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Why Taxes Force Public Assets Into Private Hands
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An article from the Wall Street Journal from August 26th, Leasing of Landmark Turnpike Puts State at Policy Crossroads, discusses a proposal to lease the Pennsylvania Turnpike to a group of private investors. The Pennsylvania Turnpike is the oldest superhighway in the nation, but it needs $12.8 billion in repairs and capital improvements.
The governor of Pennsylvania, who is proposing the deal, argues the state needs financial relief from a reduced tax base and tax revenues. The article describes Wall Street as eager to close the deal because many U.S. and foreign investors have investible funds looking for a return.
Savers may recognize that Pennsylvania, like all states, can sell tax free bonds directly to investors and then use the funds to make repairs and capital improvements for itself. If loanable funds are available, they are available to Pennsylvania as well as private investors.
The deal allows for the private investor group to raise tolls 25 percent in 2009 and then by inflation afterward, something the state can do as well.
Others worry about jobs and wages because the proposed deal allows union contracts to expire in 2011. We have to hope the governor does not intend to let others take the blame for lower wages and job cuts, but anything private investors can do to save money the state can do as well.
In effect, the governor is saying his state cannot raise taxes to make payments of interest and principal to service and retire bonds because high state taxes already bear so heavily on wages and working class citizens they cannot afford to pay more.
However, if business and individual interests have loanable funds while there are unfunded projects that need those funds, then extollers of free markets should have to explain why those funds don’t flow directly to where they are needed.
One explanation lies in America's unequal distribution of income and taxes. Lower tax rates on working class Americans and higher tax rates on business and upper income individuals will make it much easier for the states to pay for the investment funds they need.
Whether these tax changes are fair or unfair is irrelevant to the issue. What is relevant is that tax relief for working class Americans will reduce pressures to turn over public assets to private interests.
The article mentions opposition to the governor's proposal. One woman is quoted as saying, "Americans built this turnpike. … Why do we need someone else to operate it?"
People recognize that it is degrading for Americans to sell public assets to private and foreign interests. It is also unnecessary.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Inside the Root Cause of the Flailing Economy
Savers might want to read Treasury Secretary Paulson's press conference statement titled "Comprehensive Approach to Market Developments." He is asking for $700 billion for the U.S. Treasury to buy defaulted mortgages.
An economy runs on a flow of transactions. Billions in defaulted mortgage payments cuts down the flow, which will spread to other payments.
The government must support these financial institutions or watch the economy slide into recession or worse, but that does not mean the Secretary's plan is the best one.
The Federal Reserve Bank has both the ability and authority to support these institutions without an appropriation or legislation — so it is not clear why the Treasury is requesting funds for itself. Treasury Secretary Paulson does not tell us why the Treasury should be the purchaser when the Federal Reserve Bank has the liquid funds to support these institutions.
The Treasury Secretary's statement gives causes for these current defaults. He explains that the Treasury has been coping with financial problems on a case by case basis, but now the time has come "to address the root cause of our financial system's stresses."
One paragraph later he suggests the root cause: "lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford."
The statement blames irresponsible lending and irresponsible borrowing, but these defaults show that many banks and major financial institutions had billions of dollars of loanable funds, which were available for loans to businesses and corporations to fund plant and equipment or other business needs.
We have to think a bank with qualified business or corporate borrowers, or qualified home buyers would lend to them before lending to unqualified borrowers in the sub prime lending market. The term sub-prime defines a loan where lenders knowingly lend to unqualified borrowers.
Lending billions to unqualified borrowers suggests there was a large surplus of loanable funds.
Remember too that the Federal Government is a qualified borrower that needs billions of savers' dollars pay for its deficits, but still they had billions for unqualified borrowers.
Toward the end of his statement Secretary Paulson tells the country he will be working with members of Congress "to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies."
As savers we hope that happens, but lax lending practices were not the root cause. When Secretary Paulson tells us how and why an economy generates billions in loanble funds for unqualified borrowers then we will learn about the root cause of this failure.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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How Government Spending Cuts Will Lead to Job Losses
Recently the two presidential candidates and their two parties started arguing about a government project called "The Bridge to Nowhere."
From Wikipedia:
The Gravina Island Bridge, also known as the "Bridge to Nowhere", was a proposed bridge to replace the ferry that currently connects Ketchikan, Alaska, to the Ketchikan International Airport on Gravina Island. The bridge was projected to cost $398 million. Members of the Alaskan congressional delegation, particularly Rep. Don Young and Sen. Ted Stevens, were the bridge's biggest advocates in Congress, and helped push for federal funding. The project encountered fierce opposition outside of Alaska as a symbol of pork barrel spending and is labeled as one of the more prominent "bridges to nowhere".
Both sides now agree the project was wasteful government spending, but both sides claim their opposition to the project shows their commitment to save the taxpayer's money and cut government spending. It is easy to be against wasteful government spending, but neither side has much to say about the role of government in America's jobs or what might happen if government starts saving instead of spending.
Starting in December 2007, seasonally adjusted national establishment employment is down 605,000 jobs. The decline was a mixture of
- 590,000 jobs gone in manufacturing, construction and mining
- a 168,000 decrease in private sector service jobs
- a 153,000 increase in government services employment, including education
If we back up a whole year to August 2007 and look at change over the last 12 months, national employment is down 283,000 jobs but government employment is up 274,000 jobs.
If we back up two years to August 2006 and look at change for the last 24 months, then national employment is up 1.1 million jobs, but government employment is up 476,000. The government increase in jobs is offsetting losses in manufacturing and construction that are not made up by new jobs in private services.
Actually, 22.5 million people work on government payrolls in local, state and federal governments, but many more work on private payrolls as part of government sponsored and government funded projects like the Bridge to Nowhere. The terms "government contractor," "outsourcing" and "privatization" all signify private businesses, but they are private businesses doing government funded and government sponsored work.
Government employment added to government sponsored employment is more than a mere 22 million: much more.
America puts a heavy burden on its jobs by funding social security, Medicare, workman's compensation, unemployment insurance, and health insurance as a cost of employment. The personal income tax requires a higher rate on wages than on corporate dividends.
Both candidates say they will create jobs and we hope they do. It would be a better campaign if the candidates would suggest some new policies toward work and pay.
Right now, and for the foreseeable future, cuts in government spending will cause an unacceptable loss of jobs. The candidates want us to think they can manage the government to save, but without some new attitudes and new policies our government cannot save, it must spend.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Price Fixing is Legal: Why It Matters
Savers should beware that the U.S. Supreme Court recently reversed earlier Anti-Trust rulings preventing price fixing.
Under new rules established a year ago, manufacturers are now allowed to fix minimum prices for resale of their products and coerce retailers to stop discounts by cutting off supplies and refusing to sell to them. The practice is called Resale Price Maintenance and can be expensive for savers.
A recent Wall Street Journal article, Price-Fixing Makes Comeback After Supreme Court Ruling, quotes from the Court's ruling that Resale Price Maintenance "could foster competition by giving retailers enough profit to promote a brand or offer better service." In the ruling the phrase "giving retailers enough profit" suggests that retailers should be happy with the decision.
The article quotes many retailers and all of them detest resale price maintenance because it hurts their business. Higher prices definitely hurt consumers.
A discount retailer of baby products was quoted as saying that it "prices a baby car seat made by Britax, the Boulevard Convertible, at $309.99, the manufacturer's minimum. If he didn't, Britax would cut off the supply of a popular product." The retailer is also quoted as saying he could sell the seat of $229 and still make a $50 profit.
However, there is previous experience with Retail Price Maintenance because Congress passed a Fair Trade Act in the 1930s that permitted states to craft their own Resale Price Maintenance. Experience shows it goes with branded products, especially apparel, shoes, consumer electronics and home furnishings and it will raise prices for brand name products.
Savers can save by avoiding brand loyalty and concentrating on price and finding store brands or generic labels.
If the practice catches on, experience shows that retail outlets that go along with resale price maintenance for branded products have a drop in sales at the higher price. Their drop in sales gives them incentive to resell their surplus supplies in the wholesale market to other retailers, especially discount retailers.
Some years back, reselling took place in the designer jeans market where designers were trying to maintain their image with a high price. Jeans were resold as "bootlegged" products to discount retailers. Since the only way for manufacturers to enforce their restrictions is to cut off supplies, it was hard for them to know where the "bootlegged" supplies were coming from and therefore who to cut off.
The courts' ruling is anti-competitive despite the suggestion it could "foster competition." Free enterprise includes the freedom to set price at all levels of the marketing chain. Competition includes price cutting and allows for new entrants who attract customers with a lower price. We suspect that the court has underestimated the power of competition.
In the meantime, take care before you buy and ask yourself if a brand name is really worth it.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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A Book for Savers: High Wire
Savers might be interested in a new book by Peter Gosselin titled High Wire: The Precarious Financial Lives of American Families, which is a journalistic collection of essays with a common theme: America has growing economic risk and personal insecurity to go with its economic growth.
Chapters cover a selection of the new risks by using individual interviews and case studies as examples of the growing threats to personal finance.
Topics feature private sector issues that have slowly evolved through changes in practices and attitudes, especially the attitude that Americans should fend for themselves. As Gosselin notes, changes tend to take place without notice or public debate. Instead, changes come as a surprise to people who think they have something — career, pension, insurance — when they do not.
Chapters on insurance use material from interviews to illustrate the new methods and practices insurers are using to limit coverage and shift losses and risks to individuals. A chapter titled "Benefits" covers employee pension issues. A chapter titled "Housing" is about the new limits on home owners insurance. The chapter titled "Health" is about private health insurance.
Insurance is supposed to pool the random risks of many to reduce personal risk. Trouble is people who lose their jobs apply for health insurance in mid life, or later, when they are more likely to get sick, or be sick with pre-existing conditions like diabetes and heart disease.
As Gosselin explains, the circumstance of private insurance gives the companies every incentive to insure the young and healthy, and lower their risk of big payouts by avoiding the others. Gosselin does an admirable job documenting the practices and shortcomings of private health insurance and the need for a national risk pool.
The chapters on employee benefits, insurance and retirement accounts have self help and buyer beware information that makes them useful as part of personal finance. Other chapters on jobs and education have less self help information, but interviews illustrate a variety of risks of layoffs, displacement and unemployment for people from a variety of educational backgrounds and managerial, skilled and unskilled occupations.
The book is not just about politics and current events it covers personal finance issues that provide useful ideas to act on. It is quite flexible because chapters can be read in any order, or read some and skip others depending on interest. Careful readers will want to look over the insurance policies, health benefits and retirement accounts. It is a book for savers.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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How Savers and Consumers Differ On Gas Prices
The price of gasoline divides America into savers and consumers like no other issue.
The biggest differences between savers and consumers come in their attitudes toward energy policy. In his book the Age of Turbulence, Alan Greenspan wrote at the end of the energy chapter: "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."
If it is true, it is a policy: war for oil. I have never had anyone say that to me, nor have I heard any politician or major news service advocate, or try to justify, war as an oil policy.
It does illustrate the contrasts of savers and consumers on policy because it is the ultimate consumer policy: plentiful oil must be available no matter what.
Expanding Energy Supply is a Priority
American policy has been mostly consumption policy because it emphasizes production. Drilling for oil is a production policy, but so are wind energy and solar energy.
Those who advocate off shore oil drilling want to expand supply, but those who want to expand wind energy or solar power also want to expand energy supply.
The oil drillers often argue with the advocates of wind and solar energy, but the argument is over environmental policy and relative cost.
Both sides are saying technology will allow us to have the energy we need or want at reasonable prices.
Savers Limit Gas Usage No Matter the Price
Alan Greenspan suggests a policy of "… significantly higher gasoline prices to wean us off gasoline-powered motor vehicles."
That pressures people to save fuel, but unless savers have some way to cut their consumption by as much as the percentage increase in price, it will cost them much more. That is why savers want to limit the gallons they use no matter the price.
Savers know gas mileage for cars can be much higher and they want to mandate automobile mileage standards so that everyone has the choice to use less energy and save money. They want to expand rail service and have less air travel because rail uses less energy per passenger mile.
Savers look for ways to reorganize physical space so that people can live closer to work and shopping. They look for ways to make it cheaper to move closer to work: a tax deduction for all moving costs, for example.
Notice that Congress has many ways to compromise on policy. A little more off shore drilling can be traded for higher automobile mileage standards.
America needs policies that save energy and money.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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How Exchange Rates Affect Savers' Bottom Lines
Last spring, the Washington Post ran an article entitled "Foreign Buyers Flock to DC Office Market." The article explains that foreign investors bought 10 times as much commercial property in the District in 2007 as they did in 2006, with 2008 looking like 2007.
Buyers from Europe, Australia, Asia Pacific and Latin America have bid up prices to a record $867 a square foot.
Washington is an office-based economy with a stable or growing job base, so it is good to have the construction industry creating jobs and making way for even more office jobs. It would be better if the savings and savers financing the buildings were Americans.
Foreign nationals have so many dollars to invest because Americans buy so much oil and import so many products from Europe, China and other countries abroad. In 2001 and 2002 Americans paid around a dollar for a Euro, Europe's universal currency. By 2005 they had to pay around $1.35. Today, it is around $1.57.
A bottle of French wine that was $10.00 in 2002 now costs Americans $15.70. A higher price for wine makes it easy to see how higher exchange rates and a falling dollar value discourage consumption.
It might not be as obvious how higher exchange rates and a falling dollar value can benefit American savers. American buying abroad has supplied so many dollars to foreigners they are using their surplus in America's capital markets.
Some of it is loans but some of it is to buy America's assets like the office buildings mentioned above. It is sobering for real savers to see Americans trading assets like office buildings to pay for import consumption, but the devaluing dollar will begin to change that.
The devaluing dollar that limits American consumption will also limit the dollars foreigners have to invest in United States capital markets. If Americans have to rely more on its own savers, then savers can expect to earn higher interest rates.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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These Are Odd Times for Savers
America has relatively low interest rates at a time when banks and credit intermediaries are curtailing loans and cutting bank lending. Low interest rates do not normally go with less borrowing. Low interest rates, or falling interest rates, should increase borrowing and lending whereas higher interest rates decrease borrowing and lending.
Low interest rates are part of the Federal Reserve Bank's current policy to keep up spending and avoid a recession at the same time home mortgage foreclosures help limit lending since defaulters restrict the banking sector's loanable funds.
As savers, we need borrowers or interest rates would be zero. In general, the fewer the borrowers the lower the interest rate, but we should worry too about the new mix of loans.
Banks are having trouble finding enough business and industry borrowers. In the search for new borrowers they keep turning to more consumer lending and promote the use of consumer spending and consumer debt with heavy advertising.
A recent New York Times article entitled "Given a Shovel, Americans Dig Deeper Into Debt" quotes an advertising executive. "One of the tricks in the credit card business is that people have an inherent guilt with spending." … "What you want is to have people feel good about their purchasing."
The article also reported from Federal Reserve Bank data showing the percentage of disposable income used to pay debt keeps going up year by year reaching 14.5 percent in 2007. That is one piece of data and one sign of the rising consumer debt among many signs including personal bankruptcies.
The growing reliance on consumer debt and consumption spending makes it harder for the Federal Reserve Bank to maintain the economy. Sure, they can lower interest rates, but credit card interest rates continue above 20 percent for millions of consumers.
The lower interest rate policy applies primarily to business loans, but essential consumer spending depends more on people's income rather than interest rates.
America must keep up consumption spending to prevent a recession but threats to continued consumption grow with the numbers who earn stagnate wages, or who are unable to pay credit card debts, or file for bankruptcy, or have reached credit limits. Defaults limited new loans.
Government spending and tax cuts will stimulate consumer spending, but government, especially the federal government, are already running big deficits.
These are tough times for savers with interest rates low and limited ability for the Federal Reserve Bank to stimulate the economy. As savers we are in the awkward position of hoping others will go on buying, buying, buying so that we can save.
As savers, we can't change the rest of the world, but we can avoid get rich schemes, pay our monthly credit card balance and do our best to avoid paying interest and fees even as we earn less from our savings.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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