What if you could inject $1 trillion dollars into the US economy? What if this injection went directly into the private sector?What if government had no direct or indirect role in how or where these funds were spent within the US economy?Do you think by EJ Moosa
(libertarian)
Thursday, June 2, 2011
What if you could inject $1 trillion dollars into the US economy?
What if this injection went directly into the private sector?
What if government had no direct or indirect role in how or where these funds were spent within the US economy?
Do you think that would boost the US economy in any manner?
I do. If President Obama was actually serious about private sector job creation he continues to say is just around the corner, he would as well, and work with Congress to provide a tax holiday on repatriated dollars earned overseas until we have at least recovered the jobs we have lost in the US economy's private sector over the last three years.
Apple, Cisco, and other major US corporations have tried to convince the US government to do just that. With no luck so far.
The Federal Government would rather dream of the prospect of that $1 trillion dollars coming back and being taxed at a 35% tax rate. The corporations have offered a five % rate as an alternative. With our current economic situation, it would seem that even Obama would grasp that 5% of 1 trillion is a lot more than 0% of 1 trillion.
Imagine if tomorrow, $1 trillion dollars began flowing back into the US, back into the already strained banking system, where it could be spent on corporate expansions, corporate research, and other uses.
Imagine if that $1 trillion dollars were paid out as dividends? Or used to repurchase corporate stocks?
These funds changing hands would create taxable events, including local sales taxes, capital gains taxes, taxes on dividends, payroll taxes(just to name a few).
These funds would be spent without the misdirection of the Federal government trying to pick the winners and losers. They would be spent on what those that earned it thought best.
This action would not require anything from the Federal Government other than the OK to bring them home.
President Obama has had this option available to him during his entire term. We have been told how dire our situation has been.
So if Obama believes this, why hasn't he taken these steps to show he is willing to lead this nation's prosperity back to the growth it is capable of?
There are no tax dollars being generated from dollars not repatriated. No economic boost. No new jobs created. No additional tax events generated. A totally wasted opportunity.
If the goal is to enable the private sector to create more job opportunities for more Americans that want to work, then the answer seems simple.
A trillion dollars is a terrible thing to waste. Especially when we need this sort of stimulus now more than ever.
What are your thoughts? Could our economy benefit from an injection of $1 trillion dollars?
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You're about to get your wish. Or more precisely, you got it three years ago. When the financial crisis hit in 2008, the Fed's reply was to raise the monetary base from $800 billion to $2.8 trillion over the course of three years. See this graph at the St. Louis Fed for a chart that shows the increase. That's a $2 trillion "injection". As with all monetary inflations, it takes awhile for the effect to kick into gear, but that's what's happening now. We're already seeing it with gas and food prices, and basic retail prices are about to follow suit starting this month, according to the CEO of WalMart.
Essentially,the Fed have already reduced the purchasing power of all of our dollars by roughly 2/3, even though most people don't realize it yet. Don't worry...they'll realize it soon enough!
Posted By: EJ Moosa
Date: June 2, 2011 04:02:10 PM
Walt,
If I am not mistaken what you are referring to is not the same as what I am referring to. I am specifically talking about the $1 trillion dollars already earned by US corporations, but held outside of our borders.
The dollars you are referring to were not earned, but manufactured. And with them came lots of strings attached.
While I do understand your point, I hope you may also see that had we already tapped that $1 trillion in earned dollars, and put it to use, then perhaps the Fed would have never needed to inject their $2.8 trillion.
Posted By: EJ Moosa
Date: June 2, 2011 04:40:06 PM
Walt,
While the Fed's injections could and will be inflationary at some point, the destruction of real worth in the real estate markets is working to counter balance that.
I also believe that there are at least two types of inflation. And inflation due to increasing demand in a growing economy is healthy. It helps to ration the resources in demand and it should spur development of new resource in a capitalistic free market.
Then there is the type of inflation you refer to. That is the increase in the monetary supply.
From my perspective there is no simple way to discern good inflation from bad inflation because we have been using certain terms and phrases in ways that may not truly reflect what is happening.
For example, when fuel prices were rising, and the Fed intervenes to slow the economy down, this is an action I constitute as negative. It inhibits the desire of the energy producers to bring new product to market, and removes the incentive to have new players to come in in pursuit of those profits.
That is one of the reasons I believe profit margins are so low for the energy sector relative to others, and why we have not yet resolved our energy problems. We are unwilling or untrusting of the markets to bring new products online. Yet we know from experience that in a free market this is what would happen.
I would suggest that there is no such thing as "good inflation". All inflation is bad, including the kind designed to stimulate the economy, because such inflation always leads to the wrong people paying for it. It's paid for, not by those who profit most from it, but rather by those who don't profit from it at all. Inflation is the ultimate unequalizer and the true creator of the ever-expanding gap between rich and poor.
I would also suggest that true economic growth has nothing to do whatsoever with inflation of any kind.
Posted By: EJ Moosa
Date: June 2, 2011 10:47:50 PM
Walt,
Do you not feel that rising prices play an important role in a capitalistic society? What, in your view, is the signal to bring on additional capacity, plant additional crops, or develop new alternative products?
Without prices rising, what incentives are there to take additional capital, invest it and bring those items to the market?
Posted By: Bill Gee
Date: June 3, 2011 10:23:18 AM
Walt - If I may, I'd like to answer this one.
Rising prices are not necessarily a result of inflation. If you look at a standard demand schedule, an increase in price is caused by one of two factors - a change in one of the determinants of demand or a change in one of the determinants of supply. Those changes in determinants are the best triggers for changes in production. Inflation actually "mutes" the supply and demand schedules because it creates an unpredictable varable and often produces mixed signals to producers as to what and how much they should produce. For example, if the price of corn is going up, a farmer may assume that the cause is an increase in demand for their product, so they then plant more corn. However, if the increase in price was caused by inflation, then the farmer ended up planting too much corn and will end up selling his crop at a loss. Further, if consumers are going to purchase less corn due to "sticky wages", the farmer will suffer even greater losses!
Posted By: Bill Gee
Date: June 3, 2011 10:34:39 AM
EJ,
I'd also like to take issue with another presumption your column makes that US corporations actually want to reduce the corporate tax rate. That somehow they have $1 Trillion worth of business that's just waiting to enter the US Market if we just lower the tax rate to 5%. This is simply not true. The majority of US Corporations want to keep the corporate tax rate exactly where it is. The reason why is a form of protectionism against foreign competition. The most successful US companies have subsidiary companies in low-corporate tax foreign countries. These subsidiary companies contribute significantly to their bottom line. What they don't want is for more foreign companies to locate subsidiary companies in the US because they don't want the increased domestic competition.
In other words, the corporations who say they are lobbying for lowering the corporate tax rate want nothing of the kind. If they did, it would have happened already.
Posted By: EJ Moosa
Date: June 3, 2011 10:50:26 AM
Hi Bill,
Tell me how when the inflation number is calculated, how can that portion attributable to demand be removed?
The answer is it can't. So we have one number called inflation which is the sum of both monetary actions and changes in supply/demand.
And then that inflation number is used to curtail demand, if the inflation number becomes too hot. That's one of the reasons all business activity is harmed when the Fed raises rates due to inflation. Some of those increases are needed to bring additional capacity online to meet the additional demand.
Walt says there is no such thing as good inflation. I disagree. Rising prices due to increased demand and limited supply is not only good, but desired.
Unfortunately, the only gauge for rising prices is this thing we call inflation.
It's not as simple as saying higher costs are bad. It's the reason that the costs are higher that must be examined. And the inflation number is not able to accurately do this function.
Posted By: EJ Moosa
Date: June 3, 2011 10:52:12 AM
Bill, the $1 trillion has already been earned by US corporations and held overseas to avoid the current tax that they would incur to bring it back to the United States. This is not in reference to any corporate profits earned inside the United States.
Nor is it a reference to potential future business. It is $1 trillion in the banks.
Posted By: Bill Gee
Date: June 3, 2011 11:18:49 AM
EJ,
Inflation is calulated using the Consumer Price Index (CPI), which measures the cost of a standard "basket" of goods and services that a typical consumer would consume. What it does not factor in is the quantity demanded of each good. Therefore, it is fairly easy to separate the demand factor from the inflation calculation when it comes to actual consumption. What inflation does do is that it creates a need to constantly recalculate the equilibrium price of a good or service, which is the major trigger for production. However, for industries with a production lead time of over six months, a constantly changing CPI or a change in interest rates by the FED triggers such uncertainty that surplusses and shortages in production occur on a regular basis.
If there is a rightward shift in Demand, then prices will go up. Producers will respond to that rightward shift by increasing production. While inflation can be a factor in that rightward or leftward shift due to the income effect, it can be easily factored into the schedule.
Posted By: Bill Gee
Date: June 3, 2011 11:28:14 AM
With regard to the mysterious $1 trillion already earned by US Companies that are simply sitting in offshore accounts. This is simply another form of misinformation. There are many reasons why companies park funds in overseas banks that have nothing to do with avoiding taxes. In the multinational corporation that I work for, we are required by law to maintain minimum bank balances in foreign banks where we do business. We would actually prefer to keep that money in our own banks because it would cut down on overhead costs, but we cannot. Companies that do business overseas must keep that money overseas where they must also pay taxes on it.
Now, a company may want to keep excess reserves overseas for tax purposes, but if they ever wish to use those funds domestically for expansion or to pay dividends, the money MUST be repatriated first. However, if they wish to use their funds in their overseas operations, then the money can stay exactly where it its.
Again, if US corporations had any desire to lower the corporate tax rate, they would have done so already. As it stands, the status quo serves their purposes just fine in order to limit competition from foreign companies. If the corporate tax rate were to be lowered tomorrow, that $1 trillion would stay exactly where it is.
This is not so much adjusting the basket for demand changes as it is in trying to cook the numbers. But read the descriptions of what they adjust and why, and draw your own conclusions.
On the not so mysterious trillion dollars, have a look at this:
Posted By: Bill Gee
Date: June 3, 2011 12:37:55 PM
The recent spike in the price of gasoline is easy. Quantity demanded was flat relative to seasonal adjustments due to the advent of the summer driving season. Traditionally, the demand spike is no more than 2-5% and then it adjusts down again after the summer driving season is under way. The rest of the spike was due to two factors, the sudden supply shock due to the Civil War in Libya and the Fed's program of Quantitative Easing, which weakened the dollar significantly. Since that initial shock, drivers have started to cut back on their driving, plus the government threatened to investigate possible price gouging by the oil and gas industry. This resulted in lower prices due to supply and demand factors.
I'm sorry, but the article you cite is nothing more than a "love letter" to the cause of the corporate elite, and even then it clearly states that a tax holiday will likely only result in stock buy-backs and dividend payments which will only benefit those who own large portfolios of stock - i.e. the filthly rich! According to the article, the last time there was a tax holiday back in 2004, that's exactly what happened! Apple may be the exception to the rule, but Apple is one of the better companies out there and I'm sure Steve Jobs does not speak for the majority of mega-corporations out there.
I'm standing by my guns on this one. If there is a 5% corporate tax holiday, three things will happen:
1) Most of the offshore money will stay exactly where it is due to statutory requirements.
2) Of the cash that does get repatriated, 80-90% of it will be in the form of stock buy-backs and dividends, which will then find its way back into overseas tax shelters.
3) The 10-20% of the cash that does get reinvested in America will go into improving existing productive capacity rather than investing in expansion into new markets and new jobs.
Posted By: EJ Moosa
Date: June 3, 2011 12:57:02 PM
1) Most of the offshore money will stay exactly where it is due to statutory requirements.
2) Of the cash that does get repatriated, 80-90% of it will be in the form of stock buy-backs and dividends, which will then find its way back into overseas tax shelters.
3) The 10-20% of the cash that does get reinvested in America will go into improving existing productive capacity rather than investing in expansion into new markets and new jobs.
+++++++++++++++++++++++++++++++++++
I have to say the above conclusions and then using said conclusions as why it shouldn't happen is one of the many things wrong with America today.
There is nothing wrong with any of the ways described above that these funds would be used.
Many would rather have that money sit offshore than be used here in the US.
If you want America to return to a growth model, you get government out of the way. You do not pick the winners and losers based upon how you want the money spent. You let those that earned it decide for themselves.
America is not open for business as it once was. Yet those that support programs that restrict opportunities seem unwilling t connect the dots as to why things are failing.
We'll just have to disagree. The only thing we know for certain is that what is happening today, well, it just isn't working is it?
