Michelle Bachmann's Repatriation Initiative

According to Michelle Bachmann, more than 1.2 trillion United States dollars could be brought back to America in days as an immediate “stimulus” if the government would implement an overseas corporate profit repatriation tax holiday, and then permanently keep it here in the U.S. The New America Foundation study notes firms that will spend their repatriated cash face two choices, either return it to shareholders or spend in internally. However, according to Reuters, when companies return money to shareholders, the benefactors will likely be wealthy Americans who will benefit and start spending. Despite the repatriation benefitting the wealthy, it will, nonetheless, help stimulate aggregate demand, but in many ways Bachmann’s approach seems shortsighted. At a time when the federal government needs to increase revenue and American businesses operating overseas impede the survival and growth of American jobs, Bachmann proposes that when she enters the White House she would encourage long-term repatriation tax reductions. While well intended Bachmann would therein encourage multinational corporations to move operations outside of the United States. Cutting the corporate tax rate may encourage businesses to bring operations back to America, but cutting repatriation taxes ultimately only encourage foreign investment. Though Bachmann’s plan holds some benefits for the wealthy, ultimately it discourages job growth and therefore the costs outweigh the minimal benefits.  

Plights of the Euro-Zone

According to the Wall Street Journal, decreasing exports, diminished business profits, and low consumer confidence are acting to worsen the euro-zone debt crisis. The decrease in exports can likely be attributed to decreasing demand across Europe and the rest of the world as consumer confidence sinks. This can be linked to the principal of changing expectations shift the demand curve. Currently, as consumers across the globe anticipate the crisis will worsen, they become less willing to spend their money. Despite Europe’s woes, the article notes one nation’s current economic uptake. Contrary to overwhelming decreases in consumer confidence, the opposite has occurred in Italy reflecting enthusiasm and optimism in the appointment of a new leader, Mario Monti following the resignation of unpopular Silvio Berlusconi. Overall, however, the reduction of money in the economy compounds the problems of the Euro Zone, as governments tax revenue decreases. Further, WSJ notes the decreasing demand for Europe’s products decreases the willingness of companies to hire workers, due to perceived high opportunity cost of hiring at the present. The diminished business profits mentioned by the WSJ also threatens to exacerbate the troubles of the Euro Zone, as “an expected slow-down in future activity” may prompt firms to temporarily shut down and adjust variable costs in an attempt to save themselves by adjusting variable costs. 

Economic Decisions of Thanksgiving Break

Over Thanksgiving break, my grandparents came to visit my parents and me. Despite their age, both my grandma and grandpa travel frequently, but given their limited income they faced limited travel possibilities without living beyond their means. After much thought, my grandpa decided to start a small business endeavor, and market himself to cruise lines as a bridge instructor. After ten cruises teaching bridge, however, it became clear to my grandparents that- although less expensive than it would have been otherwise- they still incurred costs greater than benefits by going on cruises. Just like a firm, my grandpa found himself operating in the long-run below his individual average total cost curve, and chose to leave the market.

The day before Thanksgiving, a packaged arrived for my Dad in the mail. Rarely in our household has a single package be an object of such controversy. My dad had caved, buying a flat-screen television, making us possibly the last family in Chagrin to get rid of our antiquated TV and embrace the trend of high-definition. Influenced by changes in technology boosting supply, and changing tastes revoking the flat-screen’s boxy predecessor, my father made the purchase despite the avid protests of my minimalist mother. When it arrived, the TV itself boasted cost-efficiency, asserting via the packaging that it carried operation costs nearly a third of the costs associated with a TV like the one we formerly used. Though it boasts a low opportunity cost, the flat-screened television has still not gained my mother’s approval.

A staple of my family’s Thanksgiving celebration is desert which always features a pie often bought from the local supermarket. While in the past we’ve had one pumpkin and on pecan, this year the pie varieties differed. Instead of pecan pie, my grandmother purchased mincemeat, largely due to the high cost of pecans. My grandmother’s refusal to continue purchasing pecan pie given their price increase demonstrates that- to her at least- pecan pie is an inelastic good. Given her reduced income from recently retiring, the preference for mincemeat pie reveals it as an inferior good, while pecan pie is normal. Also inferable is that mincemeat pie is a substitute good to pecan pie.

Over my break, I grew increasingly tired of the music on my ipod. While eager for some new songs, I faced a dilemma of how to acquire them. I had two option- buy the songs off itunes for nearly a dollar (sometimes more) apiece, or get my music through less reputable methods. While itunes would guarantee me high-quality audio, I could get songs for free from a youtube to mp3 converter albeit with often lower quality. After evaluating the costs and benefits of each option, I opted for the mp3 converter. Despite the occasional sacrifice of sound quality, my utility from free songs still exceeded that of songs purchased off itunes.

After a long day of assisting my mom and grandmother in the kitchen, I eventually got to sit with my family and enjoy the Thanksgiving meal. After consuming significant portions of mashed potatoes, stuffing, roasted vegetables, cranberry sauce, and of course turkey, my enthusiasm for the food I helped prepare began to wane. I had reached the point where, despite the yearnings of my taste buds, my stomach couldn't tolerate more of the heavy Thanksgiving spread. At the point where I started valuing each bite less and less, until consumption stopped adding to my enjoyment and began detracting from it, I stopped eating. My decision demonstrated the law of diminishing marginal utility, that when I increased consumption of a product while keeping consumption of other products constant, I experienced a gradual decline in the marginal utility derived from consuming each additional unit.

        The Economist recently released an article detailing the technological advancements of Africa. Although it still lags far behind other continents in technology, use of cell phones, the internet, and social networking has risen dramatically. While demand for electrical power has already overtaken a meager supply, 24% of residents in Mogadishu access the internet at least once a week. Many access the internet through cell phones, often Chinese models. As inferior goods, Chinese cell phones are more popular in often poverty-stricken Africa than in North America or Europe. Mobile-phone operator Safaricom has 12 million customers, and has been recognized as the most profitable business in East Africa. Their dominance is largely due to rising demand and absence of competition allowing Safaricom to monopolize and expand the market for mobile phone services. The Economist notes “There are already 84m internet-enabled mobiles in Africa. It is predicted that 69% of mobiles in Africa will have internet access by 2014. A week’s worth of data can be had for $3.” Currently, the cost of mobiles with internet access carries to great an implicit and explicit cost, preventing many from purchasing them. However, the costs are expected to drop in coming years. Given the increase in cell phone usage, it would be expected that texting would increase as well, but this is not the case. For those who can afford it, Facebook has made mobile-access to the site free of data charges, and this has made Facebook more valuable compared with texting, although the two serve the same purpose. Disease, corruption, and general instability in Africa has, thus far, kept technological expansion to a minimum. Despite unfavorable conditions, use of cell phones and the internet has still risen, and is likely to continue to rise. 

Today the Wall Street Journal published an article questioning whether the U.S. economy can remain competitive in the world-market with the continued expansion of China’s economy.  WSJ quotes economic historian Niall Ferguson, asserting the U.S. “has gotten bloated with bureaucracy, litigiousness and excess regulation” when explaining why China’s market is more appealing to many manufacturing firms. I think that this is shortsighted. Yes, the U.S. has stricter regulations than China. We also have melamine-free baby formula. Ferguson brings up a very relevant issue: the necessity of regulations. While I recognize regulations create market inefficiencies, they are a necessary evil in order to protect often unassuming consumers and a fragile environment. We also need financial regulations, as counter-intuitive as that may seem. For example, financial regulations may have prevented the mortgage crisis. McClatchy News Agency asked in a recent article; “Why didn't Wall Street firms tell potential investors that the bonds they were selling them were rotten? Why did their business partners, including subprime mortgage lenders, ignore glaring evidence that borrowers weren't qualified and give loans to virtually anyone with a heartbeat?” They misguided and misinformed investors because they could, given the lack of regulations. Although many like to blame regulations for the U.S.’s economic shortcomings, repealing or even reducing regulations is not the way to improve our stagnant economic growth. In order to allow the U.S. to remain competitive against burgeoning economic powers, we need innovation to cause an outward shift in our production-possibilities frontier curve. A need for innovation makes improved education prudent. Although I have little patience with, or affinity for math or science, increased emphasis on these subjects and education in general is prudent, especially when the educational achievements and standards of the U.S. are continually surpassed by other nations 

 As China continues unfair trade practices, policymakers attempt to resolve the issue by penalizing China.  According to the Wall Street Journal, the Senate plans to introduce legislation backed by Democrats Charles Schumer and Sherrod Brown, Republican Lindsey Graham and others, which would penalize China for keeping its currency undervalued. This legislation carries provisions for trade sanctions against China. The article proceeds to offer the viewpoints of Republican Presidential Candidates on the topic of China. Mitt Romney supports a policy he terms “Confronting China,” which includes labeling China as a currency manipulator. I am uncertain of the effectiveness of such measures.

         Certainly China’s practices are to the detriment of the U.S., but we have few ways to stop their actions without imposing further damage upon our ailing economy. If we proceed with the policy backed by Romney and many other politicians, the U.S. may incur severe repercussions. For example, the Council of Foreign relations asserts  using the term "manipulation,"  would trigger negotiations between the two countries and may lead to economic sanctions.  

        To a similar outcome, Romney advocates unilateral sanctions and forbidding the U.S. government from buying Chinese goods and services. As China is one of the largest markets for U.S. goods, restricting the importing of U.S. goods there would harm U.S. businesses through cutting demand for their products, as unilateral sanctions would lessen their consumers. The result of unilateral sanctions would be an inefficient market and potentially no solvency as  unilateral sanctions rarely, if ever, successfully provoke nations to significantly change their policies to meet U.S. demands. Forbidding the purchase of Chinese goods would also create inefficiencies, as the U.S. is currently unprepared for an outflow of Chinese goods. 

      Also according to the CFR, focusing on China's currency may distract from focus on other sources of U.S. economic shortcomings.  Morgan Stanley's Stephen Roach believes the currency  issue is a "red herring” for U.S. policymakers and that the U.S. should instead focus efforts on boosting U.S. savings in order to “redirect the economy away from excess consumption towards more of a savings-based economy, as then and only then can we wean ourselves off of Chinese products."

Employment of Workers Over Age 55

            In early 2001, when I was 6, my Dad’s company went bankrupt, and he consequently lost his job. Immediately, he began to search for work. The process began with a pack of back hair dye. At the time, my Dad was 58, and believed his age would work against him in his search for employment.

            Fortunately, the U.S. economy prospered during this period. Soon, my Dad got a job with an engineering firm in Cleveland. His successful reentry into the workplace is part of the general increase in employment of older people, attributed by the Wall Street Journal to “changing incentives in Social Security,”  improved health, and a surge in attempts by older people to gain employment after their 401(k) balances were hit by the financial crisis.

              As Social Security incentives changed, workers had more incentive to remain in their jobs as the longer they delayed their retirement, the larger their benefits. According to the SSA, if workers retire before 62, they run the risk of having their benefits reduced by up to 30%. As people respond to incentives, this factor, among others contributed to raising rates of older people remaining in the work force.  Similarly, employers have made cuts to retiree health insurance to reduce input costs to production. This lead workers to strive towards working past 65, when they would qualify for Medicare.  

            Also mentioned by the WSJ article in the rise in employment of those over age 55 was a general increase in the American workers’ life span by 3.5 years since 1980. This situation created an increase in supply of older workers. As the economy suffered, businesses began to see to benefits of hiring and retaining older workers, creating a rise in demand for them. The primary reason for this was the reduced labor cost of workers over 55 coupled with with no harm to efficiency through hiring them, according to the NY Times.

            Perhaps most influential in the rate of older workers work place was the financial crisis hitting their 401(k)’s. Once again, my Dad is in this set of people. Before the crash, he had planned to retire, like many, at 65 to qualify for Medicare. Regrettably, the financial crisis set back these plans. He had to make a decision at the margin, and decide whether to carry on with his plans, or retire at an older age. At an opportunity cost of additional years of work, he decided to push his retirement back to when I graduate.

            These factors laid the groundwork for what we see in the economy today- higher unemployment in those under age 55 than older people actively seeking work. However, though there has been a comparative rise in the employment of older people, today’s economy does not necessarily suit their best interests, as those who do lose their jobs struggle more than the average worker to regain employment, and their 401(k) balances continue to experience anemic growth.

            

President Obama's American Jobs Act

            Last Thursday, I watched with my family as President Obama announced the American Jobs Act to the public. The AJA is a plan to boost infrastructure, the construction jobs associated with it, and jobs for teachers and firefighters. Further, it provides for significant tax cuts for hiring new workers, especially the long term unemployed, or raising wages. Additionally, the AJA would cut payroll taxes and give a payroll tax holiday of up to $50 million if a company hires new workers or increases employee salaries. This initiative would be effective under the economic principal “people respond to incentives.” These provisions geared towards small businesses stimulate aggregate demand as consumers experience a rise in income. Like we learned in class, a rise in income increases demand.  Of course, as we’ve also learned in class, “There’s no such thing as a free lunch.” Somehow, these measures must be paid for. As a Wall Street Journal article published today notes, costs incurred by the AJA will be covered by:

§  “Limit on itemized deductions ($200,000 individuals, $250,000 families)

§  Carried interest would be treated as "ordinary income" rather than at capital-gains rate

§  Oil- and gas-company tax breaks

§  Corporate-jet depreciation would change”

         It is important to note that these measures cover costs of $447 billion and also garner an additional 20 billion, according to White House Budget Director Jack Lew.

        As the product of a middle class upbringing, I believe in itemized deductions for the upper class, and therefore support the first measure for covering costs of the Jobs Bill. Warren Buffet recently addressed the injustice of the fact that he, a billionaire, pays less in taxes than his secretary. I agree with Buffet. The upper class, those who can afford it, should have a greater share in the burden. Most notably, this measure alone will raise $400 billion according to Bloomberg Business and Financial News.

       Next, President Obama attacks carried interest, defined as “the share of profits taken by hedge fund managers” by Forbes Magazine. In laymen’s terms, this provision imposes heftier taxation on hedge funds. Whereas before hedge fund managers were able to game the system, lessening their costs by treating carried interest at a favorable capital gains rate (intended to be used to encourage long term investment, but exploited by hedge funds), and incurring a tax rate of 15%, they now are subject to treat carried interests as “ordinary income” raising their taxes to 35%.   

      Third, the president plans to cut Oil and Gas Company tax breaks. For years these companies have used loopholes to pay nearly nothing in taxes. President Obama posed an important question; "Do we keep tax loopholes for oil companies, or do we put teachers back to work?" As we know, the real cost of something is what you must give up to get it. Ultimately by sacrificing subsidies to Big Oil in order to boost jobs for teachers, construction workers, and firefighters, we will experience an increase in income and helping the ailing economy.

       The last measure restricts tax breaks for owners of corporate jets. Opponents of this measure have argued it would hurt jobs connected with aircraft design and construction, but any job losses in this sector are outweighed by job gains elsewhere, especially in Obama’s infrastructure initiative.

http://www.huffingtonpost.com/2011/09/08/obama-jobs-speech-text-video_n_954705.html

 http://content.usatoday.com/communities/theoval/post/2011/09/obama-wants-to-pay-for-jobs-bill-by-eliminating-tax-breaks/1

http://www.forbes.com/sites/deanzerbe/2011/09/12/obamas-ideas-to-pay-for-jobs-bill-are-unlikely-to-fly-with-congress/

http://www.bloomberg.com/news/2011-09-12/carried-interest-to-help-pay-for-jobs-bill.html

http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html

http://online.wsj.com/article/SB10001424053111904353504576566802250477510.html

Is it all worth it?

                David Wessel writes in The Wall Street Journal “Osama bin Laden vowed to bleed America ‘to the point of bankruptcy.’” He goes on to contend “September 11 did not…trigger a wrenching recession.” I disagree with his assertion. He himself notes “The attacks led to Afghanistan and Iraq…wars.” It is because of this statement that I find myself with a contrasting view.            

                The United State’s wars in Iraq and Afghanistan contribute to rising oil prices, and these spiking oil prices increase inflation (Bateman, 2010). This is proven by evidence from the Washington Post; “Before the 2003 U.S. invasion of [Iraq], oil cost less and $25 per gallon… the war changed that equation.” Rising oil prices and subsequent inflation lessen amounts of disposable income, causing harm to aggregate demand.

                Diverting money from equally important endeavors to fighting wars in Iraq and Afghanistan has had an astounding opportunity cost according to Alternet News Orgainization.  Research conducted by Alternet found that “for every $1 billion spent on a combination of education, healthcare, energy conservation and infrastructure investments creates between 50 and 100 percent more jobs than the same money going to Iraq.”

                Though I disagree with Wessel’s contention that the wars have had a negligible effect of the economy, I agree with his views of war expenditures as excessive. A basic economic principal we’ve learned in class is that “Resources should be used as efficiently as possible to achieve society’s goals.” While I recognize the need to protect U.S. citizens, fighting against an elusive enemy in Afghanistan and implementing a democratic government in Iraq at the current time is unwise. This is especially true for the war in Afghanistan, where it is evidenced by Politifact that there are only 25-30 members of Al Qaeda left. Another article from Alternet concludes Al Qaeda has left Afghanistan, and is now based largely in Yemen.  Though some U.S. military presence is needed in Iraq and Afghanistan for the foreseeable future, a drawdown, in my opinion, is reasonable.  

                Like the individual, the government has unlimited wants, but limited resources. Resources are now being spent in a manner unwise and shortsighted. To conclude, I look towards the principal of marginal analysis. The impact of continued overspending in our foreign occupations has a negligible improvement on the safety of U.S. citizens, as Al Qaeda is very nearly absent from where troops are based in Afghanistan. Further, there never were WMDs in Iraq, according to a CIA assessment, and Saddam Hussein’s regime has been toppled. Funds are being diverted from healthcare, education, energy conservation and infrastructure, and inflation is rising, all contributing to a lack in economic growth. Because the costs of our spending in wars in Iraq and Afghanistan outweigh the benefits, I would answer Wessel’s final questions, “Was it all worth it? Are we really that much safer?” with a resounding ‘No.’