Archive for the ‘Economics’ Category

This post is a follow-up to my recent post on the significant potential for Israel’s recent natural gas discovery to do long-term harm to Israel’s economy.  This post draw inspiration from a recent Planet Money podcast – Norway has Advice for Libya – which was in turn based on this very interesting Financial Times article.  In that podcast Planet Money’s reporters visited with Farouk al-Kasim, an Iraqi born geologist who was key in advising Norway on the development of its North Sea Oil wealth. Significantly, both Planet Money and the Financial Times assert that Norway may be the only country to date that has not suffered adverse affects due to the natural resource curse.


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Israel’s Resource Curse

Israel has been in the news lately for record natural gas reserves off its western shoreline.  Some of my friends are what I would describe as super-zionists – seeing things like “free money” for Israel through natural gas resources as unabashedly wonderful.  Much like the American gas and natural resource boosters, these Israeli natural gas boosters tend to ignore potential costs of exploitation of natural gas resources.  The New York Times had a recent article discussing this issue at more length.  One of the significant issues in exploiting natural gas is the “resource curse” – a frequently overlooked, but significant, phenomenon in resource rich countries.

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Taxation and Fairness

I have heard a lot of complaints lately from the news media that while corporate profits and earnings continue to rise unemployment is not improving.  Now, I understand that tax hawks have done a great job explaining to us that lower tax equals more investment – but there is simply no evidence that this is correct.  Supply-side economics doesn’t work, and never has – see here, here, and here (gathering additional sources).  Now, this is not an attempted justification for tax rates of 80%, but perhaps a more nuisance accounting of our nation’s fiscal situation would be helpful.

Initially, there is no logical reason to think that an actor with more money will lead to an improved economy.  (Please point me to any study suggesting otherwise.)  Why anyone would ever have believed that supply-side economics has any basis in reality?

Yet for some reason, we believe that an increase in corporate profits or earnings will necessarily result in an increase in wages and/or employment for non-owners.  I am baffled.  Of course, an increase in profits and earnings could result in increased wages, etc., nevertheless it is not necessarily the case that it will.

In connection with the deficit talks, Republicans appear to have asserted that all new taxes are evil.  Unfortunately (for them), the economy and deficit do not agree.  Additionally, economists have always argued for taxes to account for our externalities.  For example, a gas tax approximating externalities rather than cost of constructing/maintaining federal highways.  But I digress.  Economists may disagree as to how the government should tax, what money should be spent on, etc. but there is no doubt that Republicans (and to a far lesser extent Democrats) are not basing their decisions on sound economic principals but are instead arguing for lower taxes for lower taxes sake – because certain high income earner want to pay less (and who can blame them).

Perhaps a little more honesty on this point would be in order – Republicans and fiscal conservatives should simply say that people who make more money don’t want to pay for food, shelter, and medical care for the poorest and neediest amongst us.  That the needs of those individuals are simply less important than the needs of poor children, single mothers, and seniors.  I’m not sure that Democrats care about what is “best” for society, but there is one thing I do know – Republicans decidedly do not care about what is best for society as a whole.

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This recent Wall Street Journal article discussed the DOJ’s letter to the BCS which reads, in part:

Serious questions continue to arise suggesting that the current Bowl Championship Series (BCS) system may not be conducted consistent with the competition principles expressed in the federal antitrust laws. The Attorney General of Utah has announced an intention to file an antitrust lawsuit against the BCS. In addition, we recently received a request to open an investigation of the BCS from a group of twenty-one professors, a copy of which is attached. Other prominent individuals also have publicly encouraged the Antitrust Division to take action against the BCS, arguing that it violates the antitrust laws.

Although I am somewhat suspicious that the AG of Utah is interested in this issue – after all, the University of Utah Utes are always on the outs in getting into the national championship game, see this link –  I think that the letter and the piece make a very good point.

This is a recurring issue: the anti-competitive nature of a large number of American institutions, in particular in sports organizations.  Although the NFL appears to have effectively “won” their case against the players (non) union – see this link – the issue regarding the players and owners revolved centrally around the anti-competitive nature of the NFL.  In another recent decision, the U.S. Supreme Court held that the NFL was not exempt from anti-competitive regulations, like the Sherman Anti-Trust Act.

Where does this leave us?  As most of us know, MLB – Major League Baseball – has an exemption from regulations designed to maintain competition in markets.  Clearly football and the other sports do not.  One might question whether competition in football has made it more competitive than baseball (and why football is soooooo much more financially successful than baseball – according to this study the NFL makes nearly 13% more money than baseball while playing approximately 10% of the regular season games AND competing with basketball, hockey, college football, and college basketball for viewers while baseball competes with…).  Query whether competition would improve the game of baseball and draw more fans to games.

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We have been hearing a lot lately about how lowering corporate tax rates will spur hiring. Although not necessarily set out as such, it appears that the proponents contend that a lower tax rate will (1) encourage companies to relocate to lower-tax jurisdictions and (2) develop supply-side demand for employment. Here, we will look at whether there exists ANY correlation between lower tax rates and unemployment and attempt to draw some conclusions.

With that, let’s look at the five most populous states corporate tax rates and unemployment rates:

State Corporate Tax Rate Unemployment Rate (12/2010) Unemployment Rate (6/2008) Relative Increase in Unemployment since 6/2008
CA 8.84% 12.5% 6.9% 5.6
NY 7.1% 8.2% 5.3% 2.9
TX 0% 8.3% 4.4% 3.9
FL 5.5% 12.0% 5.5% 6.5
IL 7.3% 9.3% 6.8% 2.5

Hypothesis 1: states with the lowest taxes have the lowest unemployment rate.

FALSE. Although Texas has the lowest unemployment rate this trend clearly does not hold for the other states. Florida has the second lowest corporate tax rate, but has the second highest unemployment rate while New York’s unemployment rate is only .1% above Texas’ unemployment rate while New York’s corporate tax rate remains 7.1% higher.

Hypothesis 2: states with the lowest taxes generate the lowest relative change in unemployment.

This hypothesis is clearly false, the states with the lowest relative change in unemployment since June 2008 are Illinois and New York, the states with the second and third highest corporate tax rates.

Conclusion: no correlation between unemployment rate and corporate tax rate means no causation between unemployment rate and corporate tax rate!

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Idiot Tiger Keeper

Charlie Munger is one of the smartest people on the planet. He largely agrees with me on Fannie and Freddie. I am in good company.

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Roger Lowenstein contemplates real reform.

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