Two Budget and Tax Untruths.

Two claims continue to circulate about our present fiscal crisis: the first, that we can grow our way out of debt, and the second, that a more aggressive tax policy toward the top earners (those making above $250K per year) will effectively fill the deficit hole.

Let's dispose of Whopper Number One. Suppose that the US GDP grows at 3.5% per year (the effective growth rate from 2000-2010). This is an additional $420B in the economy, and a federal tax rate of 25% of this contributes about $105B per year towards debt reduction. This is a fraction of the current deficit, so our government would continue to bleed red ink, albeit at a modestly lower rate.

As for Whopper Number Two, consider that the total AGI of the top 5% of earners (those making more than $160K per year!) is $2.9T. If we increased the effective tax rate of this group by 50% (for an effective rate of 31% for all in this group) this will provide only an additional $303B in revenue. Either the pledge to tax only the "rich" would have to reneged, or the tax rate would have to much more confiscatory, or both.

Either of these amounts is small compared to our $1.6T deficit, and their sum is less than half of it. Why do we let the blowhards continue to spin either of these fables?

We are face a moment of truth regarding the extent to which government can materially provide for its citizens through entitlements.

Politically-Induced Alcoholism.

Steven Ratnner has penned an excellent critique on the ethanol racket in the United States. He states clearly what many pols know but dare not speak: the US program to promote ethanol production for transporation fuels drives food prices up, is comparable in the energy to produce it than in what it displaces in petroleum, has led to a bizarre and contradictory arrangement of alcohol and petroleum imports and exports, and is a green pig-in-a-poke. But ethanolism does mean big federal subsidies to the agribusiness interests of the corn belt, including Iowa, an early presidential political milestone.

Postscript: a new AEI report on ethanolism can be found here.

Ultra Premium Irony.

Yesterday the United States Government announced the release of 30M barrels of oil from the SPR to help ameliorate the effects of rising oil prices on economic recovery. We note, however, the effect of the Gulf drilling moratorium and glacial rate of new drilling permitting imposed by the Administration has been to reduce domestic oil production by 240K barrels per day, or nearly 90M barrels over the last year. And then there is the knock-on effect of lost jobs in the Gulf region. The White House can't be as clownish on this as they appear...can they?

Greenspan on Squawk.

A very sober discussion with the former Fed chairman on the debt, and our future fiscal priorities. Seniors may not like what they hear.

Do Senators Understand Markets?

Maria Cantwell, D-OR, one of the Senatorial Interrogators during Big Oil's recent appearance on the Hill, demanded to know what the price of the next marginal produced barrel of oil "should be". Exxon's CEO Rex Tillerson replied between $60-$70. Ms. Cantwell deduced that given the price of oil is around $100 per barrel, this disparity demonstrated the immoral gouging by "speculators". We presume that the good senator can determine who is a "legitmate" bidder for that barrel of oil and who is not.

Perhaps one day Ms. Cantwell can ask Steve Jobs what price the next marginal produced 16 GB IPad "should be". It could be as low as $260, but it actually retails at $499. This is nearly a 100% markup.

Mark Perry has made a similar arguement, summarized at his excellent blog Carpe Diem.

And If We Cut Defense...?

The DoD budget is about $600B for FY 2010. If we cut it by 25%, that's only $150B toward deficit reduction. So please, continue the delusion that Entitlements Shall Not Be Reduced...

Frankenbanks.

Andrew Sorkin's financial blog at the NYT reports on the status of the payback of TARP loans. What the authors reveal is troubling. It seems that the taxpayer is getting straight-armed by some banks who still owe us hundreds of millions yet are turning substantial profits or buying up other troubled institutions or loans.

Some of this makes sense: if a given bank's management is floundering, then acquisition by better management using TARP may be a cheaper long-term solution than letting the bank go belly up and sticking the FDIC with the cleanup costs.

Such a decision, however, should not be based on the acquiring bank using only cheap money from the rest of us, but on the bank risking some of their own skin. This may change the attractiveness of such purchases. Other drawbacks for subsidized acquisitions are that it is driving banks to become even larger - more "too big to fail" - and private capital investment decisions become less local.

There are a myriad of unforeseen consequences caused by Uncle Sam fronting cheap money to troubled banks for indefinite period of time. So, bankers, first things first: focus on insuring your solvency, and then pay us back ASAP.

China Hijacks the Wind Energy Market.

There are consequences when the United States gives China a trillion or so dollars in net trade: the Chinese use that money to capture new world markets and push others out. One example is the wind energy industry. Just a few years ago the United States and some European firms were poised to explosively grow their wind energy markets in the U.S. and China (one remembers Tom Friedman's column on alternative energy being the growth industry for America). Cheap loans and land leases to domestic startup companies, provided by the Chinese government, along with onerous local content requirements on foreign firms have allowed the Chinese to build a world-competitive wind industry on the backs of GE and others. Now the Chinese are moving to capture the U.S. and European wind markets. Our government and our normally rabid anti-free trade unions have hemmed and hawed in creating an effective response to ersatz free trade as practiced by the Chinese.

An Observation.

Four years ago, our TV was bombarded by ads for Jumbo home loans, teaser-rate home loans, no-interest home loans, etc. Now we see many ads for companies that will help you "walk away from your mortgage, scott-free". God, what hath we wrought?

Now That's Efficiency!

From CNBC: Senator Carl Levin will attend A123 Systems' opening of its new car battery plant today in Livonia, Michigan. It will provide 3000 jobs...provided by $2.4B of Federal Stimulus Ham. That's a paltry $800K per job. Observers of the electric car business note that there may already exist a substantial surplus in electric car battery production in the U.S. Levin's answer: more Federal Ham to pay folks to buy electric cars. The Chevy Volt will start at a list price $40K. Will Uncle Sam throw in $10K of that to make them competitive with comparable vehicles with conventional power plants?

More Bad News About Unicorns.

News reports indicate that they are close to extinction in Italy, too.

Yet Another "Emergency" Spending Bill.

Remember the bill to extend unemployment insurance for which Senator Jim Bunning had the cruelty to ask "who pays for it"? Well, get ready for another "emergency" job stimulus and tax loophole closing (tax and spend for short) bill coming from Congers. Pay as you go? Come on, that is soooo two months ago!

We are heading for a tipping point in cynicism of the people towards their government.

Unicorns No Longer Found in Spain!

Spain announced austerity measures, including a 5% cut in the pay of civil servants. You know, those guys that don't create wealth, just consume it? The Spanish workers, convinced that the government is hiding the unicorns in secret warehouses, have called for a national strike on June 8. Meanwhile there are plenty of free-lance unicorn hunters among the 20% of Spaniards who are currently unemployed.

Like Scrooge and his Third Shadow, we are seeing images of things that could come to pass.

Some Social Security Math.

Just a point of reference for understanding what is reasonable in the discussing Social Security reform: under the present system, consider a person enters the workforce at 25, with a starting yearly income of $20K, an annual raise of 5% (inflation + merit), and an employee+employer deduction for Social Security of 12.4%, using the current cap of $106,800. Upon retirement at 65 the citizen will have a personal savings of about $290K. The retiree living to 85 will then have a monthly income from this savings of about $1210.

Now, allow this stagnant savings be partially invested (like the federal employee program) such that it results in an annual return of just 2%. The personal savings after forty years will be $390K, for a monthly income (assuming no additional growth) of $1625, more than 30% higher than the stagnant system. Assuming a 1% return on the savings will result in a personal savings of $335K. Of course, these calculations assume that the government didn't spend the money on something else, i.e., they didn't steal it.

The Truth That Nobody Dares To Speak.

Except for David Rosenberg, as reprinted by one of the best financial websites in the world, Minyanville:

The current level of US outstanding nonfederal debt is $27 trillion, which is astounding both in absolute terms and even more so relative to nonfederal GDP -- a 206% ratio. It is down fractionally from the 208% peak, but here is the rub. If mean-reversion means that we get back to some norm of the 1990s, then we are talking about the need to extinguish $8 trillion of nonfederal debt. The only question is how this happens, not if. If we’re talking about mean reverting to the very stable trend of the 1960s and 1970s, then the credit contraction is very likely to exceed $11 trillion.

How do you extinguish debt? Well, most households do so by deferring new purchasing in favor of paying off previous purchasing. Credit will continue to be tight, regardless of government machinations to make it otherwise. Therefore, we're not expecting the consumer to stampede the stores anytime soon. This is going to be a long, painful recovery, but it was a heck of spree that got us to this point.

The Definition of Insanity.

Small businesses not expanding? Well, let's give them the Subprime Special!

Speaking of Fannie and Freddie... - Stephen Spruiell - The Corner on National Review Online

Piracy on the Internet Sea.

The Financial Times reports that hackers are targeting friends of Google workers, compromising their social networking accounts to lure the Google personnel into clicking on their spyware links.
The source of these attacks? From the article: "the evidence pointed to a government-sponsored effort that only large spy agencies or perhaps some of the most advanced big companies could have withstood, experts said. China on Monday described accusations it was behind cyberattacks as 'groundless'."

It is our opinion that China is engaged in economic warfare through a massive effort to steal proprietary information, and refusing to adhere to world-accepted agreements on intellectual property and trade (note the recent steel dumping episode). Our dependence on their "beneficience" in buying our debt cripples our ability to retaliate in force.

The Volt's Electric Appetite.

Electric cars are being offered as die Wunderlösung to solve our transportation system's dependence on petroleum. But what would the wide-scale adoption of electric vehicles require in terms of increased electricity production?

We will take as a representative electric vehicle the Chevy Volt. The Volt is expected to operate such that it will consume 8 kW-hr to provide 40 miles of driving (which is a reasonable assumption for a day's mileage of a passenger car). The total distance driven in passenger cars and light trucks in the United States in 2008 was about 2.4T miles. If half of that distance were to be driven in Chevy Volts, the total required electricity to support this yearly travel budget would be about 240M MW-hr.

Note that the total electricity generated in the US in 2008 was about 4.2B MW-hr, so we would need to increase our generation capacity by about 6% to support the widespread use of electric vehicles. In terms of electric-power generation plants, this would mean we would need to build either 20 new nuclear-fueled plants, or 60 more coal-fired plants. This is a substantial investment in infrastructure; a typical coal-fired power plant runs about $1B to build. By the way, using the effective yearly output from a 2MW wind turbine, the number of turbines one would need to provide this electricity would be about 40,000 at a cost of about $120B just to install the turbines. Good luck with that.

One could argue that the energy needs for electric vehicles could be met with the present inventory of generating plants combined with an diligent electricity conservation program. Maybe, but it will take some fancy footwork when combined with the needs for increased electrical power to support robust economic growth.

Then there's the matter of the onerous cost of electric vehicles, but that's another detail the Ultragreen crowd likes to sweep under rug.

Truly, a Clunker.

Edmunds.com recently announced their estimate of the cost to Mr. Taxpayer of the the Obama "Clunkers" auto purchase incentive program. It came in a whopping $24K per vehicle. In related news, the estimated cost per job "saved or created" by this year's Spendulus Bill was at least $390K, based on the spending of $250B to support 640K jobs (source: WSJ).

Clunker Math.

A good friend made the following observation. A "clunker" that gets 12 mpg, driven 16,000 miles in a year consumes about 1300 gallons of gasoline, while a replacement car at 30 mpg uses about 550 gallons. So retiring a million clunkers will save about 750 million gallons of gasoline, equivalent to 37.5 million barrels of oil (a barrel is normally distilled to yield about 50% gasoline). At $70 a barrel, this means we are spending well in excess of $4B in clunker funding to save $2.7B in petroleum imports this year. This calculation is being very generous in estimating oil savings; the net mpg difference of the clunkers program is substantially smaller, and other distilled petroleum products need the crude oil, too. The clunkers program would have been better run by the Department of Agriculture, for they have extensive experience running subsidy programs.