Sunday, March 27, 2011

Uncertainty and Unemployment

Uncertainty and Unemployment

Yet more indications that it's uncertainty that's impeding job creation.

But a key reason executives give for not expanding and diversifying their operations and adding more aggressively to their staffs is less tangible, but often cited: Uncertainty.


But the employment outlook won't improve until employers' confidence in the future, and in their future business, grows to a higher level.

"American businesses respond well to certainty," said Jonas McCormick, managing partner of financial firm Deloitte & Touche LLP in Phoenix. "That certainty could be good news or bad news. But at least when they know what it is, they know how to react and how to respond to it.

"What American businesses don't respond well to is uncertainty."

As they say, read the whole thing.


Cell Phones for Everyone

The annual survey on cell phone use in the US came out last week. A couple of interesting things struck me. We now have 303 million subscribers and a population of 311 million. That means we have one cell phone for everyone over the age of 2 here in the US.

The total cumulative capital investment since 1985 is $310 billion or about $1,000 per phone in use. That strikes me as a really small investment given the communication capabilities. I suspect that our hardwired phone system cost a whole lot more.

The return on that investment also appears to be pretty healthy. The average monthly bill is $47.21 or $566 per year. New investment is running about $25 billion per year or 15.6% of gross revenues. That's a fairly hefty investment rate for an industry, although this one is still growing rapidly.

Amazing stuff.


Saturday, March 19, 2011

Stifling US Investment

Buried in the last paragraphs of a story about Cisco starting to pay a dividend is an interesting factoid.

The dividend will cost $1.3 billion annually. Cisco had $40.2 billion in cash in February, but only $3.1 billion is in the U.S. The rest sits at overseas subsidiaries.

Cisco has been reluctant to repatriate that money, because it will then be taxed at the 35% U.S. corporate tax rate.

US corporations have one to two trillion dollars in cash today. They are hesitant to invest it in the US for a number of reasons, mostly due to uncertainty about government policy. However, if the earnings are overseas, and you have to pay 35 cents on the dollar to bring them home, I can understand leaving them overseas. That also makes investing in the US really expensive.

Other countries have figured this out and charge a very small (0 - 2%) repatriation tax. This is one of the areas where corporate tax revenues would probably increase if the tax rate was lowered.

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Friday, March 18, 2011

The Budget Debate in Big Macs

One of the things an economist asks is, "Compared to what?" The congress is currently debating continuing resolutions for the current fiscal year. The last CR that passed on Thursday cut spending by $6 billion. Via Instapundit I got to Dan Mitchell who notes that:
This is the budgetary equivalent of going on a diet by leaving a couple of french fries in the bottom of the bag after bingeing on three Big Mac meals at McDonald’s.
Since my local McDonalds has Big Mac's on sale, I thought I'd see what the real comparison is. The budget for the current fiscal year is about $3,800 billion. Using McDonald's nutrition facts I determined that four Big Macs, four Medium French Fries and eight Ketchup Packets add up to 3,800 calories. This is what that looks like:

Cutting 6 calories means cutting out 40% of a Ketchup Packet which looks like this:

The original CR for the rest of the fiscal year, passed by the house and killed by the senate, cut $61 billion. That's 4 Ketchup packets or 16% of one of the Medium French Fries:

Hopefully the pictures provide some perspective on what the debate is all about.


More Subsidies for Manufacturing

Two articles in the paper today about new manufacturing plants in the Phoenix area. In both cases, government subsidies were involved.
First we have First Solar's new manufacturing plant near Gateway Airport. They will spend $300 million and expect to create 600 new permament jobs. (That's very capital intensive - $500K per job.) For that they get 37.5 million in tax breaks over the next 10 years and $2 million for stuff businesses usually pay for themselves.
Second, we have Yulex using $15 million in financing to open a new manufacturing facility that will employ 60 people. Another 40 will be employed in agriculture to grow the raw material. (At $250K per job that's half as capital intensive as the solar jobs, but still way above the average for the overall economy.) In this case they're getting tax breaks because they are in an enterprise zone.
From an economic standpoint I find both of these subsidies to be inefficient. If you're going to give tax breaks to businesses (which may be a very good idea from a growth standpoint) then the most efficient way to do it would be to lower taxes on all businesses. That way, everyone can compete based on their comparative advantage rather than on their rent seeking abilities.
Also note that the solar manufacturing is fairly risky. If the federal, state and local utility subsidies for solar production go away, so does the industry.

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Tuesday, March 15, 2011

Making FDR's Mistake III

My contention for the last couple of years is that investment is being held back by uncertainty. A lack of investment means a painfully slow recovery. Businesses have plenty of money available to invest and banks have plenty of excess reserves to lend. Neither is happening because businesses are uncertain about their future costs as well as the future regulatory regime being put in place by the federal government.

Alan Greenspan made the same point, with a lot more clarity and precision earlier today.

What is most notable in sifting through the variables that might conceivably account for the lacklustre rebound in GDP growth and the persistence of high unemployment is the unusually low level of corporate illiquid long-term fixed asset investment...

I infer that a minimum of half and possibly as much as three-fourths of the effect can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory and financial environments faced by businesses since the collapse of Lehman Brothers, deriving from the surge in government activism. This explanation is buttressed by comparison with similar conundrums experienced during the 1930s.

In other places, this is referred to as "regime uncertainty."


Sunday, March 13, 2011

Check that Business Plan

Note to everyone thinking about setting up a Medical Marijuana business here in Arizona. Turns out the US tax code does not allow business expenses to be deducted for trafficing in a controlled substance. That means a 35% tax rate on every dollar of revenue.

HT: Ann Althouse

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Saturday, March 12, 2011

Earthquake Economics

In class on Friday we talked a bit about the economic impact of the earthquake in Japan. One person mentioned the possible impact on the chip market. I hadn't heard about that but it's in the news:

SanDisk, which sources flash memory from a Toshiba manufacturing facility in Yokkaichi (see map), reported a shutdown but resumed production, according to Jim Handy, the principal analyst at Objective Analysis. (This was confirmed by SanDisk, which has co-ownership of the facility.) That Yokkaichi complex is the largest NAND flash producer in the world, Handy said.

By comparison, in December, Toshiba reported a relatively tiny split-second outage in Yokkaichi that the company said would impact production by as much as 20 percent for up to two months.

Elsewhere, the broken window fallacy has shown up again.

And natural disasters can actually end up having some positive impacts, as well as negative ones, when it comes to a country's economy, Lincoln points out.

"There's going to be a lot of rebuilding -- a lot of jobs created -- and it could serve as a major economic stimulus," he says, adding that the earthquake will also prompt Japanese residents living in the quake-ravaged areas to shop for replacement items for their homes.

The assumption is that the spending wouldn't have occurred without the disaster. That of course is incorrect. Without the disaster, the spending would have been on things that added to their standard of living. With the disaster, they get to spend money on replacing broken stuff just to get back to the standard of living they had before.

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Wednesday, March 09, 2011

An Elastic Demand

When demand is elastic, lowering the price increases revenue. In this case, a lot.

...when he lowered the price of his book The List from $2.99 to 99 cents, he started selling 20 times as many copies — about 800 a day, turning his loss lead into his biggest earner.

It helps that the marginal cost is essentially zero.

HT: Instapundit