does not need individual preferments. The basic Welfare function fulfills without red tape, and Employer contributions to Social Security becomes only a segment of their general tax picture, where their tax is owed no matter where directed. The Social Security Fund is funded adequately, and the umbilical cord between Business and tax loopholes can be cut for good. lgl

A Tax System without Loopholes.

Arnold Kling(http://econlog.econlib.org/archives/000662.html) asked if there was a better way to provide subsidies than with tax loopholes. The author provided him with an answer, but thought a more through assessment should be conducted. This is it.

Provision of Business subsidies by tax loopholes (deductions, exemptions, tax credits, investment credits, etc. ad infinitum) remain the most dubious method of providing subsidies. Such subsidies are unbounded, by which it can be said unknown largesse can be deducted from taxation by the inventive Business. The second aspect comes from the fact such tax loopholes cannot be targeted: a probable Six businesses 'piggyback' the loophole for every business for which the loophole was constructed. The third serious problem stands as 'What the Emperor bestows, let no one put aside': the Author has never seen a good tax loophole ever rescinded, except by revolution, example being the mortgage credits. The final pitfall lies in the fact that one tax loophole is a Business windfall, two loopholes make an Accountant's fairy tale.

Alternate methods to provide Business subsidies were briefly mentioned on Arnold Kling's site. Absolutely necessary industry should be protected by enforced Product prices. This is basically the reverse of tariffs. An enforced Product price is where a Product cannot be sold Wholesale below a certain Price. The Price is set yearly or quarterly with the express intent of assuring domestic production can succeed in the provision of the specific Product. Foreigner production can sell in the domestic market, but not below domestic Wholesale price. Congress could charter a Commission to issue a specific Product list along with specific Wholesale prices; Products to be included only if a failure of foreign Product could lead to reduction of domestic GDP production. Such a Commission should also be empowered to purchase essential production resources and stockpile such materials in case of adverse Trade disruption.

A Domestic Finance Fund should also be created. Yearly Applications would have to be made, in order to get a non-repaid Block grant for the sole purpose of expanding production capacity. The Applications would have to be approved, based upon a determined need for such expanded production, and the financial inability of the applying business to fund the expansion. All other subsidy systems maintained for Business should be eliminated, especially tax loopholes. The only other potential subsidy system would a Startup Package Fund to fund good Prospectives without normal immediate channels of Profit.

The real Business subsidy overall, as well as for Personal subsidies, must be low tax rates. These low rates are the only guarrantee of economic performance, as Business, Individual, and Consumer have the capitalization to participate in the economy. Welfare subsidies should be accomplished with direct Welfare transfers which are measured and exact.

The Author feels strongly about total elimination of tax loopholes, to the extent he wishes for cancelation of even individual personal deductions. Tax Rates, whether Flat Rate or Progressive, should be exact Real rates of tax. Social Security empowerment can be altered to pay additional credits to Individuals or overlarge families when there is need--applied for and approved as definitely necessary assitance. He is so radically conservative in Tax Policy, he would eliminate even the Recapitalization and Amortization expense credits for Business, relying on a Flat, Low rate of taxation. lgl

Laurence J. Kotlikoff's Social Security Plan

It will not do what Americans truly desire, but it has been well thought, and could be an acceptable alternative--which is it's basic problem. It could achieve sufficient support to be adopted. Any Author must base his opposition to such a Plan on concrete realisms, and so on to the presentation.

The first major element stands as the $10.4 trillion liability of the Social Security Trust Fund. Kotlikoff would fund this by eliminating the Employee contribution currently made with the FICA tax, while retaining the Employer half of the contribution. He would instead apply a Sales Tax. It ignores the reality that the tax on Consumption would reduce Consumer Demand significantly, thereby reducing Business Profits, Employment ratios, and all Household incomes. The second major hazard lies in the fact that Businesses and Corporations possess the majority of lobbys in Washington, and the equal contribution of both Employees and Employers forestalls pressure to eliminate such taxation.

The second major element from with the Kotlikoff plan is desire to negate the primary purpose of Social Security in the first place: maintaining a adequate lifestyle for the Elderly. He would cut Benefits for All to a miserly slightly-above starvation payment, rather than taking on the very real issue of 'Means-Testing', where monthly Benefits are phased out by increasing Income levels.

The third failure in the Kotlikoff Plan comes in no restrictions to limit Medicare provision. He would let the health care industry continue to set health care costs to their benefit--not Patients. His Plan does not propose a yearly limit to Medicare benefits--this Author suggests $30,000 per Patient per year, not counting Pain-killers, machine procedures costs, and hospice care cost. lgl

Trade Deficit

What economic thought exists considers the Trade Deficit in terms of expanding Exports, a Recession constricting imports, or accumulation of debt to foreign nations and individuals. None consider the real error which brings on the Trade Deficit: the failure of American production capture of the American Consumer markets. Each idea must be considered separately.

Expansion of Exports finds limitation because America is a Speciality Exporter. We export Information Technology (IT), and high-tech Products. These are Speciality Products, with a limited market along with large Contracts for Product at high prices. The limited, but high-tech, market means high prices quarranteeing stiff competition. The high Cost of technology alongside the lack of compatabilty between systems insure large, long-term Contracts of huge value. Loss of a singular Contract can generate a huge loss of Export value. Our Export industry is too concentrated in high-tech markets with few capable Buyers. We need to expand our Product line.

Inciting a Recession to reduce Imports will not work with the Walmart philosophy. Accumulation of debt continued through the last Recession, as American Consumers assumed additional Consumer debt in the face of increasingly good-value purchases. Consumers must be stopped at the Retail Checkout Counter, not by either Banker or Layoff. A Recession will only restrict Imports when there exist higher Retail prices. Devaluation of the Dollar, though, has its own problems, most specifically, necessary Labor cadres and Professionals almost automatically demand Wage increases to maintain purchase patterns. Foreigner Suppliers also raise objections to Devaluation of the Dollar, as it is 'ex post facto' elimination of their Business Profits.

Increasing American debt to foreigners lacks an effective appeal, as it insures American Business Profits are curtailed in Debt service to foreigners. It's basic ineffectiveness in producing Trade balance comes from the fact that Debt Service simply places more Dollar stocks in the hands of foreigners. We are simply purchasing Debt as well as Imports. The Trade balance loses greater equilibrium.

Loss of American Consumers by American Producers to foreign competition stands as the major culprit in the Trade imbalance. Economists claim the causes are Environmental standards restricting Pollution, rising health care costs for Workers, higher Wages, and higher Taxes which eliminate the competitiveness of American production. The Above are all detrimental to the bottom line of American business, but not the realistic causation for the shift to Imports.

The real cause of the shift to Imports lay in American business refusal to capitalize industry which will remain Labor-intensive, or which provides lower Profits per Capitalization than in the high-tech industries. Modern Corporate structure insists on the highest level of Profits to Capitalization consistent with high-tech industry, canceling any lesser potential investment even though very profitable. This same Corporate structure refuses to capitalize any industry of Labor requirements,which might lead to unionization of Workers who insist on Profit-sharing. This produces the real desire to tansfer heavy industry capitalization Overseas. These two elements influences Corporate decision far more than does the Economists' claimed causes; proof existing in Corporate investments going to ununionized foreign placement with minimal Wage levels, though there is immense State and Local competition to reduce tax burden and Welfare commitments for new business. This stands as true because Corporations will endure high foreign taxation and Export Costs, even radical Environmental standards. lgl

Error of 'Tax Only Once'

Conservitives, especially Neocons and George W. Bush, make great political hay on the stance of taxing Income only once; a Shorthand for eliminating Capital Gains and other forms of Investment taxation. There are several reasons why this is bad policy, which the author will discuss here sooner or later. Right now he will enter in Tax theory to present a grounding for evaluation.

There are three major concerns when considering Tax policy: Tax fairness, Tax impact, and Tax balance. Tax fairness states all Taxpayers should endure equal restriction in their economic participation due to the Tax. Tax impact remains the study of actual placement of a Tax, where and who it exactly falls upon and how heavily it affects such Taxpayers' economic participation. Tax balance recognizes different types of Tax fall harder on one group of Taxpayers, and is the determination of the matrix of taxation necessary to gain Tax fairness. The Later stands of high importance, as there is an inequality of Tax impact associated with every form of Tax.

Sales (Consumption) taxes reflect sharp tax regression, as lower-Income households spend a much higher percentage of Household Income on Consumption than higer-Income households; this assessing a much higher percentage real tax rate on the lower-Income households. The lower-Income households not only must economically participate with lower Income, but with a higher, heavier tax impact rate of taxation.

Income Taxes are inherently a progressive taxation, even a Flat-Rate Income Tax system, this effect steming from higher Incomes pay higher real monetary contributions. Income taxes though, especially Flat-Rate Income, absorb real ability to Consume from Poor households faster than from higher-Income households. This fact leads Many to oppose a Flat-Rate Income tax system, in favor of a progressive Income Tax system.

Value-Added taxation remains a third method, taxing a minimal amount at every stage of the Production process. The trouble comes in this form of Taxation incites a much higher final real taxation than desired. Each succeeding stage derives its Profit ratio from both the Production Cost and the Value-Added tax of the previous stage. The Value-Added tax is very lucritive for Business enterprise, but a disaster for the Consumer--who winds up paying a horrific real tax rate to secure the Business Profits as well as the Tax. As the total tax impact falls upon the Consumer, it is a very regressive tax; lower-Income households being high Consumers enjoying little particaption in Business Profits, with the reverse for high-Income households.

A fourth method of Taxation could be an Assets Tax. Assessment would be adjudged by subtracting Total Liabilities from Total Assets, then assessing a tax on the residual. Here lies a problem of assessment and proof. It would require an extreme amount of collaction time to collect the assessment and proof, beyond poor households' ability to endure. Such a tax would also be regressive upon the Wealthy, who would be penalized for being successful.

Back to the proposition that Income should be taxed only once. It is inherently regrssive in nature, poor households hold funcionally no Investments, and lower-Income households a relatively small percentage of total holdings. The lower Ninety percent of Households might save three percent of the taxes they now pay. The upper Ten percent of Household Incomes would reduce their taxable Income to one-quarter of current levels, and the Top One Percent of Incomes would reduce their taxable Income to a tenth of current levels subject to tax. The Income Tax rates, though, would have to be adjusted upward to generate the tax revenues necessary to fund Government operations. It stands as the most regressive tax of all. lgl

Conflict with Roubini-Setser

It is basically a conflict with the standard macroeconomic concept of Current Accounts balances. They contend it remains basically a difference between National Savings and National Investments. National Savings being the greater, then there will be a Current Accounts surplus, with a Current Accounts deficit if National Investments are the greater. They account the Trade deficit as lack of Private and Public savings. This author agrees as to the lack of Public savings--Federal, State, and Local. He disagrees about the lack of Private Savings, finding private savings rates to have actually increased since the early 1990s.

The discrepency comes in alteration of Corporate Accounting procedures, specifically, in the extension of Consumer credit alongside its forms of payment. Corporations utilize Accounting procedures to delay payment of Production Costs by using their domestic currency savings accounts until Consumer credit payments replenish those domestic savings accounts. The Profits from Production Corporations have been shipped Overseas for investment in foreign economies. Private Individual savings since the 1990s has been on the rise, but shifted in great proportion to Corporate stock, either individually, or through Mutual Funds and Index Funds. These individual funds work themselves through the financial system, turning into a net outflow of currency Overseas. A simplier explanation simply states American Private savings have been shifted to foreign investment, while domestic investment has been turned over to financial institutions to fund through demand deposits.

The Corporate Accounting procedures allow these foreign investments to be listed as liabilities, limiting both the payment of American taxes and dividends to American stockholders. This author believes American National Savings is higher than it has ever been since the 1940s, but the Profits from the National Investments are not realized by Corporate control of the funds. lgl

Quotes from Roubini-Setser

10% export growth sounds good, but 10% export growth combined with a 10% import growth implies a substantial--roughly $50 billion--widening of the trade deficit. 10% export growth and 5% import growth only reduces the trade deficit by about $25 billion

Foreigner inflows have moved from financing private sector investment to financing the growing (Federal) budget deficit.

In other words, even if the U.S. is only half way through a 20% decline in the dollar against all currencies, the U.S. has realized far more than half of the potential valuation gains from dollar depreciation by depreciating first against Europe, Canada, and Austrialia.

The first Quote states functionally little gain can be made in the Trade balance without reduction of current levels of Imports. The second Quote outlines the real Culprit today consists of Federal budget expenditures without taxation in the NIIP and Current Accounts imbalance. The third Quote assures that Dollar devaluation will not be the panecea for the Current Accounts imbalance; We must attain a Trade surplus to reduce the Current Accounts imbalance. lgl

THE U.S. AS NET DEBTOR

(My Thanks to Brad Delong for the link: http://www.stern.nyu.edu/globalmacro/Roubini-Setser-US-External-Imbalances.pdf)

Roubini and Setser have provided a very good Study of the Trade Deficit, Current Acounts balances, and the Net Debt entered into by the United States since 1997 when the U.S. net international investment position (NIIP) stood at a negative (-$360) billion. It has grown to a negative (-$2.65) trillion by the end of 2003. It is estimated to become a negative (-$3.3) trillion by the end of 2004. NIIP debt stood at 5% of GDP in 1997, and had grown to 24% of GDP by the end of 2003. It is expected to be 28% of GDP by the end of 2004.

These Authors point out the real difficulty in the American payment of these external liabilities remains the large amount of Imports v. a much smaller volume of American Exports. They express an estimate that current U.S. spending demand Japan and China absorb an additional $350 billion in U.S. Treasuries per year over the next four years, if it continues at the current level of increase. Methods of repayment of U.S. external debt entail the creation of a Trade suplus, or equilavent, while Imports continue to increase over Exports both in real and Currency terms. They also express the complications of a Dollar devaluation, or the increase of Interest rates to gain subscription of the debt. It is an interesting Read which all should undertake, and the Author will finish given time. lgl

Prediction about Inflation

The Euro was $1.2944 on November 14th, and $1.2957 November 16th. Seems insignificant does it not? It is, unless the directional creep continues. It reflects the weakening Dollar against other Currencies in the World. This means that American Imports become more expensive, and American Export become cheaper--or does it? Behlen Manufacturing Group reports Steel prices have risen 80% (had to put this in, as the Author once worked for Behlen on the plant floor). The entire situation need be evaluated.

There has been a 1.7% increase in the Price Index last month, not truly reflective of Core Inflation, as it was led by unusual Food and Gas prices. Core Inflation shines through the 0.3% increase the Core Producer Price index. It grows more worrisome as Crude materials, reducting Food and Energy price increases due to their unusual (read potentially temporary) price rise, still rose by 5.4% in October. Real anxiety comes in the fact that base production requirements--Steel, Copper, Bauxite)-- have led the way with higher Prices. The weakening Dollar, which also reduces the Profitability of Off-shoring, could lead Producers to increase Prices over the spectrum of Goods; it being likely in the face of increasing American Wages.

This Author believes Economic discussion should have an end purpose, and so he is going to enter into the most dangerous area--Predictions. He estimates that the cost of American Imports will rise by 8% by the end of 2004. He further predicts that American Exports will increase in Price by 1.7% through the end of the year. He expects overall American Consumer price levels to increase by 2% by year's end. He further expects American Wage levels to increase by approx. one percent, so New Claims for Employment will not drop below 340,000 through the end of 2004. (all numbers, except predictions, came from WSJ or NYTimes.) lgl

Federal Debt

(Joint Economic Committee Report, November 15, 2004 contains the Source material for this Post. Thanks to Steve at Deinonychus antirrhopus for the link.)

The U.S. Treasury states the Federal Government has hit the statutery Debt limit of $7.384 trillion, and the Debit limit ceiling must be raised before Stop-gap temporary measures are used up. The U.S. Congress has always been quite willing to do this, and so the Ceiling causes no worries. The real worry is ability to pay off the Debt, along with the interim Interest on the Debt-servicing. This point brings on real entrance into the Twilight Zone.

The common Economic decision process calls for a Debt/GDP percentage ratio to determine the ability to pay. This practice holds certain demerits, especially escape from the reality that Tax revenues have to be garnered to provide Debt Service and final payment. Another convenient escape presents itself as the common practice of ignoring State and Local Debt levels in this Debt/GDP methodology. The total net general government Debt (Federal, State, and Local) is 44.4% of GDP. The Reader could ask why this stands as an important datum, and can be answered that Tax revenues need be raised from American Taxpayers to pay for all the Debt Service; it expands far beyond Federal taxes, to include State and Local taxes in procuring the necessary Tax revenues. The real issue in the discussion remains the Tax revenues which must be withdrawn from Economy, and what effect such a largesse of withdrawal will have on economic performance.

The Report makes much of the difference between Publicly-held Debt and Government Accounts Debt, the later being what the Federal Government owes other Government Trust funds--surpluses currently turned over to the General Budget by law; it stating that Publicly-held Debt is only $4.3 trillion, and that Government Accounts Debt can increase the total Federal Debt even when the Federal Government as a whole runs a surplus. The fallacy of this illusion remains the necessary Tax revenues which must be withdrawn from the Economy to pay for the added Totals. The Report also comments that net general government Debt (Federal, State, and Local) at 44.4% of GDP stands midway between most other nations. It does not consider the relatively important factor that Our economy might actually function better than Others, due to less Government spending per GDP levels. The Report, while precise and accurate, tends to remind of 'Smoke and Mirrors'. lgl

Falluja and the Military Situation

The Operation has already been declared a success, though they are still shelling and bombing the insurgents. Falluja set off heavy fighting in Mosul, Baquba, Buhriz, Baiji, and Ramadi. A worse scenario is the Terrorist setting afire one oil storage tank at a pumping station on the major Oil pipeline to Turkey, blew up a pumping station to the major northern Iraqi refinery at Baiji, and set fire to four oil wells as well. Falluja has about 150,000 refugees who face a winter without housing. U.S. Jets dropped two 500 lb. bombs on Baquba. (numbers thanks to the NYTimes).

The U.S. Military, inspired by President George W. Bush, is trying to build democracy. Falluja resistance could not be allowed for the Iraqi elctions to take place; Democrats should feel grateful no area of the United States has been designated a Free Fire Zone. What ever happened to 'Winning Hearts and Minds'? Oh that is right, that one was a couple wars back; it is sad to get old. One has to remember direct criticism of the President's decisions on military policy can get you thrown in prison anymore, but at least it would not be in Abu Whatever.

This author urgently begs the Iraqi religious leadership to engage in the upcoming Election. Failure to do so will force Our esteemed President into dreaming up more military initiatives to gain compliance. lgl

War net-centre

The Defense Dept. is spending vast Billions of Dollars to functionally create their own Internet. The U.S. Army is planning an expenditure of $120b in the short-run, as described by an article in the NYTimes. What is wrong with the two previous systems of like order which were introduced? Answer: They are outdated. The last one came online in 2003. The next will come online in about 2024, and be obsolete in 2025. This is the Author's estimate.

What is wrong with the old system? It cannot do what Practitioners of Warfare have decided they wanted it to do. Does it do the job for which it was designed? Yes. Is it better than any other Information system used by any other military in the world? Yes. What is the exact problem? It lacks the Bandwidth to download a total military assessment worldwide to a laptop in the desert. The Soldier who is getting shot at is unable to find the name of the guerilla shooting at him, much less where he went to school.

There are inherent dangers in the levels of Bandwidth desired in the first place. Such width will present great ease for enemy intelligence to penetrate and corrupt. It would be extremely embarassing for an enemy computer virus to shut down the entire system on Invasiion Day. Each Soldier would need complex access keys simply to forestall the Enemy from using Computer-sharing capacity; think of the number of 'Forgot Password' which would have to be intergrated. The final element remains Security Levels: each rise in Security designation get so much more Bandwidth? The program is far too much Science Fiction with a tremendeous Pricetag, and will be outdated before it is complete.

Alternate Development: Become Bloggers such as We; it is much cheaper. lgl

Exports in the Scheme of Things

Traditional Economists extol the advantages of Trade, citing Ricardian Advantage. The composite of this Advantage must be examined, if one is to understand the value of Exports. It states for the undertrained that two countries can maximize Production and Profits by utilizing Trade with each Other, to the degree each country is producing the absolute Most of what they produce best, then they trade products with each other for each's best advantage. A great number of Economists thought Ricardian Advantage could not be explained without the use of mathematics, and Some probably still think so. This is the economic theory behind support of Trade.

Contemplation of Ricardian Advantage suggests it must consist of geographical advantage in production--access to resources, access to production energy and capital, and availability of trained labor cadres. This definition incites another utilization of Economics: if it is a concept of geographical advantage between Producers (i.e., Competitors), then superior Productive capability can be evaluated by Marginal Utility. This means that the value of producing in one Country over the Other can be determined by the Profitability of production at the Marginal Dollar position of best production levels.

The above seems overwhelmingly certain, and it brings on many speculations. The Profitability of production at the Marginal Dollar position can vary by location to resources--initial ore being consumed with transference to alternate location ores, amounts of capital investment--aggregation of capital over time, advances of technology--especially the development of alternate (created) materials for production, and greater levels of labor education and training. Consideration of all the above variables indicates that the Marginal Utility of Trade itself, over time, will decline; less and less Products would enjoy the advantages of Ricardian trade. This is not a call for autarchy, but a statement that advancing economies will acquire greater autarchcal capacities.

Another element enters the matrix at this point: the Cost of Trade itself. This Cost consists of the capital cost of Transportation, the expense cost of Fuel, the capital cost of Transportation facilities, and the Manpower utilized in Transportation. It is clear Trade is defunct of value when the Marginal Utility Profits of Trade alongside the Profits of Transportation do not equal the Costs of Transportation. A advancing Economy would seemingly demand a reducing Trade volume. So why is the United States suffering from an increasing Trade Deficit?

Artificial barriers and Costs to Production exist in the United States, which prohibit the decline of Trade in the U.S. Economists would be quick to point out it is environmental regulations, artifically high Wages due to Welfare payments, and declining resources. These are all a factor in the growth of Trade, but cannot explain the rapid growth of the Trade Deficit. Other noneconomic factors must be impacting, as the previous factors had been in place for decades. Later Posts will examine these factors. lgl

Armistice Day

Some Posts online today write on Veteren's Day in America, where elsewhere it is still Armistice Day. There has been serious consideration that World War I was the start of all of Our troubles today, what with the Belfour Declaration and the Syckes-Picot Agreement. It remains particially true, like all things of such nature; the real humor is the denial and celebration of War in the same breath.

The real causation of WWI, and what came before and after, can be summed in a single statement: The creation of mass armies under Napoleon. Only with mass armies can the slaughter of the wars been realized. Napoleon was the first to bring common citizens into uniform. He was the true innovator of modern butchery.

Many who have read my material would laugh at my believed inconsistency (I am a advocate of the Draft). It is not inconsistent to me. The greatest singular element of survival in combat stands as mistrust of your own leadership. Any Soldier who needs to fight for a great Cause, will in the course of time die. No Objective--other than staying alive and unharmed for yourself and your Unit comrades--holds any value, except to avoid the wrath of Superiors. The Draft actually produces better field soldiers, as they originally carry a paranoia concerning the fate society has dealt them. lgl

The Social Security Fund

Much discussion has been going on about restructuring the Social Security system. The Bush initiative calls for privatization of accounts, where Individuals could divert some percentage of their contributions into investment accounts. This plan has certain pitfalls, most notably a diversion of funds as Investment charges, and difficulty in determination of acceptable types of investment. Another proposal states that an Investment Board should be set up to do the actual investment directly, and avoid Investment charges, while investing as a system unit. Other proposals suggest raising the age of retirement, putting a Cap on yearly Medicare expenditures per Individual, standardizing the monthly benefits to a single level living allowance, eliminating the Cap upon contributions into the system, and lastly, raising the Social Security tax rate. All these Proposals come because of the expected deficit in the Fund which will come with the retirement of the Baby-Boomers.

Another Proposal advanced by this Author is to turn the Social Security Fund into a national banking system. Economics will state the Deficit in the SS Fund is relatively immaterial, as the real problem is the lack of participation of Retirees and the Fund in the economy. The labor force of the future will have to provide for the Retirees with Goods and Services, no matter what manner of Surplus or Deficit exists in the Social Security Fund. This lack of participation is the culprit, for both Retirees and the Fund. What is necessary is to reintergrate both Retirees and Fund into the Economy. The Social Security Fund could be altered to perform as a national banking system easily, and in such manner, perform the above desired reintergration.

The Social Security Fund has been in surplus since its inception, and will be in surplus for some period into the future--relatively unpredictable because of escalating health care costs to Medicare. The previous and current Surplus of the Fund is accounted as Treasury debt, which can be easily converted into Treasuries. Such Government Notes could equitably serve as Reserves for a banking system. The primary step for a banking system has been achieved: an existent level of deposits. The Social Security Fund can be chartered as a national bank. The most viable course after it being chartered would be to purchase private banking system with Treasuries. We achieve a new national risk banking system drawing Profits from the economy from investments, and revenue from Social Security taxes; it becomes an intergrated element of the economy. Its commitments would consist of the payment of the Benefits quaranteed to Retirees who have paid into the system. There will be no Investment charges, less risk than open investment in markets, participation of both Fund and Retirees in the economy, and risk Profits at acceptable risk levels to make up for the SS Fund deficit. lgl

The Trade Deficit

The September figures are out: Total Imports S149.0 billion--up 1.5%. This is not a drastic figure, but this is: non-oil imports hit a record $109.0 billion. The latter figure is the best indicator that the Economy is dumping Jobs, with Chinese imports rising 1.7% to $ 18.46 billion.
This is confirmed by new Unemployment claims standing at 333,000. This number states that Turnover rates are about 100,000 new claims too high, for it to be normal or seasonal Turnover. It is also not good that the new rise in imports came in Oil and Auto parts, definite indications that industrial manufacturing is retreating, and that American Oil exploration is not being conducted at viable rates--no new Jobs in this sector.

The Blog, Marginal Revolution, has a Post this morning on the effect of the falling Dollar. The conclusion reached was, in the main, the major threat would be in rising Interest rates to prop up the Dollar. This threat is not especially a great threat: A rising Interest rate would contract American Consumption levels, while not seriously affecting current economic performance--less than absolute perfect. This would bring on American Consumer pay down of Consumer Debt, a most necessary condition, as this negative-Savings begins adverse impactual levels on Household stability.

The real impact of the dropping value of the Dollar comes in sudden, immediate sharp increases in Import pricing. Most Economists and Business interests declare Exports would automatically rise, which may not actually be the case. Rising Import costs will sweep the board, and recent imports increases have come in the area of manufacturing, especially in the arena of Assembly Parts. Business interests would not be able to keep production costs down. The rise in Import prices could well bring on greater levels of Unemployment, as Consumer Demand would not be able to bail Us out of a downslide, and Exports could actually decrease. lgl

Outsourcing

There has been much discussion of Outsourcing lately, because of the Election, and this is my take on it. Drezner has an op-ed in the NY Times which states the effect of Outsourcing on Job losses has been minimal. All should read it, but even more, subsidiary information on it at his Blog (one should especially follow the links). He has done an excellent job on background information. His declaration of Outsourcing lack of effect, though, must be reexamined for possible Policy flaw.

Economists have always been too literal, due to their obsession with numbers. They concentrate daily upon marginal components of economic data, then return to economic Totals, and ignore the implications of small alterations of numeral data. It is true that Outsourcing and Business investment Overseas for purposes of Outsourcing, both made up less than 10% of the total since the Clinton years. Drezner and Economists therefore conclude Outsourcing has only minimal effect on the American Job market. This Author dissents from the above-stated Opinion.

We are experiencing an ever-increasing Trade deficit. American Business constantly increase their purchase of foreign products, such products produced at less Capital Cost due to cheaper Rents, lower Labor wages due to lack of Social Net, and a technology-enhanced Transportation network which delivers such products to American shores at rates making them competitive with American products. You may wonder how this relates to Outsourcing. The Outsourcing currently being done is inside the realm of activity where American labor was competitive with foreign labor. The labor entailed a precision and craft producing a quality production system, where the higher American Wages still generated lower Production Costs. These Jobs did much to diminish the building American Trade deficit. They also generated a domestic Hinterland Job market to act upon and actuate their initial quality production.

This Author estimates Nine Hinterland Jobs were lost, for every quality Job outsourced. Why are these Jobs being Outsourced? American Business has realized their are differences in Skill levels required even in these quality Jobs. American Business also realized foreign Jobs markets have attained a enhanced degree of skill, and offer a lower Wage market. American Business immediately takes steps to maximize their Profits, and start to Outsource where it is viable. The Problem arises in that the subsequent Hinterland Job market is equally Outsourced, though unnoticed by Economists. Ricardian Comparative Advantage to Trade turns in Comparative Disadvantage when total Productivity decreases, or when said Trade actually causes total Wholesale Prices to increase (generated by actual increases in Production Costs). American Business finds it more profitable to Outsource the quality Jobs, because of lower Wage scales, but the lost Hinterland Jobs transference raises total Production Costs due to the lesser cost of domestic onsite productivity. Outsourcing becomes a Ricardian Comparative Disadvantage of Trade. lgl

Copyright.LawranceGeorgeLux2004

Election Results 11/03/2004

The greatest threat to the Nation is the Economy. The Dollar is hollow, and the Trade Deficit continues to make it more of a shell. Bush economic policy has been proven of little value in the generation of Jobs. Bush Tax Policy will seek great reduction of Tax revenues, while Bush Spending Policies will continue to expand Government expenditures at already exhibited rates (15% increase since Y2000). The Deficit will balloon with each passing year, this Author expecting We will reach a $1 trillion yearly Defict without counting military expenditures by Y2008.

Bush Foreign Policy lacks appeal of equal magnitude. This Author estimate the American Death Toll in Iraq will exceed twenty thousand Americans by Y2009 (Conservative estimate taking very few lives per day). The Iraqi Death Toll will be much worse for the Draculas in Our midst. The Price of Oil will continue to escalate, as Bush foreign policy will do not to alleviate the Prices, he and his entire staff come from the Oil industry who rejoice at the Profit ratios. Corporations will get greater Tax breaks to produce Overseas, and the Job losses will not be made up. George W. will continue to pratel about National Security, while underfunding and overworking the fighting conponents of the Military who are understaffed, while filling the coffers of the military/industrial complex with Profits from Weapons systems We do not need.

Health Care Costs are rising at about three times the overall Inflation rate, and the Bush administration will never anger the health care industry with any form of restraints (the American Health Care industry will probably continue its overall downward spiral in Patient Care quality). The Above is not what the American people voted for, but it realistically will be what they get. I liked you better, George W., when you were a worthless drunk. lgl

Tax Proposals

The Bush administration has declared that Tax Code revision is a high priority of the second administration. Many Tax Proposals are being advanced, and they will be examined here. The two main Proposals are a National Sales tax, and a Flat Income tax. A third Proposal is for a 'Value-added' tax. Each possesses benefits and losses, most Advocates though, do not see the potential losses which can be huge. Statement of the benefits and gains must be made, and results clarified, before relevant discussion can be conducted.

The National Sales tax would adversely impact Consumption, if it was to be sufficiently high to produce enough revenue to replace the current progressive Income Tax system. The rates of Sales Tax would have to exceed Eight percent, on top of already high State Sales taxes, in order to raise sufficient revenues. The reason it would need to be this high stands that wealthy households do not spend an equivalent percentage of their incomes, as do Poor houselholds. The constriction of Consumer Dollars in Poor households would vastly exceed all the increase in Consumer Dollars gained by all previous Bush Tax Cuts. Actual reduction of Consumption could exceed 20% of the current total Consumption, destroying Business Profits and costing ten million Jobs.

The 'Value-added' Tax adds additional cost to Business operations at every stage of Production. Actual Consumer prices could rise in excess of 20%, with a 3% 'Value-added' tax rate. The application of the Tax is even worse than the National Sales tax, and would probably cost 15 million Jobs.

The Flat Income Tax actually becomes a regressive tax system, if any Tax credits or exemptions are allowed (this means I.R.A.s, 401ks, Personal Savings accounts, Personal health accounts, mortgages credits, etc.). The reason for this is the Poor do not have the ability to save the same percentage of their Income as do wealthy households, and Poor households pay a higher percentage of their Income as tax. The mortgage credits are equally bad, as Poor households cannot afford the largesse of mortgage payments left deductible. Middle-Class and wealthy individuals would reject the Flat Tax, if they lose these tax credits and exemptions, but they should not be so hasty.

A second failure of the Flat Income Tax lies in the differentiation of types of Income. Effective tax rates insist all Income be considered taxable income; i.e., Capital Gains, Interest, Rents, Business Profits, Corporate Income, and Royalties must all be considered entity income, and taxed at the same rate. This is the only method to maintain effective revenues while overall reducing the impact of tax placement. The Middle-Class and Wealthy would reject such taxation, because they held hope of savings over half their real tax payments, by alteration of the Tax Code. This is an unrealizable goal. They might reduce their real tax burden by around 20%, by proper introduction of tax rates.

The primary element is to make All subject to the tax. This means Poor households also pay their share of the tax. This is considered excess burden, unless you intergrate SS taxes into the Flat Tax. Provision will simply state individuals will be taxed at the determined flat rate, all funds entering the SS Fund until a maximum level is reached. Remaining tax revenues revert to the General Budget. Every Taxpayer gets the same maximum payment, so the SS Fund gets added income from Corporations and Business concerns. Business and Corporations will not get Investment credits, but will benefit from reduced tax rates. The necessary tax revenues will flow into Government coffers, but more equitable tax placement will reduce tax impact and enhance economic performance. The Flat Income Tax is the way to go, and the Consumption and 'Value-added' taxes will destroy economic performance and restrict Standards of Living. The Flat Tax, though, must not be regressive. lgl