FIRST: HAPPY NEW YEAR TO ALL. I hope 2011 is a great year for everyone. We've been waiting and hoping it will be.
Now, on to the year's first edition of THE ENTERPRISE, going into its 10th year!
THE HEADLINES: (Taken from just a few recent issues of the Wall Street Journal and other news media) AND SOME OF THE FACTS BEHIND THEM
PENSIONS PUSH TAXES HIGHER
Taxes are not down, of that you can be sure. If you ever tallied up ALL the taxes you pay, you'd faint. Not just Federal or State or Local income tax or sales tax, but excise taxes, luxury taxes, (check your phone and cable bills), and other taxes that are called fees....like your car license tags. Check the top of your liquor bottles for a tax stamp there too. If you still smoke, you know there is big tax there too. Now the latest thing driving taxes up is the immense burden of governments to pay for excessive benefits and pensions. Public sector employees make around 40% more than private sector employees in similar jobs, and they have much richer benefits and pensions and pay for less of them. Where does the government get money to pay these high wages and benefits--from you, that's where--from your tax dollar. But these people earned the comp and benefits, some would say. Not exactly, others would counter. They were the result of public unions negotiating the higher packages--with elected officials that those same unions contributions helped get elected. A sweet deal? Not really. It needs to be taken apart and changed.
IN A BIND (DUE TO BINDING ARBITRATION)
Ohio, where I live passed a "binding arbitration" law. If any of those state employees represented by unions (which includes most of them: teachers, firefighters, trash collectors, policemen, and a raft of governmental administrative people) don't like the way contract negotiations come out (not rich enough), they can demand a "binding arbitration" that will force the arbitrators settlement on the governmental unit--like it or not. That needs to change and hopefully our new governor, House and Senate will pass a different law, not one that dumps the costs of any disputed contract negotiations onto taxpayers with no recourse. It's time to rein in the unilateral power of public unions. At this point, one of my liberal friends will say, "but who is going to negotiate for those employees?" How about the competitive markets. Offer a job with a competitive pay scale based on public and private comp and benefit levels and if the employee wants it, fine; if not, let the look elsewhere. Or better yet, put the government jobs out for competitive bidding and let the contracts that way. After all, as President Obama loves to say, "it's only fair."
UNEMPLOYMENT CLAIMS DROP--BUT HIRING IS STILL A QUESTION MARK
There was a glimmer of hope. As one person put it, "the firings have slowed!" Isn't that a line? But have the hirings started? Next time we get stats on job creation, I don't expect a big uptick, but maybe some improvement. Why aren't companies hiring? They don't need to! Using temps, overtime and improved productivity has supported the modest demand increases. Some of the increases in sales over the past half year are because prices are up and not quantities. People make quantities, and thus the demand for people (jobs) lags the actual sales gain. The big question is how retail inventory positions will look at the end of Dec. If they are lowered, restocking will lift the economy and maybe some jobs. If not, it could be a long, cold winter before spring warms things up. But then everyone in America who is working got an extra 2% pay increase coming Jan. 1 thanks to the government spending largesse.
JOB OFFERS RISING AS ECONOMY WARMS UP--ANOTHER HOPEFUL SIGN?
There are reports of notable increases in job posting--Internet postings almost double the year earlier level--which is (hopefully) a sign of a recovery and imminent hiring plans. This is just one data point, but one of the most positive ones in a long time. This is a good sign, as is the increased advertising plans that have been announced. Companies are getting ready to track a recovery--IF one comes.
GIFT SHOPPERS FLOCK TO THE WEB
LOSER PAYS, EVERYONE WINS
Texas has a wonderful new idea (pending law) to curb runaway legal costs. Take a page from Britain's book and make lawsuits "loser pays." This will dramatically reduce frivolous lawsuits and who will like should suffer are the contingent fee lawyers who bring and cause most of them. I hope this gains momentum. It is an idea whose time has come.
TAXES AND THE TOP PERCENTILE MYTH--MUCH ADO ABOUT VERY LITTLE CHANGE
It doesn't matter what the taxes are, the top percentile will get its share, one way of another. In a study from 1999 to 2008, as tax rates meandered up and down, the top ten percent's income varied only slightly.
--Salary ranged from $440,000 (2003) to $552,000 (2000)--in 1999 it was $515,000 and in 2008 it was $504,000.
--Capital Gains varied more, as tax rates varied, but it ranged from $145,000 (2002) to as high as $428,000 (2007), and yet, in 1999 it was $320,000 and in $2008 it was $232,000.
--Dividend Income ranged from 31,000 (2002) to $83,000 (2007) because low dividend tax rates made it more beneficial in recent years.
--Business Income varied from a low of $200,000 (2002) to a high of $284,000 (2006), and in 1999 it was $217,000 and in 2008 it was $256,000.
What do all these numbers mean? They mean that when the economy is down a lot (2002) so is income; and when it's up a lot (2006-7) so it income. And above all this noise, the tax rates only matter very little to this "top Ten-Percent of Richest Americans." This group is savvy enough and flexible enough to shift around and take advantage of whatever the tax laws allow.
OUR DICKENSIAN ECONOMY
The big problem referred to by this headline is the widening gap between the highest earners/wealthiest Americans and the lowest ones. The chasm was big and if getting bigger. And it is not going to be solved by being "Robin Hood," and taking from the rich to give to the poor (who, if history is any guide, will just squander it all over again.) The kind of jobs that are valued in the USA have changed dramatically from the "industrial revolution factory worker, with only minimal education" to a "global knowledge economy worker" who is educated or trained in modern technology well enough to work in the kind of jobs that stay in the USA in the 21st century. That is a training and education issue, and a job misfit issue, and only if it is addressed from that standpoint will any progress be made. Subsidizing the lowest level of workers with extended unemployment and propping them up with high minimum wage levels just assures that they will not adapt and develop the capability to compete and hold a job in the future. The government's human desire to help them is actually hurting them. if tax policy is going to be a tool for closing the chasm, then provide incentives for the top earners/wealthiest to "do something" to help the bottom dwellers help themselves. Don't just grab money and hand it out. That accomplishes little and irritates many.
THE MYTH OF LOW INFLATION
One of the largest illusions being perpetrated on the people of the USA is that inflation is really low--under 2%. Government statisticians may (mis)calculate it that way, but anyone with a few ounces of common sense can tell the truth. IF we measured the CPI (Consumer Price Index) now like we used to a couple of decades ago, inflation would be around 8%--that's right--about 4 times as high. Check the facts: Oil is at $90/bbl, gas is at $3.00 and other energy costs are up proportionally--but wait--the government eliminated those from the CPI a few years back. I guess Energy costs don't impact inflation or our cost of living. Ditto food prices. Just go to the grocery store and look past the traffic-drawing specials at what regular prices look like. American consumers are not just reeling from joblessness or underemployment; they are suffering from a dollar that doesn't go nearly as far as it used to.
AS PART OF MY NEW YEAR'S RESOLUTION I HOPED TO HELP SOLVE SOME PROBLEMS WE FACE
There are three steps to solving any problem:
Understand the problem
Define the problem
Solve the problem
The essence of following this three step process is to find the "root causes" -- those things that are at the bottom of the problems, and solving them. This does not mean solving symptoms. Here is a classic example of why some states lose industry, jobs and population--and it shows in the coming redistricting/re-apportionment as places like Texas gain (4) seats in the House and places like Ohio lose (2) of them! It is a not so subtle hint to the tax & spend liberals who have controlled those states, that their policies are not what the people want.
STATES TAXING THEMSELVES TO DEATH
By DICK MORRIS & EILEEN MCGANN Published in the New York Post on December 23, 2010
High taxes kill states. There can be no better evidence than the 2010 Census. The states that lost House seats -- because they're shrinking, relative to the nation -- had taxes 27 percent higher than the ones that gained seats. Of the seven states that don't have a personal income tax, four (Texas, Florida, Nevada and Washington) account for eight of the 12 seats apportioned to the fastest-growing states.
New York and Ohio lost two more seats. Other losers -- down one each -- are Massachusetts, Missouri, Michigan, New Jersey, Pennsylvania, Illinois, Louisiana and Iowa. What do they all have in common? High taxes. Texas, with the second lowest taxes in the nation, gained four seats, Florida picked up two and Arizona, Georgia, Nevada, South Carolina, Utah, and Washington state each gained one. All have low taxes.
The states that lost seats ranked an average of 24th in taxes and had an average tax burden of $2,267 per capita (weighted more toward the states that lost more than one seat).
The states that gained seats ranked an average of 39th in taxes and had an average tax burden (weighted) of $1,788 -- 27 percent lower than the losing states. People vote with their feet and flee to low-tax states. It's not the climate; it's the taxes.
In New York, the city grew from 7.3 million in 1990 to 8 million in 2000 to 8.4 million in 2010 -- but population upstate shrank dramatically. Some 1.7 million people left New York state in the last decade, the largest exodus any state experienced. Upstate New York is dying, killed by high taxes. The New York City metro area can grow despite high taxes. It's the historical center for immigration from overseas, a glittering attraction for migration from within the country and the foremost global city. But upstate has no such offsetting attractions.
Consider Buffalo. From half a million people in 1960, it has fallen to a quarter of a million. It's lost half its population in 50 years.
The trend is unmistakable: The "losing" states drove out their high-income citizens (and middle-income jobs) with heavier tax burdens. As New York and other high-tax states confront their budget difficulties, they need to be mindful of this trend -- lest they wind up taxing their states into oblivion.
IS THAT TOO MUCH TO START OFF THE NEW YEAR WITH?
Maybe. And I didn't even get into our "domestic politics" outlook and a bunch of "global issues" facing a new House Majority coming in early Jan. to tussle with the Democratically controlled Senate and President Obama. It will be an interesting year, to say the least.
LAST, BUT CERTAINLY NOT LEAST
I found this little "parable" as part of a Newsletter from an investments guy that was forwarded to me. It seemed so appropriate I wanted to share it with you.
I fell asleep at my computer keyboard (in the wee hours of the morning, not in broad daylight, wise guys!), when I was awoken by The Ghost of Hanukah Yet to Come. “To say your country has been spending like drunken sailors is an insult to drunken sailors.” He went on to say that it was one thing when you were running deficits of one or two percent of GDP; if your policies were competent, you could grow your way out of this financial imprudence. “But 10% and 13%? It is not as if you are fighting a war.”
The Ghost scoffed at the notion that the nation’s top Money Man would go around crediting the demand deposit accounts of various entities, but mostly the government, to the tune of trillions of dollars. He said, “Was all this purchasing power borrowed? No! It was conjured out of thin air! And then the Money Man has the gall to say he is not monetizing the government’s debt?” He then related how the smart money caught on to the scam. When central banks become big buyers of their Treasuries’ paper, that’s never a good sign that the debt is going to maintain its value in the future.
The gurus at Goldman Sachs were among the first to wise up, and the gnomes of Switzerland soon followed, and they all began shorting the debt heavily. Yields soared. The Ghost pointed out that when you run a national debt of $15 trillion, every percentage point increase in the average cost of debt raises the deficit by $150 billion. Ten points is $1.5 trillion! The Ghost chuckled, “When rates were real low, the Treasury should have been selling the hell out of the long-dated securities, not bills.” So like a dog chasing his tail, higher rates simply meant more central bank purchases of securities, which drove rates even higher.
Meanwhile, with the regulator of the money supply wildly handing out blank checks, the people came around to the view that the paper money was getting worth less and less. So prices went higher and higher and HIGHER. It all happened so fast. The ghost explained that any asset that had a fixed monetary value became worthless: “You know that saving account you had? It’s now worthless. You know that life insurance policy you had? It’s now worthless. You know those bond funds you had? It’s now worthless. You know that pension you had? It’s now worthless.”
I asked the Ghost, “But what about the people that invested in hard assets? Didn’t they at least make out OK?” “You would think,” said the Ghost, “But you know how the Govmint always likes to gets its nose into things, for the ‘good of the people.’ Ha! The Ghost described how the Govmint determined that it would be unfair and unjust for a few individuals to benefit enormously while the masses suffer. So under the banner of “shared misery” the Govmint imposed a 95% special capital gains tax on hard asset gains. “Theft by government!,” remarked the Ghost.
The financial calamity imposed severe hardship on the public. It sent many fleeing, by whatever means possible—sometimes illegal—to freer and more stable economies, like Brazil and China.
“But Ghost,” I said, “How could we have prevented this?” The Ghost belly laughed, “Do you think I have all night? This is the territory of the Ghost of Hanukah Past, who by the way looks a lot like Thomas Jefferson, but let me boil it down to this: Capitalism rewards success but it punishes failure. And failure is necessary. To require the winners to bail out the losers destroys the incentives of both groups to do better. And there is no substitute for personal responsibility. You set up some bad precedents in the 1930s and really went off the tracks in the 1960s. As they say, the rest is history.”
“Can’t we do anything to avoid this horrible fate?” I said. He replied, “Sorry, that’s not my department. Speak to The Ghost of Hanukah Present.” And then I woke up and got back to finishing the Monthly.
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John L. Mariotti, President & CEO, The Enterprise Group, Phone 614-840-0959 http://www.mariotti.net http://mariotti.blogs.com/my_weblog/