by | BLOG, BUSINESS, ECONOMY, GOVERNMENT
Despite what you may have heard from politicians and journalists, trade deficits are not a bad thing… In fact, they almost always indicate a healthy economy.
Some people (including a number of our civil leaders) believe that the United States’ trade deficit is a bad thing. They think that it means that other countries are abusing us. This is just wrong – and economically ignorant. It is the same as saying that a deficit of sugar in your diet is a bad thing. Just wrong.
By definition, a trade deficit is when one country’s people and businesses are buyingmore goods than they are selling to other countries. Rather than indicating negativity or poverty, this highlights that the people and companies in the United States have the wealth to be able to buy more stuff than the poorer people from other countries are able and willing to buy from us. This is reflective of a healthy economic circumstance.
Actually, throughout history when the US has had a trade surplus it generally has been in economic recession or depression. Let’s take a look at what a trade deficit actually is, and why trying to eliminate our trade deficit is misleading and ultimately based in ignorance.
Ultimately, basic economics shows that the amount of money flowing back and forth between two countries has to be the same. What changes is the form of that money: capital vs. consumable goods. When the United States has a trade deficit it means that the United States people and companies as a whole are buying more consumable goods from a country than that country is buying from us. That country in turn is using those dollars
to make capital or other investments in the US – rather than buying consumable goods from US companies. China is a great example of this. The reason that we have a trade deficit with China is because we have a lot of wealth and we are willing to spend money on consumable goods. By allowing this deficit, we are in fact just letting Americans enjoy what they want to enjoy, creating a high living standard. The Chinese, on the other
hand, are willing to forego the current enjoyment of things so that they can invest in their future – by buying US bonds, or investing in US companies (like automobile plants in Tennessee which provides jobs and economic growth to the US). Those in the US have decided – one by one – that they want to buy stuff to make them happy. Let’s let them do that.
Furthermore, a trade deficit is not a US Government deficit, or debt, or anything of the kind. There is no such thing as a “country’s” deficit. It is not the United States government but rather individual Americans and individual American companies that are choosing to spend their money on consumable goods. The deficit just recognizes that in the moment, US individuals and companies are choosing, transaction by transaction, to
part with dollars in exchange for stuff that they would rather have. This is an individual choice that is reflective of individual wealth and ability to spend on consumable goods. We must reject the thinking of some in Congress and elsewhere who are trying to stop US people from buying more stuff from China and other countries. This ignorant recommendation is, by definition, hurting Americans and limiting their freedom to enjoy the things they choose.
An understanding of basic economics shows that trade deficits are a reflection of wealth and success and anyone who denies that doesn’t understand the concepts of trade and deficits.
by | ARTICLES, BLOG, BUSINESS, ECONOMY
I was disappointed to read “How the Bidens Dodged the Payroll Tax” last week in the WSJ, not because Biden is a good guy, but because the author of the screed, Chris Jacobs, gets it all wrong. Those of you who read my columns regularly know that I’m no fan of Biden, but in this case, Biden is in the right. There is nothing legally wrong with how he structured and paid his taxes – to the contrary, it elucidates an ongoing tax inequity that was completely missed in the article.
In order to understand what Biden did and didn’t do, you need to understand a little bit about s-Corps, LLCs, partnerships, and Social Security taxes. Foremost is that Social Security taxes are imposed on individuals’ earned income – salaries for employees and earned business income for independent earners. It is a tax on earned income — and only earned income. It’s money contributed from your work that goes into your retirement social security pension, not your business profits, interest and dividends income, capital gains or anything else. Social security is calculated from your working history, because you are taxed only on your earned income. That’s why it’s dubbed the payroll tax.
So now let’s look at some different scenarios. Say you work for a business operated as a C corp or S corp, and you also are a stockholder in that business. The money you get as a stockholder — such as dividends–is not working income so you do not pay the Social Security tax. But the money you earn on your labor for your work in this company – salary – up to $137,700 (for 2020)- is subject to the social security tax.( Amounts earned over the $137,700 is still subject to the much smaller Medicare Tax).
But it gets more complicated when you consider partnerships (or LLC’s which are taxed as partnerships). If you work for and are also an owner of a partnership, your share of the partnership income – both for your labor and share of profits are included in one number reported to you on a K-1 form. And the full amount is subjected to the social security tax. For instance, say you are a 50% owner of an architecture partnership and the firm makes $2 million, you would get a K-1 form showing $1 million. Though that would be for both labor and profit, you would have to pay Social Security tax on the full amount.
But if you are structured as an s-Corp, you pay yourself a salary. If the architecture firm were an s-Corp and it earned $2 million and each shareholder received a $400K salary and netted $600K in profit, they only pay the Social Security tax on the earned income, the $400K. And this is exactly what Biden did. He paid tax on his earned income.
So with an S-corp, you have cleared defined salary and (hopefully) profits. It is conceivable that, in Biden’s case, his salary was too low. That is a bit unclear. But what is absolutely clear is that the business is not all labor and therefore he should not be paying Social Security on the full amount. The problem, therefore, isn’t that Biden did something wrong or that he used an S-Corp “loophole” to “get away with” only paying tax on some portion of the business. The problem is that just because someone is a business owner should not mean that he has to pay social security tax on his business profits. Remember Social Security is a tax only on earned income and thus Biden rightly paid the Social Security tax only on his salary. The real problem is that partnerships, unlike their C-corp and S-corp counterparts, have to unjustly pay the full Social Security tax on both their labor and profits. This is the real problem with the tax code that has needed reform for many years. Biden and Trump would do well to address this inequality in the future.
by | ARTICLES, BUSINESS, ECONOMY, FREEDOM, POTUS, TRUMP
When I read commentary by people associated with the Club for Growth — known for promoting the rule of law, low taxes, small government, low tariffs, economic growth, etc. — I expect to find analysis consistent with their principles. Therefore, the recent CNS News article on 8/10, “American Manufacturers Come Back, Thanks to Trump,” took me completely by surprise because it was essentially the rantings of someone who is economically ignorant. Ken Blackwell, former elected official in Ohio and current member of the Board of Directors for the Club for Growth advocates for protectionism, pure and simple.
Blackwell praises how Trump instituted “strategic counter-tariffs on bad actors such as China to combat the effects of illegal and abusive trade practices that previously put companies like Whirlpool at an unfair disadvantage.” But this pro-tariff position runs counter to any competent economic analysis. Tariffs clearly and consistently hurt the consumer and taxpayer by driving costs up to everybody in amounts far in excess than any benefits given to those crony beneficiary companies. To call a tariff a “pro-growth economic policy” as Blackwell does is utterly ridiculous, and his entire article reads like a cheap campaign ad.
Tariffs don’t “strengthen” American manufacturers as Blackwell believes; it is cronyism of the highest order. How the Club For Growth — as well as the National Taxpayers Union — can have someone on the board with views that are economically ignorant and destructive to our economy is beyond comprehension.
by | BLOG, BUSINESS, CONSTITUTION, GOVERNMENT, RETIREMENT
There’s another issue with regard to the crushing liabilities of public sector pensions. Several states, such as California and New York, have a constitutional amendment that grants pension entitlement to public sector workers. In other words, once a person is working for the government and they have a defined benefit plan, they are entitled to keep it and transfer it, even if the contract runs out.
This kind of constitutional amendment says it’s a constitutional requirement to pay employees for their pensions. Now, what it should mean legally is that any pension any employee is earned, it is a constitutional obligation. But that’s not the problem. It has been redefined by the leftest political structure and judiciary to mean something else, which from an economic literacy point of view, that something is incompetent. They have defined it to pay the pension not only for what they’ve earned but also include an obligation to continue that level of funding into new contracts, even those that aren’t signed on yet. So even if a contract is over, it’s not really over. And their employer can’t renegotiate it.
In contrast, in private industries, if an employer terminates a defined benefit plan by a negotiation with a person or whatever, they can’t reduce what they already promised, but there’s an amount that is calculable and then that’s it. Whatever you’ve earned in a contract is specific to that contract. When the contract is over, you have to negotiate a new contract. The terms can be the same. The terms can be different. You may suddenly get offered a contract with no medical benefits when you once had medical benefits. By and large, contracts tend to be the same but there is no obligation to have anything in a new contract that existed in a prior contract.
But in the government world in some places, you have to give the person the same pension benefits in a new contract. Therefore, that is a whole additional cost factored into what an employee earns. The fact that he is required to be given that benefit in the future is an additional cost that is never factored into the equation. As a result, we have enormous forced sums of liabilities that add to the unreported sheets. Yet the municipalities say they are entitled to keep that same level of funding, which is economically illogical and illiterate. The crux of the problem is that the amendment is interpreted in a way that interferes with the ability for two parties to contract by giving one party extra benefits. This is both unjust and financially negligent.
by | ARTICLES, BLOG, BUSINESS, CONSTITUTION, HYPOCRISY, RETIREMENT
Over the years, I have written numerous articles on the looming problem of funding public pensions. Many states are facing severe shortfalls and it isn’t due to the economy or the recent recession or the pandemic. The main problem is accounting gimmicks that cities and states regularly do which results in underreporting their pensions. In the private sector, if someone were to underreport a pension, they go to jail for it, but the public sector gets away with it, and the taxpayer is left holding the bag.
Here’s what’s going on. A principle of normal (accrual) accounting is that if you have incurred current expenses, they have to be reported currently. You cannot delay reporting it until a future year, even if it is not paid until a future year. You have to count their costs today. So when you accrue an expense — for instance, a legal fee — you owe that money. Even if the bill arrives after the new year and you pay it that next year, you still owe it for the current year when incurred. It is a payable – that is, a liability – as of the end of the year incurred.. This is accrual basis accounting, and it’s how pensions must be accounted for in the public sector — but they’re not. And therein lies the problem.
When an employee works for a government (or any organization) in a given year, all costs associated with that employment must be recorded as an expense for that year. Naturally, the regular pay iis an expense incurred. That’s an easy enough concept to understand. But there are other things to consider — for instance, a bonus. If you have a bonus that is not paid until the next year, it still has to be recorded in the year it was earned. Now, pensions are not paid out in the year worked or the year after, but they will be years in the future and actuaries can calculate that amount. That amount is not what is booked as an expense. What is booked as an expense is what’s paid. There’s a disconnect between the funding requirement for pensions, and those funding requirements are usually less than the cost incurred.
If that amount is two billion dollars (one billion earned now and one billion in future pension benefits) you are supposed to record two billion dollars. In other words, that liability should be factored in on the balance sheet. But what’s happening instead is that they’re merely recording the one billion earned by the employee as an expense and not accounting for future payouts. There is no measure of a pension’s accrued actuarial liabilities (the current value of earned benefits in the future). The accountants are merely recording the present expenses while underreporting the future ones.
In a given year, you might incur $100 million in future payments for employees who work. So that $100 million is the true cost. Remember that even though the money is not paid for many years, you still need to know what that cost is today, and include that amount in the budget. You cannot say you’ll ignore it and not include it because you won’t pay it for twenty years. But that is what has been happening. Suffice it to say, in the private sector, it’s very onerous. You have to pay in an amount very close to what the cost is so that the company doesn’t go bankrupt and then leave the pensions hanging. That is both right and responsible. But the morons in the public sector think that because the municipality is so powerful, it doesn’t have to do the funding requirement — and therein lies the reason why they are in trouble. They only put the amount that they pay as an expense; they don’t put the whole thing. That is fraud. So now they’re falling further behind. Even if they don’t have to fund it all, they are required to keep a balanced budget, but they don’t.
What’s even more difficult, a lot of municipalities also promised other things like future medical expenses, and those aren’t even booked. They’ll just list it as an expense when it is paid. That’s not right. You can’t promise someone a benefit and have a legal obligation for the future and then not book it on your books. And what’s worst of all is a constitutional amendment in several states that grants pension entitlement to public sector workers. In other words, once a person is working for the government and they have a defined benefit plan, they are entitled to keep it and transfer it, even if the contract runs out. They have defined it to pay the pension — not only for what they’ve earned but also include an obligation to continue that level of funding into new contracts, even those that aren’t signed on yet.
These non-standard, non-accrual forms of accounting for public pensions over the past few decades have resulted in reckless — and dare I say criminal — budgets resulting in billions and trillions of unfunded liabilities that in some places are financially insurmountable. Those that have engaged in such practices should be sued criminally for intentionally filing false sheets on their pensions.
by | ARTICLES, BLOG, BUSINESS, FREEDOM, GOVERNMENT, QUICKLY NOTED
One of my favorite topics is the Jones Act, a little-known maritime law that has a big impact shipping goods. I have written extensively on it before, so I was delighted to see the Competitive Enterprise Institute publish a paper on the topic since the Jones Act has been in place for 100 years now. Below is the Executive Summary, and then a link to the full paper. It is a must-read for understanding why the Jones Act needs to be abolished.
“The Jones Act requires any ship traveling between two U.S. points to be U.S.-manufactured, -owned, -flagged, and -crewed. This heavy-handed protectionist measure was enacted in 1920 with the stated purpose of ensuring a strong merchant marine to support America’s commerce and the nation’s preparedness for war and national emergency. A century later, the evidence is clear: The law has not only failed to accomplish any of those objectives, it has systematically undermined each of them.
Today the Jones Act mostly covers well over 30,000 tugs and barges plying America’s inland waterways, and its punitive restrictions mainly benefit railways and trucking companies.1 As for America’s once mighty oceangoing merchant marine, the law has protected it to death: Less than 100 oceangoing vessels remain in the Jones Act fleet. As of 2019, the few American shipyards that can build commercial oceangoing vessels are being kept afloat by defense contracts.
The law’s supporters argue that because its costs are difficult to quantify, it is not clear that it costs anything. This is highly misleading. The law is designed precisely to restrict the supply of domestic shipping so that American domestic ship operators and shipbuilders can charge more. Shipping rates on Jones Act routes are typically several times more expensive than rates in the competitive international market, especially in terms of cost per nautical mile traveled for a standard container. The Jones Act’s proponents are fervent supporters of “buy American” but the law favors imports over domestic commerce. It is protectionism for foreigners.
The law has also failed its national security mission. The military utility of the Jones Act fleet has faded faster than the Jones Act fleet’s dwindling numbers. Modern warfare requires transport ships that are fast and flexible, while the global maritime industry is heading in the other direction, with transport ships that are increasingly slower, bigger, and less maneuverable. As for national emergencies, every time one requires sealift, the Jones Act needs to be waived so victims can get the relief they need from ships that are actually available.
According to one study, the Jones Act is equivalent to a 64.6 percent tariff on domestic seaborne trade. For Alaska, Hawaii, and especially Puerto Rico, the impact is particularly onerous. The impact of the Jones Act on American energy is also notable, and difficult to justify in today’s world of globally dominant North American oil production and falling prices.
While repeal of the Jones Act would be ideal, at a minimum, significant reforms are long overdue.”
You can read the full analysis here.
by | BLOG, BUSINESS, COVID, ECONOMY, GOVERNMENT
Charles Passy’s article in the WSJ was a veiled plea to save the culinary scene of New York City. With two specific outrageous proposals, Passy’s economic bias here is unbearable.
First, he describes how “bar and restaurant owners throughout the city say such claims are being denied at the present time because of policy exclusions, despite the businesses having paid thousands of dollars for their property and casualty insurance over the years.” As a result, Passy argues that insurance companies should be forced to cover things they never intended to cover (nor could it ever have been an insurable event).
Second, Passy endorses a “measure to prevent landlords of commercial properties from enforcing provisions that hold tenants, such as bar and restaurant owners, personally liable for rent should they be unable to pay because of the pandemic.” In other words, Passy wants to allow tenants to not be personally responsible for paying rents though they specifically agreed to it.
New York doesn’t have the right to pass such laws, giving money out and interfering in contractual relationships in which they are not a party. Not only is it illegal and immoral, but unconscionable. It is astounding that the WSJ would allow such an outrageous article.
by | BLOG, BUSINESS, COVID, ECONOMY, FREEDOM, GOVERNMENT
The WSJ had a thoughtful opinion piece a couple of days ago. The author wanted to “quantify how many deaths were caused by delayed shutdown orders on a state-by-state basis”as a means to examine the efficacy of quick shutdown. Below are some key takeaways, and you can read the piece in full here.
“To normalize for an unambiguous comparison of deaths between states at the midpoint of an epidemic, we counted deaths per million population for a fixed 21-day period, measured from when the death rate first hit 1 per million—e.g.,‒three deaths in Iowa or 19 in New York state. A state’s “days to shutdown” was the time after a state crossed the 1 per million threshold until it ordered businesses shut down.
We ran a simple one-variable correlation of deaths per million and days to shutdown, which ranged from minus-10 days (some states shut down before any sign of Covid-19) to 35 days for South Dakota, one of seven states with limited or no shutdown. The correlation coefficient was 5.5%—so low that the engineers I used to employ would have summarized it as “no correlation” and moved on to find the real cause of the problem. (The trendline sloped downward—states that delayed more tended to have lower death rates—but that’s also a meaningless result due to the low correlation coefficient.)
No conclusions can be drawn about the states that sheltered quickly, because their death rates ran the full gamut, from 20 per million in Oregon to 360 in New York. This wide variation means that other variables—like population density or subway use—were more important. Our correlation coefficient for per-capita death rates vs. the population density was 44%. That suggests New York City might have benefited from its shutdown—but blindly copying New York’s policies in places with low Covid-19 death rates, such as my native Wisconsin, doesn’t make sense.”
The author then went on to examine Sweden’s policies (less restrictive than ours) and integrated those into his analysis:
“How did the Swedes do? They suffered 80 deaths per million 21 days after crossing the 1 per million threshold level. With 10 million people, Sweden’s death rate‒without a shutdown and massive unemployment‒is lower than that of the seven hardest-hit U.S. states—Massachusetts, Rhode Island, Louisiana, Connecticut, Michigan, New Jersey and New York—all of which, except Louisiana, shut down in three days or less.
We should cheer for Sweden to succeed, not ghoulishly bash them. They may prove that many aspects of the U.S. shutdown were mistakes—ineffective but economically devastating—and point the way to correcting them.”
Only time will tell what methodologies worked and what didn’t, but this is an important conversation to have, especially since the economy continues to worsen.
by | BLOG, BUSINESS, COVID, ECONOMY, GOVERNMENT
It might not be so crazy after all for relatively young people who are going broke and having their lives torn out from under them to try to get back to normal in as careful a way as possible: going to gyms, salons, and other businesses. Might it be reasonable for some people to try it out to see if it can help with the infection rate? Can we trust people to be careful?
Some businesses such as FedEx, supermarkets, and medical practices are open and more are starting to or trying to open up, and yet they are not getting a lot of business because people are afraid, or told they need to be afraid. But why not open up and if people are willing to take the risk and practice social distancing and mask-wearing, we should let them.
The economy is horrific the way it is, and it just cannot remain like this. Many people’s lives are now devastated. For many, we have probably passed the point where the cure is worse than the disease.
We know by now that the virus does pose a risk of death, but we also know that in the vast majority of situations, the virus is more mild than it is lethal – especially for certain cohorts. People are well-educated enough to be able to make an informed decision as to what level of socializing they want to engage in for themselves. We should let them make that choice and start to get back to the business of doing business.
by | BIDEN, BLOG, BUSINESS, ECONOMY, ELECTIONS, TRUMP
Democrat Presidential Candidate Joe Biden not only wants to return capital gains to Obama-era rates, but furthermore he would increase them while simultaneously returning the top rate on ordinary income. Biden has said, “I believe we should, in fact, the capital gains tax should be at what the highest minimum tax should be; we should raise the tax back to 39.6 percent instead of 20 percent.”
Add to that the 3.8% Obamacare tax (NIIT) instituted in 2013, and he would have some taxpayers effectively paying a 43.4% long-term capital gains tax! The current total top rate is 23.8%
Biden should know better. The actual impact of raising the capital gains rate by the Obama administration was devastating to the economy. By discouraging the sale of assets, there was reduced capital available for new projects and opportunities, reducing job creation and wages, and resulting in lower revenue collection. Furthermore, the expected after tax rate of return on new projects went down, assuring that fewer of them went forward.
Additionally, there were a number of localities, like the state of California and New York City, which have tax rates of 12% or more and also a large concentration of wealthy people and high performing businesses. Obama’s capital gains rates of more than 37% brought elective capital projects to a crawl. And Biden wants to raise them even higher?
Shame on Biden. Why sell an asset to fund further investment and opportunity when the government takes a large share of the gain with the loss remaining all yours? It makes virtually no economic sense to do so. A higher capital gains rate put a stranglehold on risk-taking and available capital, and would negatively impact the economy.
