Category Archives: Trade

American vs. Chinese poor

China is boosting their determination of poverty to an annual income of $229.30. In the United States, the poverty level is $10,890.

So a poor person in the U.S. makes nearly 50 times as much money as a poor person in China. Additionally, American poor get all sorts of free services (subsidized public transportation, welfare, libraries, food stamps, etc.) from the government that the Chinese poor do not receive.

In fact, China’s per capita GDP is just $4,382. An American living in poverty has higher income than the average person in China.

Egyptian Artifacts At Risk

For centuries, Europeans took Egyptian artifacts and brought them to Europe, most notably by Napoleon and Horatio Nelson. More recently, Egypt had been demanding those artifact returned. But now, amid all the chaos in Egypt, those artifacts are at risk.

Looters rip heads off 2 mummies at Egyptian Museum

Would-be looters broke into Cairo’s famed Egyptian Museum, ripping the heads off two mummies and damaging about 10 small artifacts before being caught and detained by army soldiers, Egypt’s antiquities chief said Saturday.

Zahi Hawass said the vandals did not manage to steal any of the museum’s antiquities, and that the prized collection was now safe and under military guard.

With mass anti-government protests still roiling the country and unleashing chaos on the streets, fears that looters could target other ancient treasures at sites across the country prompted the military to dispatch armored personnel carriers and troops to the Pyramids of Giza, the temple city of Luxor and other key archaeological monuments.

Hawass said now that the Egyptian Museum’s collection is secure from thieves, the greatest threat to the collection inside is posed by the torched ruling party headquarters building next door.

I’m sure, the European countries and museums that have been considering returning many artifacts to Egypt will cancel their plans to do so.

Hopefully, Egypt returns to peace and establishes a freer society and these artifacts can be safe. But I wouldn’t count on it.

Sovereign debt crisis spreading to first world countries.

I’ve written about the sovereign debt crisis numerous times already. See here, here, here, here, and here. But so far, I’ve only written about those “at-risk” countries such as Portugal, Greece, Spain, and Ireland or individual states such as Illinois. In other words, the sovereign debt crisis has so far been limited to “small” countries or states. Debt defaults among these countries or states certainly would cause problems and a sharp decline in financial markets, but likely wouldn’t break the bank. But if this crisis spreads to larger, more financially important countries, it would obviously have a much larger impact, possibly one similar to the stock market crash of 1929.

Marketwatch reports that the sovereign debt crisis may in fact be spreading to a first world nation:

There’s no ‘B’ in PIIGS, but Belgium could eventually cause headaches of its own for the euro zone if a bitter and protracted political fight prevents the country from hitting its deficit-reduction targets.

Belgium, in northern Europe, has seemed an unlikely candidate for sovereign-debt troublemaker. From a fiscal perspective, the country, whose capital Brussels is the home of the vast EU bureaucracy, has been associated more with the so-called core of the euro zone than the troubled “periphery.”

But an increasingly bitter political divide along linguistic lines has left Belgium without a government since April and is beginning to raise some concerns.

Belgium, which has enjoyed solid growth, appears on track to reduce its budget deficit to 4.8% of gross domestic product this year from 5.6% in 2009, economists said. The nation’s deficit is among the lowest in the euro zone and compares well with other core countries, including Germany at 4.5% of GDP, France at 8% and the Netherlands at 6%.

But if a government isn’t formed soon, the 2011 fiscal target of a reduction to 4.1% could be in jeopardy, said Philippe Ledent, an economist at ING Bank in Brussels. That in turn would make it all the more difficult for Belgium to meet its target of bringing its deficit down to 3% of GDP, the EU limit, in 2012.

In reality, a 4.1%, 4.8%, or 5.6% don’t seem too bad, especially considering the 10.6% deficit here in the US for 2010 and 8.3% deficit expected for 2011.

Belgium’s deficit figures raise few alarms, but government debt stands at around 100% of GDP, which compares more closely with Greece and Italy.

U.S. debt, by comparison, also stands at about 100% of GDP.

The financial markets are starting to notice Belgium’s problem:

Belgium has had no problems selling its government bonds. Borrowing costs have risen, however, with the yield premium demanded by investors to hold 10-year Belgian debt over benchmark German bunds standing at around 0.8 percentage point, up from around 0.4 percentage point around the same time last year.

But borrowing costs are far from problematic, Ledent said. Belgium’s premium remains nowhere near comparable to Spain’s, for example, which is at around 1.6 percentage points, much less Ireland’s at around 4 percentage points.

The cost of insuring Belgian debt against default is up sharply since the April elections, but well off the peak seen in mid-June. The spread on five-year sovereign credit-default swaps was at 119 basis points last Thursday, according to data provider CMA. That means it would cost $119,000 a year to insure $10 million of Belgian government debt against default for five years.

The spread stood at around 60 basis points in mid-April before the latest round of political turmoil and peaked at 149 basis points in late June.

“Up to now, there has been no strong impact [on borrowing costs], but I’m not sure it will continue like that,” Ledent said. “If in two, three, four months we still don’t have any government, financial markets will consider that we won’t reach the [budget] target and then there could be an impact on the spread.”

How long can countries like Belgium or the United States continue to borrow at low interest rates? These are countries with deficits exceeding 4% of GDP, in Belgium’s case, or 8-10%, in the United States, with debts equal to 100% of GDP. Logic tells us that in these countries, either taxes have to rise significantly or government spending has to fall sharply. Neither Belgium nor the U.S. is doing much to reduce their deficits and even less to cut government spending. Both countries, along with all other nations, are hoping for and relying on an economic recovery to lift their finances. What if we enter another recession? What if the recovery is slower than they expect, as it has been so far? All this talk of deficit reduction will be gone and we’ll be looking at even larger deficits and debt levels.

Worse yet, what happens when investors demand higher interest rates? As mentioned above, Belgium is already paying an extra 0.4% interest on its debt. That does not sound like much, but with government debt at 100% of GDP, the deficit increases by 0.4% just from the interest payment. This is an additional cost on government at a time when it needs to reduce its costs. It increases the deficit just as the country is trying to reduce it. Furthermore, this creates a self-fulfilling prophecy: worries of a debt crisis will cause a country’s interest payment to rise and deficit to increase, thus increasing the chances of a crisis.

So I will repeat what I’ve written many times: The sovereign debt crisis is far from over. In fact, it is just beginning.

The Causes of the Greatness of the Ancient Greeks and their Decline

Why can’t the US be like the US of the 1950s?

Sam Zell says Brazil is like ‘US in the 1950s.’ CNBC reports:

Brazil is booming and brimming with business opportunities—like the “US in the 1950s”—billionaire businessman Sam Zell told CNBC Wednesday. He said if Brazil continues on the same course, he predicts that the “fiscally conservative” nation will soon be one of the top two countries in terms of growth.

The real estate tycoon said Brazil has 8 percent debt, compared to 70 percent (of GDP) in the US. The country has a AAA rating from several major credit-rating institutions.

Why must we look for Brazil to be the US of the 1950s? Why can’t the US be like the US of the 50s? Let’s examine some changes that have occurred to the US in the last 50-60 years.

In the 1950s, government spending at all levels averaged 27.0 percent of GDP. Non-defense spending averaged 15.5 percent of GDP. Today, government spending is 43.9 percent of GDP and non-defense government spending is 37.7 percent of GDP. So government spending as a percentage of GDP has risen 62.6 percent in the last 50 years and non-defense government spending has risen 143 percent in that time. (You don’t hear these number reported to you on the news, do you?) Click here to see a chart of non-defense government spending.

The government now confiscates more of your money through taxes to pay for this largess. In the 1950s, government at all levels took in 26.6 percent of GDP. Now, government takes 30.4 percent of our money, a 14.3 percent increase.

But that’s not all. In the last fifty years, regulation has increased dramatically. Back in 1950, there was no Department of Transportation, Federal Highway Administration, Federal Railroad Administration, National Highway Traffic Safety Administration, National Credit Union Administration, Consumer Product Safety Commission, Environmental Protection Agency, Occupational Safety and Health Administration, Federal Energy Administration, Farm Service Agency, Food and Consumer Service, Agricultural Marketing Service, Federal Grain Inspection Service, Animal and Plant Health Inspection Service, Foreign Agricultural Service, Food Safety and Inspection Service, Rural Development Administration, to name just a few. Not only do these agencies cost money, they put an added burden on consumers, businesses, and employees which costs the United States $1.5 trillion each year. That’s like an added hidden 10% tax on the economy, which would bring the real rate of taxation up to 40.4 percent.

In the 1950s, government welfare spending accounted for 1.57 percent of GDP. Today, it accounts for 5.21 percent, a 231% increase. Wikipedia explains how LBJ’s Great Society caused this massive increase:

After the Great Society legislation of the 1960s, for the first time a person who was not elderly or disabled could receive a living from the American government. This could include general welfare payments, health care through Medicaid, food stamps, special payments for pregnant women and young mothers, and federal and state housing benefits. In 1968, 4.1% of families were headed by a woman on welfare; by 1980, this increased to 10%.

Lastly, the United States government has actively pursued a policy of limited oil production. Back in 1950, the US produced 5.9 million barrels a day of oil and had net imports of 545 thousand barrels, 8.4 percent of the total consumptions. In 2009, US production had risen only 21.8 percent over the previous 59 years to 7.2 million barrels a day. But consumption had risen 162 percent to 16.9 million barrels. As a result, imports increased 1,680 percent to 9.7 million barrels a day. At a current price around $70 a barrel, that adds up to $248 billion a year sent overseas, about 1.6 percent of GDP. Thus, over the last 60 years, trillions of dollars have left this country, to be spent primarily by unfree societies overseas. See oil data here.

Biden: We Can’t Recover All the Jobs Lost. Michael E. Newton: Yes we can!

Vice-President Biden said:

Vice President Joe Biden gave a stark assessment of the economy today, telling an audience of supporters, “there’s no possibility to restore 8 million jobs lost in the Great Recession.”

I say we can restore those 8 million jobs and a lot more. But first, the government has to do something it is not used to doing: get out of the way. Given the chance, the American people will work hard and smart. We will succeed, but only if the government lets us. All we ask is that the government leave us be to work and earn the wages of our success and assume the costs of the risks we take.

First and foremost, government needs to reduce its share of economic output. In reality, government produces very little, but it does take money and redistribute it, a small percentage of which goes into goods and services that Americans want, though most of these could have been produced by the private sector. Look at this chart I posted earlier. Government’s share of the economy has steadily grown over the last hundred years. Every year, government creates more jobs, but this means fewer people available to work for private businesses, fewer people started new businesses, and fewer areas where private business can work without competing with government-run agencies or publicly subsidized organizations. Private business is being crowded out of the marketplace and it should be no surprise that they are not laying people off. Government needs to reverse this dynamic and enable the private sector to create jobs, take risks, and earn a profit.

Everybody knows that higher prices leads to less demand. Everybody except the politicians in Washington. High income tax rates discourages people from working. Taxes on dividends, interest, and capital gains discourage savings and investment. As a result, Americans are “going Galt” and going into debt. Why work hard to have most of your income taken away from you and given to somebody who doesn’t work? Why save and invest, risking a loss on your investment and paying taxes on any gains, when you can go in debt and have the government bail you out? To encourage work, government should lower income tax rates. To encourage new businesses and increased production, government should eliminate investment income. In fact, why not move to a consumption tax as Alexander Hamilton argued for in Federalist #21:

It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposed—that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty that, “in political arithmetic, two and two do not always make four.” If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

While the working public pays exorbitant tax rates, the government has increased the incentives to not work. The government now provides 99 weeks of unemployment benefits. The government has expanded the food stamp program. The government has been “modifying” loans for those who were underwater. While I certainly believe we should be helping those hard hit by the recession, why not do it smartly? Instead of paying people not to work, let’s spend that same money encouraging business to hire more people and invest capital. In other words, lower taxes and reduce regulation. That is the best way to help those who are unemployed.

The “do it yourself” trend caused by high taxes

For at least 2,400 years, philosophers and economists knew the benefits of specialization, also known as division of labor. Xenophon wrote in the 4th century BC, “he who pursues a very specialized task will do it best.” Adam Smith greatly elaborated on this, as did many others.

Today, however, we are starting to see a trend away from specialization toward “do it yourself.” Here’s an example:

Do-it-yourself trend growing

People stretch dollars by doing their own chores

Across the country, people are taking on chores that only a year ago were hired out to someone else. They’re dyeing their own hair, shoveling their own snow, washing their own cars and taking up paint brushes to brighten their living room walls.

This trend toward “do it yourself” is partly caused by the high rates of taxation in the United States. I’ll give you an example:

If I need a plumber to come fix my sink, first I have to earn the money and give 40% or so to the government in taxes.

Using the money I just earned, or the 60% that remain, I hire a plumber. The plumber knows that he needs X dollars per hour for his work. But because he has to give 40% of his income to the government, he actually charges 67% more than he receives after taxes (ie. he needs $60, but charges $100 with $40, a 67% increase in price, going to the government).

So to pay for $60 of plumbing work, I actually have to earn $167 ($167 – 40% of $167 is $100 to pay the plumber’s $100 so he can keep $60).

Thus, the cost of hiring somebody to do a $60 repair is $167. Even if it takes me three hours to do the repair instead of 1 hour, it just about pays to do it myself instead of hiring somebody.

The result of our high rates of taxation is a terrible choice. The homeowner can either hire a plumber to do the work for him, but with a 40% tax on income, he must earn nearly three times the amount of the plumber’s after-tax income to pay him for his work. Or he can do it himself, in which case the plumber loses income and the homeowner loses both time and income he could have made working at his job.