The jobs-creation killer that is high corporate taxes

WSJ op-ed by Laura D’Andrea Tyson and others lamenting the US’s relatively high corporate tax rates and its effect on dampening job creation here.

Gist:

All of the business leaders interviewed for this study agreed that U.S. tax policy has a “major impact” on their competitiveness and investment decisions, and most said that policies like limits on skilled immigration handicap their companies.  In the words of one executive, tax considerations are “often one of the largest line items in the investment projection.”  Moreover, many of these leaders voiced concern about the future ability of this country to attract and grow corporate investment, R&D and jobs.  U.S. multinationals will not aggressively invest and hire here at home if they can’t realize attractive returns from doing so.

Depressing stuff, given the anti-business mood in Washington.

The case for NOT punishing BP too much

Bloomberg Businessweek article.

Simply put, BP plays too big a role in the US market to let it go under.  If it does, the loss will compromise what little energy security we possess.  

So Obama backing off some, saying on 16 June that "BP is a strong and viable company, and it is in all of our interests that it remain so."

BP's skill in negotiating its way into strategically important regions--like post-Saddam Iraq--is considered a serious US national security asset.

The Russian dream

Pic here.

Bloomberg Businessweek piece.

It is one of the great memories of living in the USSR in 1985:  everybody was in apartments and nobody really to have a house, unless you were rich or connected and had the dacha.

Well, here's Medvedev bitching about the same almost two decades later, noting that 77% of the country's 142 million live in apartment blocks.  

So here's the modern equivalent of Lincoln's land give-away (the Homestead Act), as Russia has amassed almost 2.5m acres to "seed the land with single-family homes."

Says the guy who runs the government's fund to promote housing:  "The person who has something to defend is a different kind of person."

Amen.

The buy/sell on US-China trade

Bloomberg Businessweek story on how to move forward with China on trade.

The five ways?

#1) really crack down on the China trade a la Krugman;

#2) declare an emergency a la Nixon 1971;

#3) use the WTO on China big time;

 #4) keep up the jaw-jaw-jaw on as many fronts as possible; and 

#5) get our own house in order.

My sense?  It will be a combination of all five in some measure.

What really attracted me to the piece was the weird chart above and realizing what a strangely low-tech trade we have with China--in terms of what's been growing the most over the last decade.  We send beverages and tobacco, ag and livestock, waste and scrap and some basic industrial commodities.  They send chemicals, computers and electronic products, paper and transportation equipment.  Pretty basic really.  I mean, when the growth is highlighted, what's the big difference our trade with China and Brazil's trade with China?

Chart(s) of the day: Old Core debt at WWII-era levels

Two from The Economist on Old Core debt.

First one shows how we’ve collectively returned to the public debt levels, as a percentage of GDP, that we had coming out of World War II—roughly 120%.

Well at least it took the biggest global economic crisis since the Great Depression to achieve it.

Why it may prove much harder this time to whittle it down:  personal and industrial and financial sectors are much more indebted now.

When all of those sectors are added together, the US is in the middle of the pack, as the second chart shows, behind Japan, Britain, Spain, South Korea, Switzerland, France and Italy.  Collectively, the nation owes 3 times its annual GDP.

On households, I’m assuming they’re only counting the “underwater” portion of mortgages (the non-asset-backed portion). 

The usual underlying logic on assuming debt that’s not asset-backed is that future growth will allow you to pay it off.  But as The Economist warns, that’s perhaps a very poor bet in societies experiencing profound aging.

Keynesianism comes with the same dangers for state capitalists

WAPO story detailing the "genius" that is economic planning in the obviously superior Chinese economic model.

Unlike in the United States -- where President Obama's large stimulus plan became the subject of protracted congressional wrangling and was shaped to include tax cuts and aid to states -- Chinese leaders followed a simple mandate: Spend and build.

Forget the tax cuts; in China, it was infrastructure, infrastructure and more infrastructure.

China was already awash in big-ticket construction projects. The stimulus allowed China to speed up some projects, begin digging on others and extend the building boom to less-developed areas in the country's west and north. The result, 18 months after the stimulus was introduced, is an astonishing frenzy of building -- highways, subways, airports, bridges, high-speed rail lines and even new cities constructed, literally, in the middle of nowhere.

Hmmm.  Impressive.

Now the truly scary parts.  First, what do we know of these economic "geniuses"?

Several economists said it was difficult to determine the worth of all the spending because there is no official, centralized list of projects -- making it difficult to untangle whether projects are funded from stimulus loans, from local governments floating bonds or from some combination of the two.

"It's a black box financed by black laws," said Xu Xiaonian, an economics professor with the China Europe International Business School. "There's not enough information to make any sensible judgment."

Second, our stimulus was set up by federal spending.  In China, cities and provinces aren't allowed to take out loans like that, so they set up dummy investment entities that assume the loans. The result, despite this infinite cleverness (indeed, is it not a NEW ECONOMIC MODEL?):

As a result, economists said, local governments are now sitting on a total potential debt bomb of 7 trillion to 11 trillion yuan.

"There's tens, or hundreds, of Dubais waiting in the pipeline," said Xu, referring to the debt-laden Persian Gulf emirate. "It was a panicked reaction to the global crisis. So they rushed out to spend money wherever they could. They borrowed from me -- and from every Chinese." He added another ancient proverb: "You eat your dinner at noon, you have to starve at night."

No question the stimulus worked both here and there, but the price tags are similar--as is the Keynesian "genius."

Ain't no such thing as a free lunch, I believe Prof. Xu said.

In an age of network building and globalization's rapid expansion, the "robber baron" philanthropists are required to hold off the populists

Economist story that just reminds me that, in globalization terms, we are living through an age of great “robber barons” and their subsequent personal guilt expressed in their laudable but somewhat quixotic attempts to fix the world with their wealth.

Gates cannot become Gates without globalization, nor can Buffett.  But globalization, with its capacity to make a huge world seem that much smaller, makes the disparity between fantastic wealth and the rest of us all that much more apparent 

The last time we saw this sort of progressive largesse?  Naturally, it was during the microcosmic globalization that was America’s sectional economies being knitted together into a continental one following our Civil War.  Swap out Carnegie for Gates, and the song remains the same—just on a grander, truly global scale.

Natural and good, it’s just not enough.  The populism must be followed by the progressivism, so I understand the reach for Obama, who is perceived as being as anti-business and wealth as Theodore Roosevelt was.

The moral case for entrepreneurs

Lexington column in The Economist.

Clearly, Americans are down on free enterprise.  It sounds asinine after all entrepreneurs have done for this country over the decades, but it's true.  I daily listen to all sorts of otherwise sensible people spout all sorts of populist crap that's just embarrasses themselves far more than it reveals anything dark and dirty about American capitalism.

Argument from Arthur Brooks, president of the American Enterprise Institute:  Americans are about 70-30 in favor of free enterprise, but the 30% are firmly in control of Washington. 

Lex's wisdom:

The American right misses Mr Obama's real flaw.  He is not a "socialist"; but he does not understand business.  As even Democrat-leaning CEOs complain, he neither expresses enough appreciation of capitalism nor shares the wavelength of those who practise it.  Bosses are ushered in for photo-calls and then ignored.  It is one thing to seek redress from BP, another to vilify it as an alien invader.  He is interested in economics and technology; but not in how you make money. That coolness is a weakness . . .

I think this is accurate.  Obama has never been a businessman and does not understand the logic whatsoever. And the more he displays it, the more plausible becomes a GOP win in 2012 if they nominate a biz-friendly sort instead of some dumbass social conservative.

The end of the Third World?

A map of the world distorted to depict projected shares of global GDP in 2015.

Economist piece.

Bob Zoellick, World Bank pres., says "2009 saw the end of what was known as the third world"--meaning the end of a distinct, separate part of the world that is aid-dependent and unimportant.

Is this a plausible notion? asks The Economist:

While the rich world stumbles out of recession, Asia, Africa and Latin America are accelerating and contributing more than ever to world output. Two fast-growing countries, Turkey and Brazil (“powers of the future”, says Iran’s president), struck a deal in May that was intended to break the deadlock over Iran’s nuclear programme. Though less than meets the eye, the agreement was still an intriguing case of emerging-nation diplomacy. And the football World Cup gets under way this week in South Africa, arguably the poorest country to host the event.

Yet at the same time, Mr Zoellick’s bank is not in any danger of going out of business. 

The simpler argument, says the paper, is that the Third World dies when the division between First and Second Worlds ends in 1989 ("end of history").

But the world is still "binary," says the paper, noting that 1B ("bottom billion" live on less than $1.25 a day (basically one half of the one-third of the world's population in my Gap).

Can we at least still buy the dependency theory?  Not when south-south trade (and south-BRIC trade) rises twice as fast as global trade.

But aren't these nations hopelessly in debt?  Public debt in emerging economies is 40% of GDP and flat, while Old Core public debt was 75% of GDP in 2007 and rising toward 110% by 2015, says the IMF.  So South Africa has a better credit rating than Greece.

Nice conclusion:

In 1826 the British foreign secretary, George Canning, boasted that he had “called the new world into existence to redress the balance of the old.” Now the third world has come into its own to redress the imbalances of the old. Canning and others also helped to transform the diplomatic architecture of Europe after the end of Napoleon. Far less has been done—in international financial institutions, in patterns of aid-giving and in diplomatic habits—to reflect the reality of the third world’s end.

As I've long argued:  dependency theory turned on its head, and if that's not the end of history, then it's the end of Leninism.

The EU's "terrible" rules: better or worse for entrepreneurship?

Economist story lauding the "blooming" environment of Europe's tech entrepreneurs.

The EU is derided as biz-unfriendly with all its rules and regs. But the chart suggests otherwise.

So yes, a small entrepreneurial pool compared to Silicon Valley America, but moving in the right direction and hardly damaged by the EU integration process per se.

China: moving ahead with yuan-settled trade

WSJ story noting that "China government will expand a trial program for settling trade deals in yuan to most of the country . . . in an effort to accelerate the internationalization of the Chinese currency after a slow start."

The program started just last July, replacing the long-held norm of denominating trade deals using dollars or other foreign currencies.  Until now, only Shanghai and Guangdong-province companies could settle in yuan and only with companies based in Hong Kong, Macau and a few foreign nations.  Now the program grows to 20 provinces and major cities.

The goal?

... to gradually make its currency more important internationally, and reduce is reliance on the dollar, which [Chinese officials] have said leads to outsize impact from U.S. economic policy on China and other countries.

The fear is natural enough:  ". . . U.S. deficits could lead to inflation that weakens the value of the dollar."

This shift will be slow, because as China proceeds, it moves into an undiscovered territory.  But it's a good thing and an inevitable shift. Frankly, we need China to make the dollar less relevant as a global reserve currency.  It won't stop being one--ever.  But it should not dominate as it has in the past, because that reality allows us too much freedom for fiscal irresponsibility.

As I have said here many times, I would like a future global economy where the euro and the yuan (or some "asia" that includes the yuan) can, in combination, overshadow the dollar and force its corrections in value. This is the next, most natural iteration of the global economy, and however China moves itself and us collectively down that path, we must welcome the evolution, as unsettling as it may seem to us in the here-and-now.

Do not fall into the fallacy of thinking this shift only benefits China and only penalizes us. The discipline we gain is much needed, and China will find itself ever more constrained by this new financial connectivity.

They left the Carolinas, then the Caribbean, then Mexico, and now China?

WSJ story:

Rising labor costs in China are forcing U.S. apparel and accessories retailers, such asAnnTaylor Stores Corp. and Coach Inc., to consider relocating at least some of their production to countries with cheaper work forces. But doing so could risk increasing other expenses, such as shipping.

"We are looking to move production into lower-cost geographies, most notably Vietnam and India," Mike Devine, Coach's chief financial officer, said at a conference last week. The luxury-handbag retailer already produces goods in those countries, but plans to increase its presence in both of them.

Guess Inc. is thinking along similar lines. Dennis Secor, the fashion brand's chief financial officer, said in an interview that Guess is looking to build its production capabilities in Vietnam, Cambodia and Indonesia.

JC Penney says its apparel makers have been leaving China for Indonesia, Vietnam, India and Bangladesh for the past five years.

Nobody can sit still on the production chain, and China, with its rapidly aging population, has to move faster than most.

Bergsten: the imbalance threat is still there

Fred Bergsten op-ed in FT.

The key logic:

Global imbalances are about to jump again. New estimates from the Organisation for Economic Co-operation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300bn (€251bn, £208bn) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further . . . 

Whatever the intent, these European developments will have effects similar to the overt steps taken by other major countries to enhance their trade competitiveness. The most extreme case is the massive intervention by China and surrounding countries to keep their currencies severely undervalued. Other emerging markets are likewise seeking to expand further their war chests of foreign exchange by running large external surpluses. . . The eurozone has joined this “new mercantilism” and the result will be a sharp rise in global imbalances.

The counterpart increases in deficits will again accumulate mainly in the US as no other country could attract the requisite financing. The large deficit countries within the eurozone must reduce their imbalances. Along with the large surpluses of China and other Asian countries, the new European surpluses will probably double the American current account deficit beyond its previous record of $800bn in 2006. The US could then maintain its recovery only by continuing to run large budget deficits and again tolerating debt-financed consumer demand. This is the opposite of the rebalancing strategy agreed by the Group of 20 leading economies as critically important for sustaining global expansion and reiterated by its finance ministers last weekend.

Many regard this scenario as a desirable resolution of the current European crisis . . . 

There are three glaring problems with this vision, however, all centred on the US. First, the sharp escalation of its own domestic and international imbalances would intensify the risk of future market attacks on the dollar and US financial assets. As soon as Europe and other alternatives regain their acceptability to investors, the unsustainability of the US situation would return to centre stage at even more dangerous levels.

Second, the higher imbalances themselves could sow the seeds of a new financial crisis just as they helped sow the seeds of the last crisis . . .

Third, a renewed explosion of the US trade deficit could well trigger the outbreak of protectionist trade policies that has been largely avoided to date.

My sense of the past two decades: every crisis of the global economy triggers fixes that eventually beget their own crisis, but nowadays that cycle is getting faster and faster because of the growing hyperconnectivity and interdependence.

I would expect more debates on ever-more ambitious rules.

Chart of the day: too much deflationary pressure a bad thing

Economist chart.

For a long time, China's deflationary impact on prices was seen as a good thing:  it meant China's rise didn't lead to more expensive goods in the West--just the opposite.

But with the West is a slump, a vicious cycle sets in:  more belt-tightening means less demand, means lower prices still, means . . ..

So the view of economists rounded up online by the mag is, "deflation is the bigger short-term danger in big, rich economies, whereas inflation is an immediate worry in many emerging economies and, potentially, a longer-term danger in rich ones."

Roach on resilient Asia

As someone with a lopsided head myself, I got to love this crooked face.

Fabled Stephen Roach in the FT. He decouples as chairman of Morgan Stanley Asia and joins the faculty of Yale this summer.

Roach is famous for his bearishness.

Here, he's pretty bullish.

Three lessons stand out from his three years in Asia, he says:

First, Asia learnt the painful lessons of the 1997-1998 regional crisis very well

Hence, the huge build-up in reserve currencies.

Second, there is the China factor.  As I have criss-crossed the region, there has been no mistaking Asia's new China-centric character.

Another frequent theme here.

Third, Asia cannot presume that just because it weathered the global crisis it has discovered the holy grail of economic prosperity.  In an increasingly complex and integrated world, trouble has an unpredictable way of mutating.

I'm on board for all three judgments, as readers of this blog will attest.

Roach notes that in the late 1990s, exports made up 35% of GDP among developing economies.  Now it's 45%. Asia has a "full plate," says Roach, when it comes to the rebalancing issue.

I also concur with Roach's concluding fear, something I've been saying for the past decade actually:

But I leave Asia with one big worry--that the rest of the world doesn't get it.  I worry, in particular, about the steady drumbeat  of China-bashing in Washington--especially as we approach mid-term elections this year.  

Thus Roach heads off to academia to change some minds as best he can.

We can only wish him well, cause they come no smarter.

The demographic explanation for the Eurozone's woes

NYT biz-page profile of yet another economist "doomster" who correctly called the recent woes. Naturally, the man is now considered a seer of the highest order, but the fellow, Edward Hugh, seems to be taking it well enough.

And I say that with some empathy: whenever I was introduced in years past as somebody who "foresaw 9/11," I felt that sort of hype was completely misplaced.  I foresaw types of things happening, and if you line up enough "bad" predictions, I guarantee you, you'll eventually become a celebrated seer--for a bit. But once you start lapping that crap up, you're finished as a thinker and you just start chasing celebrity, something Hugh seems bemusedly detached from as a life goal.

His main point is a simple one, which is why it's so robust: a eurozone that combined aging saver societies with demographically younger, credit-friendly populations was doomed to have a rough marriage. It's almost the globalization-integration equivalent of the stingy old rich guy marrying the spendthrift younger wife, except this "marriage" didn't come with the sanctity of political integration. So go figure, when the first credit crisis hits, these two sides turn on each other--the microcosm being nasty old frugal Angela Merkel shaking her finger at those crazy young Greeks and Irish and Spainairds!

Very cool and transmittable concept.

Rest of the story is how he's a suitably hot blogger with a--now--almost cliched unconventional career path. The stirring victory of the non-conformist!

But note how he's hard up for money. 

Good to have the day job, and that old PhD sometimes proves handy in that regard.

My point: a lot of us monkeys all over the planet banging away in our blogs, hoping this stay-at-home venue brings us great riches. And yeah, get enough monkeys and enough typewriters and somebody will bang out "War and Peace" on a regular basis. You just can't count on that as a viable career path.

How much has Obama preserved America's connectivity?

Last piece by outgoing Lexington at The Economist.

In it, Lex provides summarizing judgment on Obama's success to date in keeping America an open and connected society/economy.

The record is decidedly mixed:  no progress on an immigration bill combined with politically-insipid shows of military force along the border (the 1,200 guardsmen just sent); no great trade barriers but also no serious efforts to move free trade pacts on the books (Colombia, South Korea).  A Cato expert is quoted as saying the Obama administration seems to view trade policy as a way to advance environmental and social goals and nothing more. Our border bureaucracy is described as the worst in the advanced world (I guess I would agree).

Larger downstream argument advanced: US military dominance is waning in the sense that we can no longer play Leviathan to everyone and assume all the SysAdmin jobs that result. Suggestion is that we need to recalibrate alliances to account for rising great powers.

Good news is that US soft-power exports remain world-class.

China is contrasted:  one-fifth of college grads say they want to emigrate, but few peasants do.

Piece ends with call for Obama to stand up more for openness.

Kind of a sad finale for this Lexington.  He doesn't seem to be finding much improvement on this score from Obama.

I think we're going to see a lot more such arguments from big-thinking types regarding the importance of America standing up for its cherished ideals.  Obama's too-lawyerly approach does not inspire like his speeches, and the gap is becoming noticeable.

Chart of the day: Why China will survive a real estate bubble burst

Economist story subtitled, "China's economic boom can survive a property bust.

First reason is the fact that most Chinese mortgages are for less than half the house's value, so hard to go "underwater" (unlike in US, where the habit became, between first and second mortgages, one of being 100% in debt, so any drop in prices immediately put a lot of people underwater--i.e., owing more than the house was now worth).

Second reason shown in the chart:  why the yuan value of all mortgages in China is skyrocketing, as a percentage of GDP, the total still remains quite low (less than 16%).  In the US, the share is more like 80%, so a lot more potential impact when a bubble bursts.

Good news for China and the global economy.

Greece learning from Turkey? Have pigs started flying?

Bloomberg BusinessWeek piece stating that when PM Recep Erdogan and the AKP took over Turkey in 2001, the "Turks were worse off than Greeks--and the IMF cure worked."

The logic?

Erdogan and Babacan [finance minister] used the IMF's tough regimen as an excuse for doing things that previous Turkish governments had avoided for decades.

A biggie?  The gov stepped up tax collection from under-reporters, something you just know is a huge problem in Greece.

Point being, the Turks could have defaulted then, just like Greece considers now.  But that would have been dealing only with the most painful symptom of the moment.

Canada takes its economic cues from China now?

Bloomberg BusinessWeek piece.

The "China club" of countries whose economies are increasingly driven by China's demand for raw materials are Australia, Brazil, Malaysia and Peru.  All have been forced to raise interest rates to tamp down hot growth caused by China.

Now experts expect Canada to join that club and raise rates instead of doing the usual, which is to follow our Fed's lead.  Canada feels forced to because of the growth created by China, India, Korea and other Asian economies' demand for minerals and energy and food.

Scary for some to think Canada no longer takes it cues from us, but great for anybody who wanted pillars of demand outside of the US consumer, because while that worked wonders for two decades following the fall of the Berlin Wall--fueling the rise of hundreds of millions of people out of poverty in Asia, now it's Asia's turn to help out.

So this is good, but new and therefore disturbing to many.