Trump’s Tax Plan is Aimed at the 2018 and 2020 Elections, Not U.S. Competitiveness

Trump’s Tax Plan is Aimed at the 2018 and 2020 Elections, Not U.S. Competitiveness

April 26, 2017

President Trump wants to cut the tax rate for all American businesses to 15 percent, and damn the deficit. If you believe him, any damage from higher deficits will be minor compared to the benefits for US competitiveness, economic efficiency, and tax fairness. The truth is, those claims are nonsense; and the real agenda here is the 2018 and 2020 elections. Without substantial new stimulus, the GOP will likely face voters in 2018 with a very weak economy – and tax cuts, especially for business, are the only form of stimulus most Republicans will tolerate. Moreover, if everything falls into place, just right, deep tax cuts for businesses could spur enough additional capital spending to help Trump survive the 2020 election.

Let’s review the economic case for major tax relief for American companies. It’s undeniable that the current corporate tax is inefficient – but does it actually make U.S. businesses less competitive? The truth fact is, there’s no evidence of any such effects. In fact, the post-tax returns on business investments are higher in the United States than in any advanced country except Australia, and the productivity of U.S. businesses is also higher here than in any advanced country except Norway and Luxembourg.

The critics are right that the 35 percent marginal tax rate on corporate profits is higher than in most countries. But as the data on comparative post-tax returns suggest, that marginal tax rate has less impact on investment and jobs than the “effective tax rate,” which is the actual percentage of net profits that businesses pay. On that score, the GAO reports that U.S. businesses pay an average effective tax rate of just 14 percent, which tells us that U.S. businesses get to use special provisions that protect 60 percent of their profits from tax (14 percent = 40 percent of 35 percent).

Tax experts are certainly correct that a corporate tax plan that closed special provisions and used the additional revenues to lower the 35 percent tax rate would make the overall economy a little more efficient. But lowering the rate alone while leaving most of those provisions in place would have almost no impact on the economy’s efficiency – and the political point of Trump’s plan depends on not paying to lower the tax rate.

Finally, would a 15 percent tax rate on hundreds of billions of dollars in business profits help most Americans, as the White House insists, since 52 percent of us own stock in U.S. corporations directly or through mutual funds? The data show that most shareholders would gain very little, because with 91 percent of all U.S. stock held by the top 10 percent, most shareholders own very little stock.

Moreover, the proposed 15 percent tax rate would cover not only public corporations but also all privately-held businesses whose profits are currently taxed at the personal tax rate of their owners. So, Trump’s plan would slash taxes not only for public corporations from Goldman Sachs to McDonald’s, but also for every partnership of doctors or lawyers, every hedge fund and private equity fund, and every huge family business from Koch Industries and Bechtel, to the Trump Organization..

There is no doubt that the President’s tax plan would provide enormous windfalls for the richest people in the country. Beyond that, it may or may not sustain growth through the next two elections, since even the best conservative economists commonly overstate the benefits of cutting tax rates. But the truth is, there aren’t many other options that a Republican Congress would accept.

 



Donald Trump and Paul Ryan’s Plan to Put Foreign Investors First

March 29, 2017

The “Border Adjustment Tax” (BAT) endorsed recently by President Trump is his administration’s first foray into international economics. It is an inauspicious start.

BAT advocates like House Speaker Paul Ryan promise it will cut the trade deficit by making U.S. exports cheaper abroad and foreign imports more expensive here. The truth is, a BAT won’t much affect U.S. exports or imports, and it certainly won’t create jobs. It would produce a large stream of new federal revenues, and it could trigger retaliatory tariffs on some U.S. exports. A BAT also would enrich a great many foreign investors and companies, and leave a lot of American investors and large companies poorer. All told, it’s the kind of “bad deal” that Mr. Trump once railed against.

Mr. Trump and Speaker Ryan never mentioned a BAT until recently, and the reason they like it now is that it’s a cash cow to pay for their sharp cuts in corporate taxes. The Trump-Ryan BAT would give U.S. producers a 20 percent rebate on the wholesale price of any goods or services they export – 20 percent, because that’s the GOP’s preferred corporate tax rate – and impose a 20 percent tax on foreign goods and services imported here from abroad. It would raise trillions of dollars, because we import about $500 billion more per-year than we export.

For conservatives at least, all those revenues should be a red flag. In a populist period, a subsequent President and Congress may well decide to raise corporate taxes — and when they do, the BAT’s fat revenue stream could well go to fund progressive causes.

Mr. Trump still has no Council of Economic Advisers, so maybe he believes that a BAT will spur U.S. exports and create jobs. Even Peter Navarro should to be able to tell him why that won’t happen. At first, a BAT would strengthen demand for U.S. exports and weaken demand for foreign imports here. But those shifts in demand would quickly strengthen the dollar and weaken foreign currencies, perhaps enough to offset the BAT’s initial impact on import and export prices. In theory, the currency movements triggered by the changes in prices brought about by the BAT should restore pre-BAT prices for both imports and exports, so the only change would be a lot of new revenues from taxing net imports.

In practice, the BAT’s impact on the dollar and U.S. trade is a roll of the dice. As Federal Reserve chair Janet Yellen noted recently, no one knows how closely the currency changes will mirror the BAT’s direct effects on prices. If they overshoot, U.S. consumers will pay more for imports; if they undershoot, U.S. export prices won’t fall much. On top of that, no one knows how much of the BAT tax U.S. importers will pass along to American consumers, and how much of the BAT rebates U.S. exporters will pass along to their foreign customers. Finally, painful retaliation might follow, since China and others won’t take kindly to paying a 20 percent tariff on their exports to the United States, and China’s competitors won’t like the BAT’s substantial devaluation in the yuan-dollar exchange rate.

One effect is certain: The BAT will harm U.S. investors and reward foreign investors as the currency changes reduce the dollar value of U.S.-owned assets abroad and increase the foreign-currency value of foreign-owned assets here. The Bureau of Economic Analysis tells us that in the second quarter of 2016, Americans held foreign stocks, corporate and government bonds, and derivatives worth $12.9 trillion; and foreign-owned financial assets in the United States totaled $20.3 trillion.

If we assume the Trump-Ryan BAT leads to a 20 percent increase in the value of the dollar and a corresponding 20 percent decline in the trade-weighted value of foreign currencies, it would reduce the value of U.S.-held financial investments abroad by nearly $2.5 trillion and increase the value of foreign-owned financial investments here by more than $4 trillion. What kind of deal is that, Mr. President?

The trillion-dollar losers will include U.S. investors in European or Asian mutual funds; U.S. companies with profitable foreign subsidiaries, from Microsoft and Facebook to Coca Cola and Pfizer; and U.S. banks that lend to foreign companies. The trillion-dollar winners will include foreign investors with U.S. mutual funds; foreign companies with major American subsidiaries, from Toyota and Anheuser Busch to Unilever and Phillips; and foreign banks who lend to U.S. companies.

Perhaps the best motto for the Trump-Ryan BAT is “Put Foreign Investors First.”

Robert J. Shapiro, chairman of the economic and security advisory firm Sonecon, was Under Secretary of Commerce for Economic Affairs in the Clinton administration. In the 2016 campaign, he advised Hillary Clinton.

 



What Hillary’s Campaign Missed

November 15, 2016

Last week’s election should be dubbed the revenge of the neglected. The outcome would have been different if Hillary’s strategists had taken to heart James Carville’s famous quip in 1992, “It’s the economy, stupid.” I remember it well, because I pulled together Bill Clinton’s economic program for the 1992 campaign. Of course, today’s economic problems are different from those of a quarter-century ago. But the political manifestation is virtually the same – tens of millions of Americans justifiably dissatisfied with their economic conditions and prospects.

As regular readers of this blog know, I’ve spent several years tracking what’s happened to the incomes of Americans of different ages, races and ethnicities, educational levels and gender, as they grew older. The Brookings Institution published the first results in 2015 covering the period 1980 to 2012. I sent that report to Hillary and Bill Clinton and as many of those who worked for them as I knew. The results refuted the left’s claims that incomes of average Americans have stagnated for two generations – across every category, median household incomes rose at healthy rates, year after year, through the presidencies of both Bill Clinton and Ronald Reagan.

But the results also showed tectonic income changes from 2001 to 2012 as this steady income progress ended. Hillary was particularly struck by the study’s darkest finding: The median income of households headed by people without college degrees — which covers nearly two-thirds of all U.S. households – fell as their household heads aged from 2001 to 2012.  This unprecedented development, of tens of millions of families losing income as they aged from their thirties to their forties, or from their forties to their fifties, held across race, ethnicity and gender, and for all age groups except millennials.

For example, the real median income of households headed by high school graduates ages 35-to- 39 in 2001 fell from $54,862 in 2001 to $49,800 in 2012. (All income data here are in 2012 dollars.) So, these Gen Xers earned $5,062 less at ages 46-to- 50 in 2012 than they did when they were 35-to- 39 years old in 2001. Their counterparts a decade earlier – households headed by high school graduates ages 35-to- 39 in 1991 – saw their real median incomes rise from $51,645 in 1991 to $63,614 in 2000, for gains of nearly $12,000 (about 20 percent) as they aged from their later-thirties to their later-forties.

Baby boomer households headed by high school graduates who were 45-to- 49 years old in 2001 suffered even larger income losses than the Gen Xers: From 2001 to 2012, their real median income slumped from $63,534 to $51,002, falling $12,532 or some 20 percent as they aged from their later-forties to their later-fifties.

Households headed by college graduates didn’t lose income as they aged over the following 11 years, but only barely so. The median income of those households headed by people ages 35-to- 39 in 2001 inched up from $97,470 in 2001 to $100,771 in 2007, and then fell back to $98,845 in 2012, when they were 45-to- 49 years old. Compare that to the 1990s, when households headed by college graduates ages 35-to- 39 in 1991 saw their median income rise from $81,742 in 1991 to $106,454 in 2000, gains of $24,712 or about 30 percent I calculated that about half of all working-age households lost substantial ground as they aged through that decade, and another quarter of Americans treaded water. This was an economic turn the United States has never seen before. It gave meaning to Donald Trump and Bernie Sanders’ claims that the economy is rigged, and it bred the broad anger that ignited their campaigns.

Hillary’s campaign didn’t ignore these developments. But her strategists, intent on reprising President’s Obama winning coalition, focused instead on the special problems of young, minority, and female voters. The campaign offered the Hispanic community a new path to citizenship for undocumented workers, and promised pay equity for women. It called for larger Earned Income Tax Credit checks for working-poor families, and debt relief for recent college graduates. All of these initiatives have merit. But none of them directly addressed or even acknowledged the structural forces squeezing out income gains for much of the country.

Hillary pressed me to explain the long income slump. I told her the truth: These income problems did not bubble up from the trade deals of the 1990s and the offshoring of manufacturing jobs, which happened mainly in the 1970s and 1980s. The fault lay mainly in forces much harder to demonize, namely technological advances and the way globalization and the Internet affect how companies price their goods and services.

Americans love the entertainment and social networks fostered by information technologies and the Internet. But these technologies also restructured the operations of virtually every office, factory and storefront. As that happened, anyone without the skills and confidence to work effectively in an IT-dense workplace saw his or her “labor value” erode and wages fall. College graduates avoided the worst of the income slump, because virtually everyone who earned a bachelor’s degree in the last 15 years is IT literate.

The other major culprits for the recent income squeeze are the Internet and, yes, globalization. Again, manufacturing job losses are not the heart of it. Rather, the Internet and globalization both intensify pricing competition, and businesses facing those strong competitive pressures often find themselves unable to pass along any rising costs in higher prices. So, as energy and employer healthcare costs rose sharply, especially from 2000 to 2008, many U.S. companies were forced to cut other costs. The data show that those cuts started with jobs and wages.

All of these downward forces took hold throughout the 2002-2007 expansion, and the financial crisis and deep recession that followed only amplified them.

The data also show that conditions shifted again in 2013, when energy prices collapsed, Obamacare started to slow employer healthcare premium increases and, with wages and salaries depressed, hiring became an attractive proposition again for companies. The latest data show that incomes have been rising since 2013 across virtually every group. For my friend Hillary, it was too little, too late: A few years of modest income progress have not offset a decade of painful losses.

But Trump’s success as president will depend on sustaining those income gains for four more years. As I’ve said here before, the economy needs a good dose of stimulus, and Trump’s deficit-defying tax cuts should jump-start growth in late-2017 and 2018. But his tax plans are so excessive economically, they could set the Federal Reserve on a course of multiple interest rate increases that slow growth by 2019. Beyond that, the economic challenge that Hillary also would have faced is that income progress ultimately requires healthy productivity gains, but productivity growth have slowed dramatically for few years now. If Trump and the GOP Congress fail to nudge up productivity, they could face their own populist revolt in 2020.



The Vast Economic Costs of Trump’s Plan to Bar Muslims from the United States

June 21, 2016

Donald Trump’s mindset and style virtually compel him to attack anyone who might be a threat or enemy, and he recruits supporters by going after groups he casts as their enemies or threats. His darkest suspicions and contempt are reserved for Muslims. He presents his solution, barring people from Muslim-majority countries from entering the United States, as a low-cost way to fight terrorism. But Trump’s plan would not only trample religious tolerance and a half-century of foreign policies to improve our relations with the world’s 56 Islamic nations; it also would impose enormous costs on the American economy.

Our analysis shows that immigrants and visitors from Islamic countries contributed $334 billion to America’s GDP in 2014 — all of it at risk under Trump’s approach.

Here’s how we estimate those costs. First, more than seven million current U.S. citizens or residents came here from Muslim-majority countries or are married to, or the children of, those immigrants. Based on America’s current per capita GDP, those households contributed more than $189 billion to the economy in 2015. In addition, Trump’s policy would end tourism from Islamic countries. At a minimum, some 3.2 million tourists from majority-Muslim nations visited the United States in 2015 and contributed an additional $145 billion to our GDP.

Let’s deconstruct those costs. First, Census Bureau data compiled by the Migration Policy Institute tell us that, in 2014, 3,013,309 current U.S. citizens or residents were immigrants from the world’s major Islamic countries, including 2,835,510 adults. The total number is higher, since Census data specify the country of origin for U.S. immigrants from the 21 larger majority-Muslin countries but not 35 smaller Islamic nations, including Libya, Somalia and Tunisia. Here, we’ll stick with the official data of more than 2.8 million current adult U.S. citizens and residents from Islamic nations.

Trump’s attacks on Muslims extend not only to those immigrants, but also everyone connected to them by marriage or blood who also reside here. ]According to the Center for Immigration Studies, the average family or household size of immigrants from the Middle East, sub-Saharan Africa and South Asia is 3.12. Let’s assume that half of those immigrants marry or live with other immigrants from Muslim countries, and the other half marry or live with native-born Americans or immigrants from other countries. On that basis, the 2,835,510 adult immigrants from Islamic countries would include 1,417,755 married to or living with each other, forming 708,878 households, and another 1,417,755 households with spouses or partners who are not immigrants from Muslim countries.

Altogether, they constitute 2,126,633 households headed by Islamic immigrants (708,878 + 1,417,755). Some of those households consist of one person, others of single parents with children, and still others with two adults with or without children. On average, we know that these households have 3.12 members; and on that basis, the 2,126,633 households with immigrants from majority-Muslim countries have 2,381,828 children living in the United States.
All told, therefore, we estimate that the households of current adult U.S. residents or citizens from majority-Muslim countries consist of some 6,635,093 people: 2,835,510 adult immigrants, 1,417,755 spouses or partners who are not from Islamic countries, and 2,381,828 children.

The simplest gauge of their economic impact is per capita GDP, which was $28,555 in 2015. That tells us that current U.S. residents or citizens from Muslim-majority countries and their immediate families or households were responsible for $189,431,905,200 of U.S. GDP in 2015.

Trump’s ban on people from Islamic nations entering the United States also would end tourism from those countries. The Bureau of Economic Analysis (BEA) collects data on foreign tourists entering the United States by their continent of origin and how much they spend here as tourists. The BEA does not break down these numbers by country, so we’ll focus on tourists from the Middle East and Asia, which includes three of the four countries with the world’s largest Muslim-majority populations (Indonesia, Pakistan and Bangladesh).

BEA reports that 1,225,500 tourists came to the United States from the Middle East in 2014. The BEA also tells us that 9,697,312 tourists came from Asia; and across Asia. Muslims account for 32.2 percent of the continent’s population. Once again, we’ll be conservative and assume that just 20 percent of Asian tourists who visited the United States came from Islamic countries, or 1,939,462 tourists from Asian majority-Muslim nations.

These two geographic groups add up to 3,165,962 tourists visiting the United States from Islamic countries, or 9.2 percent of all tourists who came here in 2014. This understates the actual number and percentage, because this accounting does not include tourists from large Islamic countries outside the Middle East and Asia, including Egypt and Nigeria in Africa, and Turkey in Europe. All three of these countries are among the world’s eight largest Islamic nations, and together their Islamic populations exceed those of Indonesia or Pakistan.

The BEA also tells us that tourists visiting the United States consumed $913.1 billion in goods and services here. Taking account of the impact of those purchases on U.S. employment and incomes, BEA concluded that tourists visiting the United States in 2014 were responsible for $1,576 billion of U.S. GDP.

Based on our understated estimate that tourism from majority-Muslim countries accounted for 9.2 percent of all tourists visiting the United States in 2014, and BEA’s accounting of the impact of their spending on U.S. GDP, Trump’s plan would cost the U.S. economy another $146 billion per-year from foregone tourism.

All told, if Trump’s plan had been in place and precluded both the immigration of more than 2.8 million adults from Islamic nations who are current U.S. citizens or residents and normal tourism from those majority-Muslim nations, it would have cost the American economy more than $334 billion in 2014 ($189,431,905,200 + $144,707,232,000 = $334,139,137,200).

Donald Trump would put every American’s money where his own mouth is. The United State currently has 133,957,180 households and a total population of 321,442,019 persons. Excluding households headed by immigrants from Islamic countries, America consists today of 131,830,547 households and 314.806,926 people. So, if Trump’s plan had been in place and stopped immigration and tourism from Islamic nations, it would cost Americans an average of $1,061 per-person and $2,535 for every non-Muslim household.



Everyone Will Lose if the UK Exits the EU — Except Donald Trump and his Soulmate, Vladimir Putin

May 23, 2016

On June 23rd, Britons will hold a referendum on whether to stay or leave the European Union (EU), and surveys point to close vote. If Britain does exit the EU, or “Brexit,” the fallout could be serious and widespread. In February, G-20 finance ministers warned that Britain’s leaving the EU “could threaten global economic recovery.”

Brexit also would produce serious challenges for the United States, and possibly for Hillary Clinton. The EU represents much of what Donald Trump is campaigning against. So, a Brexit vote will give Trump an opening to lace his smack-downs of Hillary with talk about his so-called positions on trade, immigration and NATO.

If Britons say “No” to Europe, the first fallout will hit as when global investors pull back Europe and Britain, driving down the Euro against the dollar and, by 2017, driving up our trade imbalance with Britain and Europe. Britain has also been a big advocate of the Trans-Atlantic Trade and Investment Partnership (TTIP), and Brexit could well disrupt those talks.

Trump will call these developments proof that wide-ranging trade pacts don’t work and that Hillary doesn’t appreciate how they weaken countries. In fact, wide-ranging trade deals have been key factors in Europe’s recovery in the ‘60s and ‘70s, the developing world’s rapid modernization since the early ‘90s, and America’s leadership in information and Internet technologies. And if Brexit ends up strengthening the U.S. dollar, it will show that global investors still see the United States as the world’s strongest and most stable economy.

If Brexit happens, the U.K. also will have to restore its border controls with EU countries, including new limits on inflows of European workers to Britain. Those moves could also trigger new calls by right-wing European politicians to close EU borders to new immigrants from Turkey and Syria, which in turn could mean more refugees seeking asylum in the United States.

Trump will likely see these developments as proof that Europe is lining up behind his draconian plans to tighten borders and bar Muslims, and turning its back on Hillary. In fact, every major leader in Europe, including Britain, has condemned Trump’s anti-Muslim stance. Moreover, these new developments won’t change the EU’s distinctive policy of very light controls at the contiguous borders of EU countries — and Britain’s new approach would merely apply America’s current border regime to the U.K.’s borders with the EU.

A “No” vote by Britons also will cost the EU its largest military power, weakening the EU’s security and defense initiatives and its plans for European-wide defense cooperation. As a result, concerns will increase about Europe’s capacity to be an effective geostrategic partner to the United States, and about NATO’s future value.

Trump will likely call these developments proof that our 67-year old commitment to NATO, backed up by 67 years of investments, has gone bad, and that Hillary mismanaged U.S.-European relations. In fact, if Brexit pulls Britain out of the EU-wide defense policy and weakens EU security plans, those developments will enhance NATO’s role and importance, especially as a bulwark to Vladimir Putin’s ambitions to weaken European resolve and sow trouble between the United States and its most important allies.

The downside for Trump in using Brexit as evidence of his own canniness is that his criticisms line up pretty closely with Putin’s. They both say that the multilateral trade agreements of the last half-century have undermined the traditional economic arrangements they favor. They both also see Muslims as threats to the values and order they have each sworn to restore.

On NATO and the U.S.-European alliance, Trump’s views also align more closely with Putin than with U.S. strategy under every president since World War II. And why not — after all, Trump and Putin are equally committed to “Make America (or Russia) Great Again.”

 



Why We Need the Hackers behind the Panama Papers

April 28, 2016

The outrage heard around the world on the release of the Panama Papers brings to mind Claude Rains’s turn as the Vichy prefect of police in Casablanca, “discovering” gambling going on at Rick’s Café. The fact that many of the world’s richest people and most corrupt politicians squirrel away hundreds of billions of dollars in secret offshore accounts has been common knowledge for years. Less well known is the dogged opposition of Congressional Republicans to reforms that would end much of the secrecy surrounding the untaxed offshore wealth of the very rich and very powerful, reforms that most other countries have embraced.

The ownership and assets of these offshore accounts are hidden by complex networks of trusts and shell companies, often distributed across multiple tax havens from the Cayman Islands and Bermuda to Luxembourg and Singapore.  Lawyers and bankers create and maintain these trusts, shell companies and accounts in ways that have kept them hidden; at least until hackers accessed 11.5 million pages of files on the networks held by the Panamanian law firm Mossack Fonseca, a leading fixer in this shady practice.

The outstanding question is why governments allow these networks to remain secret, when they shield trillions of dollars in investment gains and profits that escape normal taxation and the ill-gotten riches of criminal and terrorist organizations and crooked politicians. The United States has two major laws in this area. For 46 years, the Bank Secrecy Act of 1970 has directed that any U.S. citizen, resident or business with financial interests in offshore accounts must report any income earned on those accounts.

The Foreign Account Tax Compliance Act of 2010 goes further. It directs all American citizens and residents that file U.S. income tax to report all offshore financial assets valued at $50,000 or more, and mandates that all foreign financial institutions report to the U.S. Treasury all of their accounts with substantial U.S. owners that also receive payments from the U.S. Both laws carry big financial penalties for violation; but neither law has any enforcement provisions, so the laws have little effect.

As financial losses from cross-border tax evasion and corruption have mounted, the Organisation for Economic Co-operation and Development (OECD) stepped in to sponsor new international standards for financial transparency and, equally important, new protocols for the automatic exchange by governments of the information they collect. Under these OECD standards and protocols, each government agrees to collect information on all account balances, investment income and other proceeds from financial assets within its jurisdiction; and to automatically share that information with the tax administrators of the nations where the owners of those accounts, investments and assets reside.

The G-20 finance ministers endorsed these standards and protocols in 2014. Since then, 97 countries have signed on, including most tax havens.  Even Panama agreed to the new standards and protocols, although the OECD reports that Panama and 10 other countries have not yet implemented them.

But the whole system is on hold, because the United States has not signed on. The Obama administration endorsed the new transparency system and proposed legislation to require U.S. financial institutions to collect the information on foreign-owned accounts held here and to authorize the automatic exchanges. Citing their longtime “respect for privacy rights,” Congressional Republicans flat-out reject both proposals.

On top of the administration’s proposals, Senator Sheldon Whitehouse has offered new legislation to strengthen the proposed transparency regime. His proposal targets many of the stratagems used by U.S. multinationals to avoid U.S. taxes, including shifting profits to tax haven countries. He also would tighten the OECD’s transparency standards and beef up compliance in several ways.

Whitehouse’s bill states that any foreign trust or shell company with substantial assets in the U.S. and managed here will be deemed a U.S. taxpayer, that U.S. taxpayers who set up entities in tax havens will be considered to control those assets, and that funds transferred from the U.S. to those entities will be deemed taxable income not yet taxed.  Most important, the proposal would bar U.S. banks from dealing with any foreign financial institution that fails to disclose offshore accounts opened by Americans and holding non-U.S. investments. Unsurprisingly, the Senate GOP has blocked the bill.

Such a bar is the big stick required to pierce the global secrecy treasured by the very rich and the very corrupt, and ensure that the automatic exchanges of information happen. In 2017, Hillary Clinton and a Democratic or divided but chastened Congress should pass reforms directing that all U.S. financial institutions comply with the OECD standards and protocols. This step would not only create real transparency; it also should produce several tens of billions of dollars in new annual revenues for the Treasury.

These reforms also must bar U.S. financial institutions from conducting business with any foreign financial institution that fails to disclose the ownership and holdings of accounts, trusts and shell companies owned by U.S. citizens, residents and businesses, within their jurisdiction. That’s a threat that every financial institution in the world will have to take seriously.



How Greece Could Short-Circuit the U.S. Expansion

June 18, 2015

In chaos theory, the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world. This week, Greece, a nation with a GDP smaller than the Philippines, became that butterfly – and its ongoing economic struggles could cause storms that would upend the financial stability of Europe and wreak serious collateral damage on our own economy.

Greece has flirted with sovereign debt default for more than three years. The latest talks for another bailout from the European Union and the IMF broke down this week, with Greek Prime Minister Alexis Tsipras calling the EU proposal “humiliating” and the IMF’s conduct “criminal.” Normally, the debt troubles of a country with an economy barely one percent the size of our own wouldn’t matter much to us.  But as a member of the EU and the Eurozone monetary union, Greece’s problems can reverberate deeply throughout Europe.  Global investors already are nervous that the EU and IMF may be unable to head off Greece’s looming insolvency.

If the worst happens, Greece’s default could trigger runs on government bond markets in other Eurozone countries seen at risk, including Italy and Spain.  Since Europe’s large financial institutions hold more than $1 trillion worth of those bonds, a Greek default could spark a financial meltdown rivalling even the 2008-2009 crisis.

This crisis has unfolded in fits and starts for a long time, and the EU and the European Central Bank (ECB) have spent hundreds of billions of Euros trying to support those bond markets and strengthen the banking system. No one knows if it will be enough to stave off the worst-case scenario. But if a genuine crisis unfolds over the next month or so, everyone does know that European voters will never accept another bank bailout. And if Europe’s economy falls into a tailspin, the ECB will have little room to support and stabilize it by cutting interest rates.

Greece’s default also would trigger its exit from the EU and the Eurozone. No country has ever done so before, so no one knows precisely what would happen next. Inevitably, the consequences would be destructive. To begin, if Greece has to abandon the Euro and revive the drachma, its economy would come to a halt.  The government could not pay its employees or vendors, or issue pension checks; and untold thousands of Euro-based contracts today across Greece and between Greek and foreign concerns would have to be renegotiated.  So, on top of an unfolding financial crisis, the balance sheets of those foreign firms would suffer further, and a rapidly-deepening recession would spread across much of Europe.

These prospects explain why President Obama made the Greek crisis a top priority in his talks at the recent G-7 summit. The EU is America’s largest trading partner; and perilous times there would quickly affect U.S. jobs and investment – and those costs would increase as the fast-falling value of the Euro would drive up the foreign prices of U.S. exports. Even more serious, our financial institutions and multinational companies have thousands of deals involving European banks.

In a crisis, that becomes bad news for U.S. stocks: If cascading events threaten the solvency of those banks, many of those deals will become problematic, depressing the value of our own banks and companies.  The results here at home could be a credit crunch, falling employment, and a new recession – and this time, the Federal Reserve could do little to help.

The United States needs a prosperous Europe for not only the obvious economic reasons, but also as our geopolitical partner from the Middle East to the Korean peninsula and the South China Sea. A weakened Europe, consumed by recession and facing the possible unraveling of a half-century of economic union and political collaboration, won’t be there for us the next time a U.S. president needs support to advance American and Western interests and influence.

What are the odds?  A scenario in which everyone loses usually inspires steps to head off the terrible reckoning.  Yet, events in coming weeks may demonstrate how domestic politics in Greece and across much of Europe put the two sides at such cross purposes that everyone will needlessly suffer. At this point, calming this butterfly’s wings will require uncommon statesmanship and a real willingness by leaders in Greece, the EU and Washington to take measures that will cost them popular support.  So far, we’ve managed to side-step a serious crisis, and we could see another deal that papers over the problems for a while.  But if Greece and the EU do run out of options this time, your retirement accounts could lose a third of their value over the next year.



The Peculiar Economics of Falling Oil Prices

December 8, 2014

The sharp fall in worldwide oil prices is a silver lining with a silver lining, even if the linings are a bit tarnished. The price of the world’s most widely-used commodity has fallen sharply over the last five months, from a spot market price of $115 per-barrel in late June to $77 last week. For consumers everywhere, that means major savings that will mainly go to purchase other goods and services; and those boosts in demand should spur more business investment. So, if low prices hold for another six months, analysts figure that growth in most oil-consuming and oil-importing countries could be one-half to a full percentage-point higher than forecast, including here in the U.S. and in the EU, China and Japan.  It’s a blow to the big oil-producing and oil-exporting nations; but the global economy will come out ahead. After all, the U.S., EU, China and Japan account for more than 65 percent of worldwide GDP, while the top ten oil exporting countries, led by Saudi Arabia and Russia, make up just over six percent.

The hitch for this rosy scenario is that much of the revenues that OPEC countries now won’t see would have gone into financial and direct investments in the U.S. and EU. That means that new investments in American and European stocks and bonds could be reduced by some $300 billion per-year. The upshot may be slightly higher interest rates and slightly lower equity prices, which would dampen the growth benefits of lower oil prices.

The lower prices are driven mainly by supply and demand, but market expectations and some strategic maneuvering by Saudi Arabia play a role, too. Yes, worldwide oil supplies are up with rising production from U.S. and Canadian tar sands and shale deposits, and Libya’s fields are fully back online. Moreover, these supply effects are amplified by softness in demand for oil, coming from economic stagnation in much of Europe and Japan, China’s slower growth, and our own increasing use of natural gas. Oil prices also are influenced, however, by the prices that buyers and sellers expect to prevail months or years from now. Last week, when the “spot price” of crude oil was about $77 per-barrel, the price for oil to be delivered next month was almost $10 lower. In fact, the world’s big oil traders see crude prices continuing to decline not simply into 2015, but for a long time: The price for oil to be delivered in mid-2016 is less than $72 per-barrel and, according to these futures prices, not expected to reach even $80 per-barrel until 2023.

Don’t count on a decade of cheap oil. Yes, technological advances have brought down the cost of extracting oil from tar sands, shale and deep water deposits, as well as the cost of producing and transporting natural gas. But the economics of these new energy sources work best at prices higher than those prevailing today. A long period of low oil prices would slow the growth of supply from those sources — and so, drive oil prices back up. The Saudis are counting on it.  They’ve refrained from cutting their own production, which could restore higher prices, in hopes that another year of low prices will slow down investments in all those alternatives sources.

The truth is, oil prices will rise again whether the Saudis’ tactic works or not. While the outlook for much stronger growth remains slim for Japan and much of Europe, an extended spell of lower energy prices will support higher growth here, in China, and across many of the non-oil producing countries in Asia, Latin America and Africa. Stronger growth and energy demand will bring on line more alternative sources of energy — as long as oil prices are high enough for the alternatives to be competitive.

This is an old story. Oil prices fell, and as sharply as they did this year, in 1985 and 1986, in 1997 and 1998, and in the aftermath of the 2008 – 2009 financial upheavals. Each time, oil prices marched up again after one, two, or at most three-to-four years. Of course, that volatility also makes some people billionaires. To join them, what you’ll need is patience and a hedge fund’s access to credit. With that, all you do is go out and purchase a few billion dollars in contracts to take delivery of crude in 2018 or 2020 at today’s futures prices, and then dump the contracts when oil prices once again head north of $100 per-barrel.



Are Financial Crises the New Normal?

June 17, 2014

The policy-making committee of the Federal Reserve Board meets again tomorrow, and the news won’t be encouraging. The one-percent decline in GDP in the first quarter disposed of the Fed’s forecast for 2.9 percent growth this year, and they have to lower it to the range of 2.0 percent to 2.5 percent. That’s just what the IMF did yesterday, forecasting as well that the United States won’t reach full employment again until 2017. So the Fed will leave interest rates at rock-bottom levels through at least next year. But Fed chair Janet Yellen will also continue to wind-down the quantitative easing program, because doing otherwise would signal big troubles ahead for the U.S. economy and scare the daylights out of the markets. In short, happy days are still out of reach, and there’s little the Fed can do about it.

We know it could be a lot worse, since it was much worse not very long ago. And it is much worse in other places. Consider Argentina: On Monday, the Supreme Court refused to let the Argentine government arbitrarily void its contracts with selected American lenders. So, now Argentina — with admittedly the world’s most irrepressibly, irresponsible, freely-elected government — may face another sovereign debt default by the end of the month. And according to the ratings agencies, the place next in line for a debt default is Puerto Rico. If it happens, the Obama administration will have to swallow hard and bail out our island Commonwealth — or risk economic chaos there and new problems for important banks here and in Puerto Rico.

Across the pond, Yellen’s counterpart at the European Central Bank (ECB), Mario Draghi, continues to work overtime to stave off a European financial crisis. Two years ago, Greece, Spain, Portugal and Italy were all teetering towards sovereign debt crises, until Draghi stepped in and pledged that the ECB would purchase as many of their bonds as it took to support their debt markets. Two years later, those debts continue to rise, though not as fast as before. But their economies are still not productive enough to attract the foreign investors they need to support their large public debt burdens. And the large European banks which hold more of those bonds than anyone except the ECB are still unprepared to weather a serious crisis. Yet, you wouldn’t know it from official pronouncements: Wolfgang Münchau reported this week in the Financial Times that the “adverse scenario” designed by the ECB to stress-test those banks’ ability to weather a big shock is, in certain respects, more optimistic than the ECB’s own forecast.

Finally, while China blusters that its renminbi should be an exchangeable, global currency on par with the dollar, the flood of credit it unleashed to maintain high growth in recent years has left much of its banking system technically insolvent. And its “shadow banking system” — the network of arrangements that many Chinese municipalities and businesses use to borrow funds outside the regular banking system — is in equally precarious shape. The only things protecting China from its own financial crisis are strict credit controls and the fact that the renminbi is not an exchangeable currency, which insulate it from the judgments of global capital markets.

The fact is, financial crises have become as common as they were in the 19th century before the rise of central banking. This new cycle started in Latin America in 1985–1986, followed by Spain, Japan and Sweden in 1990–1991, moved on to Mexico in 1995 and East Asia in 1997–1998, and then to the United States in 2008–2009. The European Union has barely skirted its own crisis for the last three years, and the strains are intensifying in China. In ways that no one understands, the ultimate source of these cascading crises almost certainly lies in the globalization of capital markets. Until we figure out how and why this is happening, everyone’s prosperity will be hostage to upheavals that governments cannot control and can only barely manage.



World Bank Shocker — China’s GDP to Top the U. S. in 2014 — Means Little

May 1, 2014

The World Bank shook up a lot of people this week with its declaration that by a new accounting, China’s GDP will top America’s this year. But the meaning and significance of that accounting remain at best elusive. Last year, the World Bank reported that using prevailing exchange rates, China’s GDP in 2012 was barely half that of America ($8. 2 trillion versus $16. 2 trillion). The new report draws on a statistical adjustment called “purchasing power parity,” or PPP, often used to compare GDP in two or more countries when exchange rates fluctuate widely. In analytic shorthand, PPP calculates GDP by looking at what it costs households in one country to feed, house, educate and otherwise take care of itself — including the costs of doing business and maintaining government — compared to households in another country.  

Setting aside the fact that U. S. -China exchange rates have been pretty stable, here’s how PPP works. You start with a basket of personal and business goods and services in each country, taking account of habits, tastes and preferences. So, the Chinese basket will be different from its American counterpart because, for example, Americans eat potatoes and subscribe to premium cable stations while Chinese eat rice and go to outdoor cinemas. Since a serving of potatoes in America costs more than a serving of rice in China, China’s GDP is adjusted (upward) to take that into account. These comparisons also require adjustments for quality. Americans pay much more for health care and housing than Chinese — but the quality and quantity per-household of these services and goods as Americans consume them is much higher and larger than Chinese enjoy. So, World Bank statisticians have to not only observe prices and levels of consumption, but also come up with adjustment factors for differences in quality for each country. The truth is, nobody knows how to do that for countless goods and services, including the Bank’s PPP experts.

The United States is the baseline for PPP calculations. So if China’s basket of goods and services takes half as much income to buy there as the American basket does in the United States, after accounting for quality differences, China’s GDP is adjusted up by that increment. I should also mention that PPP analysis can produce a range of results based not only on all of the adjustments, but also on which of four distinct and accepted ways of calculating PPP the analyst uses. This week’s announcement of PPP-based GDP came after the World Bank applied a new weighting regimen to one of the four methods. What it means, then, depends on all of those assumptions and calculations, which makes any conclusions based on that accounting problematic, at best. As the Bank itself noted, “Because of the complexity of the process used to collect the data and calculate the PPPs, it is not possible to directly estimate their margins of error.

By any accounting, China’s GDP has been growing very rapidly for several decades. The reasons are pretty basic. They start with the world’s largest workforce producing Chinese goods and services. And, thanks to the foreign direct investments of advanced technologies and business methods, much of it from America, Western multinationals have given China the means to make all those workers more productive. Yet, the lives led by China’s people remain a world away from the lives of Americans. Even using the World Bank’s PPP calculations, per-capita GDP in China is just $9,844, compared to $53,101 in the United States.

One more caveat: China’s PPP-adjusted GDP may be said to statistically rival America’s — whatever that means — only because U. S.  growth has been unusually slow for more than a decade. If the American economy had continued to expand since 2001 at the rate it grew in the 1990s, our GDP would still be more than 20 percent bigger than China’s even using the World Bank’s new adjustments and accounting. For that, we have no one to blame but our policymakers and ourselves.