Archive for the ‘Financial Crunch’ Category

GreedSome myths won’t die – take the one about higher taxes retarding employment, investment and economic vitality. The truth is that higher income taxes stimulate employment and re-investment. The proof is historic (our best periods of economic power were highly taxed) and it’s simple math: when income taxes are high, business owners avoid wasting their money on taxation by re-investing money in the business, by hiring, and by internal investment.

How is the average voter so easily duped? It’s easy: Joe Paycheck pays taxes on every dime he earns. He easily buys the myth that if a business pays tax it has less money to hire. Untrue. Businesses avoid paying taxes by hiring more. Joe Paycheck doesn’t realize that businesses pay employees with tax free money – they only pay income taxes if they don’t hire. So the higher the taxes, the stronger the incentive to put that money to good use rather than waste it on paying Uncle Sam.

TED organizers are smarter than that. So why is it they don’t want you to see this video?


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We’ve grown so accustomed to bone-headed behavior by Republican leadership that when they do something normal it’s newsworthy.  Speaker Boehner broke a pledge to fellow Republicans by allowing a vote on legislation not backed by a majority of Republicans.  The details of the deal to avert the fiscal cliff are less significant than the courage shown by the Speaker, who will face a re-election vote within days of choosing country over party.

The prior position of the Speaker nullified democracy and made bi-partisan majorities a near impossibility – only legislation supported by a majority of one party would be considered.  It was brilliant procedure and brilliant intra-party politics – but it was a disaster for building national consensus and practical political compromise.  Let’s hope Beohner’s change of tactics is a harbinger of things to come.

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Washington will be consumed with thrashing out the politics and policy surrounding the Bush tax cuts.  Extend for some, or extend for all?

Here’s the Policy Wonk Plan:

1. Extend for all under $250k, as proposed by Obama, plus

2. Extend and Expand tax break for all, but only for creating new jobs, in the form of:

  • A tax holiday for all payroll related taxation for new employees (full or part-time) retained for at least one year, and
  • A tax credit for all increases in venture capital investments over the prior three years.

The Repugnican leadership want you to believe that a tax break for the rich will create new jobs.  If so, let them show us the money and show us the jobs.

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Bank Pay Cuts

When a company takes in major investors’ money, it usually comes with strings attached – a board seat, special control rights, and, often, a defined role on compensation committees.  This is especially true when the company has no better choices available than to take the money, along with the strings.

It is disingenuous for the Wall Street Journal to decry this when the investor happens to be the Treasury or the Fed.  Bloomberg got it right, quoting a Delaware investors’ lawyer, saying “…it was inevitable, and it was their own damn fault.”

This is not creeping socialism, but tough, hard, unforgiving capitalism coming back to bite its most aggressive proponents and successful beneficiaries.

Taxpayers to banks: If you wany my money to run your bank, you’ve got to agree to my conditions.  If you don’t like it, get your money elsewhere.  If you can’t find the money, and you’re insolvent, well, we’ve got the FDIC to take care of you.  Take your pick.

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Economists like to measure the health of an economy by looking at growth.  But is there a point where we will simply have enough stuff, and the real human utility of additional industrial production will be zero?  Perhaps the current economic crisis a reflection, in part, of a world in which demand for more goods and services has faltered for the best of reasons – many people simply have enough.   The job losses and foreclosures of today may be an unintended by-product of an economic system that depends on continuous growth for stability, and has not yet adapted to finite demand.

Some economists are preparing Americans for a reset – a step back to lower asset values, perhaps a lower standard of living, and then a return to more moderate growth rates, fueled less vigorously by excessive leverage.  Perhaps instead they should be preparing for an economic system that will be healthy and stable as economic growth approaches a natural limit.

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If we’re going to continue to buy Japanese cars, Arabian oil, Chinese goods, and so on, then we must have something to sell, too.  We have a national ‘credit card’ with the highest credit limit of any nation in the history of the world, but for all that, it is also a finite credit limit.  To pay the bill, we must export.

Pat Buchanan is right to recognize this problem, although his prescription, pure protectionism, is outdated and won’t work. He is also correct in his observation that the world will be buying literally billions of automobiles in the next decades.  The Economist estimates that by 2050 the world’s automobile fleet will grow from 700 million cars today to over 3 billion, with China alone driving more cars than the entire world fleet today.  We must have a substantial piece of this market, and that is why the bailout question is so vitally important.

Think U.S. automakers don’t stand a chance?  Think again.  A record 65% of GM’s sales in the first quarter of this year were outside America.

Barack Obama put it succinctly when he said the stakeholders in the auto industry must devise together a plan to create a sustainable auto industry.  If they will do it, that’s an investment worth making.

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If there is a bailout, it should like a whole lot like a planned bankruptcy.  What’s that look like?

Stockholders – wiped out.
Creditors – fully at risk, substantially written down, and in control.  Including Uncle Sam, who will be last in, and should be first out.
Management – the creditors get to decide.  Largely out.
Board – the creditors pick a new board.
Employees – contracts void, wages down, numbers down.  Toyota’s U.S. plants will be the benchmark.
Suppliers – ordered to continue to supply.

Good for GM and good for the country.

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