Clinton Tax Rates, Japan’s Lost Decade, Irrational Exuberance, Dot-Com Bubble, EBT and Job-Creating Capital

Posted by PITHOCRATES - November 14th, 2012

History 101

The Economy of the Nineties boomed because of Japan’s Lost Decade and Irrational Exuberance

President Obama wants to raise taxes on the wealthy.  He wants to go back to the Clinton tax rates.  The economy was booming during the Clinton Nineties.  Better than it is now.  Tax rates were higher in the Nineties than they are now.  While the deficit is greater now than it was in the Nineties.  And the debt is greater than it was in the Nineties.  The conclusion?  Higher tax rates improve economic activity.  Produce smaller deficits.  And grow the debt at a slower rate.  At least, that’s what those who want to raise tax rates say.  The only problem with this is that there are reasons why the economy was booming in the Nineties.  And it didn’t have to do with tax rates.  But, instead, the Japanese.  And irrational exuberance.

The Japanese government partnered with business in the Eighties.  Corporations worked closely together for the good of the export economy.  And the national economy.  This was Japan Inc.  And the economy surged.  Fueled by low interest rates.  People in America worried about the Japanese buying American landmark assets with their fat profits.  An American magazine joked that America would become a wholly owned subsidiary of a Japanese corporation.  A Democrat presidential candidate said America was a fool for not doing what the Japanese were doing.  But the good times didn’t last.  That inflationary monetary policy caused a massive asset bubble.  And when it burst the Japanese suffered a deflationary spiral that last a decade or more.  Their Lost Decade.  This great contraction weakened America’s greatest economic competitor.  Greatly helping the US economy.

Also during the Nineties the Internet was coming of age.  In the Eighties there was the personal computer.  Silicon Valley.  And Microsoft.  A lot of investors were looking for the Microsoft of the Nineties.  No one knew who that was going to be.  But one thing everyone knew was that it was going to be a dot-com.  Investors poured money into dot-coms that didn’t have anything to sell.  Hence the irrational exuberance.  Dot-coms built great office buildings and technology corridors in cities.  New ‘Silicon Valleys’ were appearing across the country.  Kids went to college to learn how to make websites and set up ecommerce.  All these young kids filled these new dot-com buildings.  But when the investment money ran out these companies went bankrupt.  As they had no revenue.  Or anything to sell.  The dot-com bubble burst after Clinton’s Nineties.  Giving George W. Bush a bad recession at the beginning of his first term.  Also, President Clinton pressured lenders to qualify the unqualified for mortgages they couldn’t afford.  Starting a great real estate bubble.  That burst after Clinton’s Nineties.  Causing the subprime mortgage crisis about a decade later.

The Government taxes Small Business Owners as Rich People even though they’re not really Rich People

So there is more to the Nineties than those Clinton tax rates.  The Japanese gave them an able assist.  Then a lot of bad investing creating a lot of artificial economic activity that created a bubble.  That crashed into a recession.  Thanks to a lot of governmental interference in the private sector economy.  They kept interest rates artificially low.  And offered a lot of incentives to get those dot-coms to build in their cities.  Leaving cities with a lot of empty buildings, budget deficits, bloated public sector payrolls and no increase in tax revenue to pay for the additional infrastructure and services.  This is what the Clinton policies gave us.  Not sustained economic activity.  Or a budget surplus.  So going back to the Clinton tax rates is not likely to produce sustained economic activity.  Or a budget surplus.  Especially when President Obama has outspent Clinton over a trillion dollars a year.

So returning to the Clinton tax rates won’t help to reduce the deficit unless they return to the Clinton spending as well.  And that’s not likely to happen.  So what will the increase in tax rates do?  Well, we can get an idea by comparing the Clinton tax rates (1999) to the last tax rates we used (2011).  As they apply to a small business.  The following is an income statement for what could be a typical small business with about $1.8 million in annual sales revenue.

This is a very summarized income statement using some typical percentages for cost of sales and overhead.  This also assumes about $350,000 of debt on the company books.  Giving an interest expense of about $28 grand.  When you subtract all of these expenses from revenue you arrive at an earnings before taxes (EBT) of $358,016.73.  For many small business owners this EBT flows to their personal income tax return as personal income.  Which sounds like a lot.  But business owners will leave most of this money in their businesses.  So while the government taxes them as rich people they’re not really rich people.  For what the government doesn’t tax away will become retained earnings.  And reinvested back into their businesses.

Higher Taxes and Higher Regulatory Costs hurt Job Growth by taking away Job-Creating Capital from Businesses

All right, so let’s look at what the government would tax away.  Based on the 1999 tax rates.  And the 2011 tax rates.  Using the tax rates for married filing jointly we get the following income tax for each set of tax rates.

The 1999 tax brackets give an effective tax rate of 31.4%.  In 2011 that fell 4.7 points to 26.7%.  Which increased net profit from 13.7% in 1999 to 14.6%.  An increase of 0.93 points.  Not as big a change as in the income tax rate.  But it’s an additional $16,730.50 the small business would have to reinvest into the business.  Which could pay for a lot (even help pay their interest expense).  Especially over time.  In two years that’s about $33,461.  In five years that’s about $83,650.  In ten years that’s about $167,300.  That’s a lot of ‘free’ money the business could use to grow their business that they didn’t have to pay back.  But if we returned to the Clinton tax rates that’s money these businesses would no longer have to invest into their business.  Forcing them to pay to borrow money.  Adding additional interest expense.  And burdening the business with greater debt.  Which would be a disincentive to add additional costs.  Like creating new jobs and hiring people.

A lot of small business owners don’t pay themselves.  That is, they don’t get a paycheck like everyone else in their business.  Instead they distribute earnings from the business.  People think all business owners are rich.  But here’s something they don’t understand.  Even though they pay income taxes on their total business earnings they may only take a small percentage of their earnings out of the business.  In this example the married couple draws $75,000 a year to live on.  Even though they paid income taxes on $358,016.73.  Netting only $75,000 on these earnings would be like having 79.1% of your earnings withheld in taxes from your paycheck.  While these numbers vary among business owners this generally holds true.  They pay taxes on amounts far greater than what they take out of their business to live on.

If we go back to the Clinton tax rates it will reduce the amount of investment capital owners have to grow their business.  Which new regulations have already reduced by increasing costs.  With the unknowns of Obamacare basically freezing all new hiring.  As small business owners don’t know if the government will leave them enough money to grow their businesses.  Or even enough to maintain their current business operations.  Which is how higher taxes and higher regulatory costs hurt job growth.  By taking away job-creating capital from businesses.

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Private Investors passed on Solyndra, so why didn’t the Smart People in Government pass, too?

Posted by PITHOCRATES - September 14th, 2011

The High Cost of Solar Power makes Reliable Fossil Fuel-Produced Electricity even more Attractive

Solar panels. One of the darlings of green energy. And a favorite of the Obama administration. Especially Solyndra. Where Vice President Biden made a personal appearance to showcase the government’s half billion dollar investment into the economy of the future. A future, albeit, that will not include Solyndra. Why? Sales of solar panels are down. Way down (see Opposing view: ‘Perfect storm’ sank Solyndra by Daniel Poneman, Deputy Secretary of Energy, posted 9/14/2011 on USA Today).

Unfortunately, expanding production has coincided with short-term softening demand, a product of the banking crisis in Europe and its wider economic effects. The combination has had a dramatic effect on the price of solar cells, which has plummeted 42% in the past nine months. This has taken a serious toll on solar manufacturers everywhere, including the U.S.

Actually, what made Solyndra’s solar panels unsellable was something else. They didn’t use silicon. Like everyone else. They used another material. And a different technology. This cost more. But the installation was cheaper. So the total package was competitive. Until the price of silicon fell, that is. Which priced them right out of the market.

Solyndra needed silicon to remain expensive to remain competitive. Much like E85. That really only sold well when gas peaked over $4/gallon. And people didn’t realize that they had to buy more of it to go as far as gasoline would take them. Which meant a lot of people bought E85 only once. But government still subsidizes it. To make it cheap enough to get people to buy it. Even though they don’t want it.

Which is why solar panels aren’t selling. Governments everywhere are implementing austerity measures to reduce record debts. Which means they can’t subsidize these solar panels anymore. Which makes their high prices even higher. Making that sweet reliable fossil fuel-produced electricity all the more attractive. So bye bye Solyndra.

This month, Solyndra , a California-based company, filed for bankruptcy. Solyndra had been named one of the world’s 50 most innovative companies and reported sales growth of 40% to $140 million last year. In 2006, the company applied for a federal loan guarantee. It underwent years of rigorous internal and external review before being approved — before the perfect storm of deteriorating market conditions.

This year is 2011. So they reported sales of $140 million in 2010. And if you do some math, this means they reported sales of $100 million in 2009. Sounds impressive. But numbers are relative. We have to put them into some kind of context for a true understanding.

Government Investment into Solar Energy is Politics over Substance or just Plain Cronyism

So let’s find a little context (see White House ignored red flags in loan to failed solar company by Martin Wolk posted 9/14/2011 on MSNBC).

The FBI raided the Silicon Valley headquarters of the company, Solyndra, last week, investigating whether the government was misled when it loaned the company $535 million in taxpayer funds…

Solyndra received the loan guarantees in 2009 as part of President Barack Obama’s promise to create millions of so-called “green” jobs. But last month, Solyndra declared bankruptcy, laying off all 1,100 workers.

Hmm, let’s see. That was $535 million to produce $100 million in sales. Now that’s putting things into context. In other words, $100 million in sales is not impressive. In fact, it is downright abysmal. Only about 19% of the federal loan produced sales in 2009. For the last two full years of their existence, about 45% of the federal loan produced sales.

Worse, by the time you subtract the cost of sales from these sales and calculate the return on this government investment, there is none. Even before the bankruptcy. This was a horrible investment. This is a lot like all of those dot-com startups. Companies that were flooded with investment capital. As people were anxious to find the next Microsoft. Pouring money into companies that never produced anything to sell. And when the investment capital dried up, the dot-com bubble burst.

At least with the dot-com economic destruction, private investors lost. The green energy bubble, on the other hand, it’s the taxpayer losing. Because we’re subsidizing so much of this green energy. Why? Because private investors see it for what it is. A bad investment. There isn’t a market for this stuff. So they’re not throwing good money at bad investments. Unlike Uncle Sam.

House Republican investigators have unearthed emails — reviewed by NBC — which reveal repeated warnings by government staffers about the loan. Days before final approval there was a warning that one model showed the project would run out of cash in September 2011, which it did.

Another memo from the White House Office of Management and Budget, also cited by The Washington Post, questioned the model the government was using, but said “[g]iven the time pressure we are under to sign-off on Solyndra, we don’t have time to change the model.”

Why the rush? The White House appeared to be pushing to meet political deadlines so Vice President Joe Biden could announce final approval when he spoke at the groundbreaking for the new plant.

A key question is whether Solyndra’s political connections were a factor. A big Obama donor associated with the venture, identified by the Post as Tulsa billionaire George Kaiser, repeatedly visited the White House. He has denied using his influence to win approval of the loan.

This explains a lot. Staffers warned against the loan. Some even did math. Probably recognizing that there were no sales. And with no revenue coming in it was a simple matter of dividing investment capital by their monthly costs. Which proved very accurate. The staffers were smart. The policy was just bad. But, alas, staffers don’t make policy.

This is politics over substance. Or just plain cronyism. Which means one of two things. Government is incompetent. Or corrupt. Take your pick. Whichever one makes you feel better.

If Private Investors won’t Invest it has to be a Bad Investment

Solyndra is just one example of bad government policy. The whole ‘green energy is our future’ is a pipe dream. An excuse for the government to spend money. And to pay back campaign donors.

If this was our future, private investors would be pumping investment capital into green energy like there was no tomorrow. Like they did with all of those dot-coms. Those didn’t need any government investment, did they? And you know why? Because the private sector is full of greedy bastards looking to get richer. That’s why. And they will bury someone with investment capital if that someone has a good idea.

Anything the government ‘invests’ in, then, is a bad idea. Why? Because private investors say so.

www.PITHOCRATES.com

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FUNDAMENTAL TRUTH #15: “Most people would rather hear a pleasant lie than an unpleasant truth.” -Old Pithy.

Posted by PITHOCRATES - May 25th, 2010

“DO THESE JEANS make my ass look big?”  Men don’t like this question.  And when their wife or girlfriend ask it, they know to tread lightly.  Unless the relationship is on the outs.  In which case they may answer with something like, “No, it’s your fat ass that makes those jeans look big.”

If the man cares for the woman.  If he loves her.  If he ever expects to have sex with her again, he’ll say something nice.  No matter how much more of her there is to love back there.  It’s called a white lie.  Normally, we don’t base our relationships on lies.  But when it comes to the butt, though, lies are good.  They spare hurt feelings.  Should a person’s genes not bless them with a heavenly derriere to display in a tight pair of jeans.

White lies don’t hurt people.  In fact, we use them in order not to hurt people.  Such lies don’t have consequences.  And people may know you are lying.  Even expect you to lie.  It shows you care enough to make someone feel better about something you know they’re sensitive about.  Like her big butt.  Or his performance in bed (“Whew, that was the best five minutes of my life.  Really.”).

WHEN YOUR CHILD IS learning a musical instrument, he may make more noise than music.  But you encourage him.  Or her.  You tell them they’re good.  That they’re getting better every day.  And, yes, you would love for them to play in front of your visiting family.  And when they do, the family applauds and tells them they’re good, too.  Your child is encouraged.  And he or she keeps practicing.  A little white lie and no one gets hurt.

Suppose your daughter wants to sing.  She listens to the reigning pop queens and sings along.  Only thing is, she’s tone deaf.  She doesn’t sing well at all.  In fact, when she does sing, you start looking for a hurt cat because you’re sure no human could make such inhuman noise.  But you don’t want to hurt her feelings.  And you’re sure it’s just a passing phase.  So you tell her how wonderful she sounds.  No one gets hurt.  Nothing can go wrong with that, can it?

Well, suppose her school is having a talent show. Anyone can simply walk up to an open mike and do whatever they want.  And she wants to sing.  In front of her friends.  In front of her classmates.  In front of the 2 kids that always tease her.  Now the issue is a little more complex.  Do you tell her the truth about her singing and hurt her feelings.  Or do you let her sing.  And risk the kids laughing at her.  And teasing her about it afterwards?

BUT IT’S NOT just the white lies we want to hear.  Say your husband is staying later and later at work.  You call to see what time to expect him for dinner but there’s no answer.  When he comes home late you tell him you were worried.  You called and there was no answer.  He apologizes for worrying you and says he was with a client.  You’re relieved.

Or you come home from work and your wife isn’t there.  Concerned, you call her and there’s no answer.  When she comes home she says she was at the gym with a friend and left her cell in her gym bag.  You’re relieved.  Then she goes upstairs to shower.  Funny, you think.  She usually showers at the gym.

Learning about infidelity is not easy.  And it’s painful.  You ignore signs as long as you can.  You believe the lies.  You want to.  You need to.  Then you find an earring in the car that isn’t yours.  Or you bump into your wife’s friend who says she misses her now that she quit going to the gym.  Soon, the evidence forces you to face the awful truth.  And it kills you inside.  Divorce.  The children.  It’s just the beginning of so much bad to come.

SO WE LIKE it when people lie to us.  At times.  For the truth can be disagreeable.  Ugly.  Painful.  And we’d rather not have that pain.  No, we’d rather live life in a sitcom where there is always a good laugh and rarely anything bad ever happens. 

Politicians know this.  They know that most people don’t like the harsh realities of life.  So when they need to get elected, they lie to us.  No one wants to pay more taxes.  So the politicians promise that only the rich will pay any new taxes.  But massive government spending requires massive taxation.  And taxing the rich just can’t pay for it all. 

George Herbert Walker Bush promised no new taxes.  He said, “Read my lips.  No new taxes.”  He raised them.  Didn’t want to.  Said he had to.  To balance the budget.  Because he and Congress didn’t want to cut spending.  Same with Bill Clinton.  He promised there would be no middle class tax increase.  But there was.  He said he tried as hard as he could not to but had to.  Again, the spending thing.  No one wants to cut spending.  It doesn’t help win elections.

But we wanted to believe the lie during the campaign.  They promise us everything and say it won’t cost anything.  That’s what we want to hear.  We don’t want to hear the intricacies of monetary and fiscal policy.  That increased taxation dampens economic activity.  Decreases incentive for risk takers.  So they take fewer risks.  Create fewer jobs.  Which increases unemployment.  But we don’t want to hear this.  We just want the free stuff.  Just promise it.  Tell us it’s free.  And we’ll vote for you.

LITTLE WHITE LIES have little consequence.  We say them because we care about someone.  Other lies, though, do.  Big ones.  If we fall for them.  If we believe in an ever-expanding welfare state, we’ll keep voting ourselves the treasury.  Until we’ve emptied it.  And when there’s no more money, we’ll say, well, it was nice while it lasted.  But all good things must come to an end.  Or we’ll riot.

Or we’ll cut spending elsewhere to fund our insatiable appetite for free stuff.  Maybe we won’t build a new aircraft carrier.  Or we’ll close an overseas Air Force base.  Or we’ll reduce the size of our conventional forces.  Because we’ve been lulled into a false sense of security, we may think a large standing army is not necessary anymore.  But it was that large projection of force that gave us that sense of security.  It scared the bad guys.  Because the ability to project force, and the will to do so, will create consequences if the bad guys do act. 

During the dot.com boom of the 1990s, times were good and we got complacent.  During those good times, though, the bad guys hit Americans in a series of attacks (World Trade Center bombing, Tanzanian Embassy bombing, Kenyan Embassy bombing, Khobar Towers bombing, the USS Cole attack).  We didn’t fight back.  We lied to ourselves.  We didn’t want to believe that America was under attack.  Head in the sand, we wanted to continue to enjoy the good times.  This only emboldened our enemies.  They saw that America didn’t have the will to fight back.  So they upped the ante.  And in 2001, they attacked on 9/11.  And that attack was just too great not to awake a slumbering giant.

WE MAY NOT like the unpleasant things in life.  But they are part of life.  And we have to deal with them.  However unpleasant they are.  They are what they are.  No matter how we try to rationalize them away.

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