James Pethokoukis

Politics and policy from inside Washington

The U.S. state budget shortfall in a picture

Jun 14, 2010 20:08 UTC

This, from the Center on Budget and Policy Priorities:

stategap

The Dirty Shirt Theory and the Keynesian Endpoint

Jun 14, 2010 18:34 UTC

From Ed Yardeni:

The bears are mostly, and rightly, concerned that many economies around the world are overly leveraged. They claim that both private and public debt burdens are so great now that they are depressing economic growth. This has the potential to cause a deleveraging death spiral for the global economy according to the most bearish of the bears. The bulls believe that the global economic recovery has plenty of forward momentum and is self-sustaining even if many governments are forced to implement austerity measures to placate the Bond Gods.

Speaking of the Bond Gods, I was surprised that the clever folks at Pimco weren’t mentioned in the Businessweek article on the leading stock market bears. They are the ones who coined the phrase “The New Normal,” describing an economic outlook of structurally weak economic growth and persistently high unemployment. They argued that the stock market rally over the past year was a “sugar high.” Last week, they rolled out the “Keynesian Endpoint.” The gist of this concept is that many governments have maxed out their credit lines. As a result, they can no longer borrow as much as they need to prop up their flagging debt-burdened economies. So their only remaining policy options are to devalue their currencies and to restructure their debt, i.e., default. Pimco apparently likes the dollar and U.S. Treasuries because the U.S. is the “least dirty shirt,” according to Pimco’s Bill Gross in a June 4 radio interview on Bloomberg Surveillance with Tom Keene.

Me: Of course, this was the obvious flaw with all the Return to Big Government talk. Such a return is fiscally unsustainable. Markets will prevail.

Bill Gates’ Big Government plan for clean energy ‘miracle’

Jun 14, 2010 15:26 UTC

Bill Gates and a bunch of other top corporate executives want Uncle Sam to spend a lot  more on clean energy research and development. Here’s why:

Energy innovation is a commitment to long-term prosperity. If the United States invests in its clean energy future now, our nation can reap immense benefits. We have seen this work in other sectors, and it can work in energy. Public- and private-sector innovators have made miracles happen right here on home soil—Americans developed the computer and the Internet, delivered air and space travel and decoded the human genome. Standing on their shoulders, we can see a clean energy future within reach. By scaling the good technologies of today and discovering new technologies that do not yet exist, we have an opportunity to achieve a similar miracle in energy.

So they have created a new group to push their agenda, the American Energy Innovation Council. Here are some of its members:

Norm Augustine, former chairman and chief executive officer of Lockheed Martin; Ursula Burns, chief executive officer of Xerox; John Doerr, partner at Kleiner Perkins Caufield & Byers; Bill Gates, chairman and former chief executive officer of Microsoft; Chad Holliday, chairman of Bank of America and former chairman and chief executive officer of DuPont; Jeff Immelt, chairman and chief executive officer of GE; and Tim Solso, chairman and chief executive officer of Cummins Inc. The Council is advised by a technical review panel consisting of preeminent energy and innovation experts and is staffed jointly by the Bipartisan Policy Center and the ClimateWorks Foundation.

And group has five big recommendations:

1) Create an independent national Energy Strategy Board; 2) Invest $16 billion per year in clean energy innovation (vs. $5 billion currency); 3) Create Centers of Excellence with strong domain expertise; 4) Fund the Advanced Research Project Agency-Energy at $1 billion per year; 5) Establish and fund a New Energy Challenge Program to build large-scale pilot projects.

And this is how they plan to pay for it:

When there is a system to reduce greenhouse gas emission in the United States, it will likely generate revenue—in the form of permit sales, for example. The first $16 billion of these greenhouse gas revenues should be devoted to RD&D— because new technologies will make it far cheaper to reduce emissions. This is a virtuous cycle. The United States employs other user fees on the energy system today that could be expanded. Wires charges (a small fee on electricity sales) are a natural way to finance improvement in the electric sector, just as gasoline taxes pay for transportation infrastructure. Reducing today’s subsidies to fossil fuel industries could also cover much of the distance.

Me: Why, exactly, do they think this will work? Granted, when you are talking about trillion dollar deficits, this is not a great deal of money. So maybe it is worth taking a flyer. But the evidence would indicate it is a long-shot at best. A 2003 OECD study on what drives economic growth in advanced economies found “no clear-cut evidence” that government R&D — as opposed to private sector R&D — provides any economic benefit.

What does boost economic growth, according to that study? Avoiding this scenario, for one thing: “For example, high personal income tax rates can discourage entrepreneurship since entrepreneurs are self-employed and/or managing unincorporated businesses, whose profits are taxed through the application of a progressive rate schedule to personal income.”

COMMENT

Just to throw the conspiracy cookie in here: why do you think private industry would not stifle creative clean energy research as they have for the last 80 years? This is why government-sponsored research, with appropriate oversight, through private contractors could yield better results than a straight-up free market program.

Of course the interference could always be done (as it is now, also) through lobbying efforts, but it’s much easier and cheaper to buy competitors than congressmen.

Posted by iago0618 | Report as abusive

US ready may become world’s highest corporate taxer

Jun 14, 2010 14:21 UTC

The US has the second highest corporate tax rate among advanced economies. But maybe not for long. Tell the people the bad news, Reuters:

Japan’s ruling Democratic Party will seek a reduction in corporate tax to encourage economic growth as part of its platform in upcoming upper house elections, Japanese business daily Nikkei reported on Saturday. Without citing any sources, the daily said the Democrats want to cut corporate tax in order to increase the global competitiveness of Japanese companies. Rates charged to Japanese firms are high compared with other countries, Nikkei reported. Japan’s corporate tax is around 40 percent, about 10 to 15 percentage points higher than taxes in EU nations and countries like neighbouring South Korea, it said.

Scott Hodge of the Tax Foundation finds this peculiar:

On the same day that Japan’s Nikkei business daily is reporting that the Japanese “government is aiming to cut tax on company earnings by five percentage points next fiscal year,” the Wall Street Journal is reporting that “Democrats are trying to boost their political fortunes ahead of this year’s midterm elections by attacking corporate tax rules they say encourage U.S. multinationals to send jobs overseas.”

Me: What the US should be doing is putting a long-range deficit reduction plan into place and then boosting growth through cuts in corporate and capital tax rates.

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