Politics of the VAT

Democrats fear a Value Added Tax because it is very regressive. (That means the poor pay more taxes as a proportion of their income than the rich). Republicans fear a VAT because it can easily raise lots of money — just look at Europe. But, once Republicans realize it is regressive and Democrats realize it will raise lots of money, it may suddenly be hailed as a rare bipartisan solution to our fiscal problems.

Luck for the Lady President

This past Sunday Argentines reelected president Cristina Kirchner. Like all good politicians lady luck has been with her. Argentina pulled out of its ’01 financial meltdown by; not paying its bills, devaluing its currency and defaulting on its debts. Miraculously, this worked (8% annual real GDP growth) because commodity prices began rising in late ’01 and have remained high ever since due to strong emerging market demand.

Italy is Next!

Greek PM Papandreou’s call for a referendum to approve additional financing has heightened fears that Greece will default. In response 10-yr Italian debt yields hit 6.33% a euro-era high and as much as 4.55% above super safe German bonds. Once the spread exceeds 4.5%, clearing houses can force investors who use Italian debt as collateral to make margin payments. In the recent past, all such requests have resulted in bail-outs. Italy, look out, Berlusconi, bye bye!

High on Hopium

Q3 GDP came in at 2.5%; best performance since Q4 ’10. But, after looking at the economic entrails the number is weaker than it looks. Consumer spending on utilities and healthcare is what drove spending, not discretionary items. Worse, spending rose only because savings rates fell from 5% to 4%. Savings is falling because personal disposable income fell 1.7% in Q3; a huge decline. I bet the GDP number will be revised down.

Ethics for Economists

The Friday File: US academic economists (but not econ bloggers) are adopting a code of ethics requiring them to disclose conflicts of interest by reporting research-funding sources and material financial relationships. This is partly motivated by the documentary “Inside Job” winner of an Academy Award that highlighted the undisclosed consulting relationships of several very influential economists. While it’s regulation, it will reduce the incentive to profit from deception, thus improving information quality.

Playing Footsie with the FTSE 100

Britain’s FTSE 100 (like the S&P 500) is a measure of blue-chip respectability signaling good governance, and so on. Now, some businessmen have figured out how to break into this index without a solid record. First, they buy a firm that’s already public, then they convert shares in their shady firm into shares of the recently bought firm. Note the unintended consequences. Rather than living within the rules, people try to game them.

Brother Can you Spare a Job?

While some are unemployed by choice and some due to a lack of necessary skills, I do not think it’s that many. Here’s why. There are 14 million unemployed and 3.1 million job openings, or 4.6 jobless workers per opening. Prior to the recession the ratio was about 1.5. In only a few industries do we see wage growth and we see increases in unemployment across all ages, occupations, industries and education levels.

Roads for Nobody

China has 46K miles of highways; we have barely 47K. China plans to build out to 112.5K miles by ’30 yet there are just one-third as many cars in China as here, and worse, Chinese highways have high tolls, to pay for the roads, which strongly discourage use. Unless auto ownership booms and drivers can soon afford the high tolls, China is wasting its money. It should build surface roads, not expressways that serve no one.

A Snorkel Perhaps?

Obama’s latest effort to help underwater homeowners, who are current, refinance at lower rates will help, but, it’s no panacea. Estimates are that a million households will take advantage of this plan and will, on average, save $2,500/year. If all $25 billion gets spent it will boost our economy by 0.16% of GDP. Of course this assumes none of the interest income that will be lost ($25 billion) was spent. So, the net effect will be somewhat less.

Reverse Engineering

The Friday File: The US economy has lost manufacturing jobs as foreigners can often make things more cheaply than we can. What manufacturing remains is increasingly high end; it’s less easily outsourced. But, there are exceptions. In Americus, GA 50 people make 2 million pairs of chopsticks/day bound for. . . .China! Turns out poplars, which are plentiful there, are ideal for chopsticks; they aren’t too hard and needn’t be treated with chemicals.

70 Words on the Economy. Daily.