Irene was not so bad. She knocked down a few trees, flooded a few basements. But, in the end, she was a good girl who left quietly when her time came.
Traders, players, speculators and mid-night ramblers drifted back into Manhattan as soon as they could clear the fallen trees. They must have felt they had been spared for some great purpose. They must have looked to the heavens as clouds parted and rays of golden sunlight struck their uplifted faced. Whatever got into them, they rushed to the stock exchange and bought US stocks! The Dow rose 254 points.
If you believe the stock market, the storm is over…all is well…
But US GDP grew at only a 1% rate last quarter. That is a small number. Don’t look too carefully or it will disappear altogether. If you deflate the latest ‘growth’ number by the inflation rate published by the Bureau of Labor Statistics (actual year-to-year CPI-U is 3.6%) you get negative real growth. Recession, in other words.
And then, you have to wonder. Suppose you were to adjust that number for population? US population is growing at something just under a 1% rate. What you would see is that the average American is getting poorer (his share of GDP) at about 3% or 4% per year.
And then you are able to make sense of a lot of the other economic information that comes your way.
For example, a report out yesterday tells us that the personal savings rate in America keeps edging up — just as you’d expect. From next to zero, it has moved up over 5%. Households continue to cut back on spending…and increase savings. In the last quarter, they paid down $50 billion of debt. A drop in the bucket…but at least it was the right bucket. The Wall Street Journal:
In a marked shift from their borrow-and-spend behavior during the boom, US households are now by and large prioritizing saving and debt reduction. On Monday, the Commerce Department is to release July figures likely to show the personal saving rate, or proportion of after-tax monthly income unspent, in the 5% to 5.5% range…
We also learned that gasoline use is at a 9-year low. Labor Day weekend is less than a week away. But this year, forecasters believe more Americans are going to stay home. They can’t afford the cost of filling up the tank for a long road trip.
We hope this is true. We’re driving up to New York from Baltimore to attend a wedding. We don’t want to get stuck in a lot of traffic.
But it is sad to think that people can’t afford to visit friends and relatives because they don’t have the cash to pay for gasoline. Oh, for the good old days! We remember buying gasoline for 25 cents a gallon back in the early ’70s.
Sigh…but that was before Richard Nixon came up with the funny dollar we have today. Let’s see…suppose Nixon had done the right thing? Suppose he had honored America’s commitment to settle her debts in gold?
There would have been Hell to pay in the mid-’70s…but isn’t it better to pay Hell sooner rather than later? After all, the entire amount of foreign claims against the dollar at the time was something on the order of $50 billion. Now, it is around $4 trillion. Maybe more.
So, just for fun…let’s imagine what would have happened. Of course, there would have been this aforementioned period of wailing and gnashing of teeth. And then? And then, US producers would have had to get busy making and exporting products…while consumers would have been forced to curtail their reckless spending. America’s trade deficit would have remained under control…and the US would still have jobs in manufacturing. And it wouldn’t have debt equal to 370% of GDP.
But how much would people pay for a gallon of gasoline? Well, let’s see…let’s assume that gold has done a fair job as real money, of holding its purchasing power steady. Back in the early ’70s you could have bought 160 gallons of gas with a single ounce of gold. And today? At $1,800 an ounce, and gasoline at $4, you can buy 450 gallons. It’s as if the price of gasoline had fallen to about 10 cents a gallon!
Either gasoline is too cheap. Or gold is too expensive. If we were a trader we’d short the latter and go long on the former.
And since we’re always just guessing, we’ll take a guess as to what this means…
Gasoline is weak because the economy is fundamentally weak. Gold is high because Richard Nixon destroyed the integrity of the dollar, the US economy, and the world’s monetary system. Each of these trends will have to play itself out. In the meantime, gasoline…and/or gold…may need a little adjustment. And the storm continues…
And more thoughts…
At least the feds aren’t cutting back. The private sector spent itself silly in the ’00s. Now it’s the feds’ turn.
With all the talk of ‘cuts’ and ‘budget reduction’ you might have the idea that the feds are putting the same screws to their budgets as everyone else. You might have thought, too, that much of recent government spending was temporary ‘stimulus’ spending, intended to kick the US economy in the derriere, in order to get it moving faster. That spending might have been expected to taper off as the emergency passed. If you thought that you would be as dumb as a voter. The 2011 budget is on target to hit an all-time high of $3.6 trillion, more than $100 billion up from last year. Total outlays are increasing at a breathtaking pace — up by a third in just four years.
And now that the debt ceiling has been cracked…the sky’s the limit.
*** Baltimore. Our home town. What a dump.
But what a nice place to study “stimulus” projects. Baltimore has been drawing money from the feds for years…presumably to redress one failure or another. Of course, one failure only led to another….and to more federal funds! In fact, the city is an urban example of the old maxim — you get what you pay for. The feds paid for education programs…infrastructure programs….police programs…welfare programs…
And they all worked beautifully. Now, the city is more failed than ever — and getting more federal funds! Steve Hanke has the report:
How Property Taxes and the ‘Curley Effect’ Are Killing Baltimore
As affluent residents leave town, the political playing field tips further and further in favor of pro-tax Democrats.
By Steve H. Hanke and Stephen J.K. Walters
This coming Labor Day weekend, traffic in downtown Baltimore will move at more than 100 miles per hour — or not at all: The city’s main streets will be closed so that IndyCar racers can compete in the inaugural Baltimore Grand Prix. Much more than prize money is at stake.
Nine days later, on Sept. 13, voters will pick a mayor, and incumbent Stephanie Rawlings-Blake is betting that the auto race will draw thousands of free-spending tourists and stimulate the local economy, thereby demonstrating her vision and competence. In fact, it will be an economic dud, a money-loser even for its promoters, and a logistical nightmare for residents.
The race exemplifies the city’s development strategy: Subsidize big downtown projects with other people’s money — in this case, over $6 million in federal stimulus funds for the two-mile race course — and proclaim an urban renaissance.
Away from the waterfront, this strategy’s failure is apparent. The city has lost 30,000 residents and 53,000 jobs since 2000, marking the sixth consecutive decade of population and employment exodus. About 47,000 abandoned houses crumble while residents suffer a homicide rate higher than any large city except Detroit. The poverty rate is 50% above the national average.
Much of this decline is a result of the city’s exorbitant property- tax rates, which are twice as high as any other jurisdiction in Maryland and Washington, D.C. The encouraging news is that all four major mayoral candidates are promising property-tax relief.
Ms. Rawlings-Blake promises an inconsequential cut to 2.068% from 2.268%, spread over nine years. It would be “paid for,” she says, with revenue from a casino that doesn’t exist. Her reluctance to consider stronger medicine reflects not only poor economics but something more sinister.
To attract what little investment Baltimore has in recent decades, public officials awarded subsidies to big developers to offset the difference between the city’s confiscatory tax rate and that of nearby counties. But developers have to “pay to play,” which assures a reliable flow of campaign contributions to sitting officials — and invites corruption. Indeed, Ms. Rawlings-Blake took office only 18 months ago, after the previous mayor resigned as part of a plea bargain to resolve a scandal involving her allegedly accepting gifts from a developer seeking subsidies.
Now Ms. Rawlings-Blake’s challengers are asking: If tax breaks for the connected are a good idea, why not give them to everyone? State Sen. Catherine Pugh promises to halve the city’s tax rate in her first term or not run for a second. Otis Rolley, a former director of city planning, offers a similar 50% cut for the first $200,000 of assessed value and higher rates for more expensive properties (or vacant ones). And Jody Landers, a former city councilman, promises a cut of 30% to 35% phased in over four to six years.
But tax revolts are hard to win at the local level. The problem is what Harvard economists Edward Glaeser and Andrei Shleifer have called the “Curley effect.” In Boston during the first half of the 20th century, Mayor James Michael Curley built a political machine by strategically shaping the electorate — taxing well-heeled “Brahmins” heavily and redistributing the proceeds to poor Irish immigrants. This not only bought Irish votes but chased the old Yankees out to the suburbs, further tilting the political playing field in Curley’s favor.
In modern Baltimore, the machine has exploited class divisions, not ethnic ones. Officials raised property taxes 21 times between 1950 and 1985, channeling the proceeds to favored voting blocs and causing many homeowners and entrepreneurs — disproportionately Republicans — to flee. It was brilliant politics, as Democrats now enjoy an eight-to-one voter registration advantage and no Republican has been elected mayor in 48 years.
But Baltimore’s high property taxes have repelled investment in physical capital for decades. As that capital decayed and became scarce, labor became less productive and less prosperous. In 1950, the city’s median family income was 7% above the national average. Today it is 22% below it. And it won’t be easy to undo this damage as long as City Hall remains in the hands of politicos who are committed to a fatally flawed business plan.
Other noteworthy victims of the “Curley effect” have been rescued via statewide referenda. Boston, for example, was in worse shape than Baltimore back in 1980: Its population had fallen more in the preceding three decades (30% as opposed to 17%), its per capita income was 2% lower, and its crime rate was 42% higher. Then, in 1980, Massachusetts voters adopted Proposition 2 1/2, forcing Boston to cut property taxes by an estimated 75% within two years and capping future annual increases at 2.5%.
It was the kind of reform Boston needed but wouldn’t have chosen itself (akin to California’s earlier Prop 13, which revived cities like San Francisco and Oakland). Businesses and residents flocked back to Beantown. Its population rose 10% between 1980 and today, while its per capita income is now 43% higher and its crime rate 25% lower than Baltimore’s.
The spillover benefits of capital-friendliness — enhanced public safety, school quality, and economic and social mobility — are much- ignored but crucial elements of tax reform. As the renowned urbanologist Jane Jacobs once said, “cities don’t [just] lure the middle class. They create it.”
Baltimore stopped creating its own middle class decades ago, but it has a chance now to reverse decades of disinvestment, depopulation and decay. All voters have to do is invite capitalists back to town for more than just a weekend car race.
Mr. Hanke is a professor of applied economics at the Johns Hopkins University. Mr. Walters is a fellow at the university’s Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
for Markets and Money