Market Talk

I seem to recall that one of the selling points for the government bailouts in the wake of the Panic of 2008 was that the private sector had to be saved if we were ever going to create jobs again in this country. It was sold as that we weren’t so much bailout out a bunch of private players that wreaked havoc with the economy so much as we were preserving a system that would help repair the damage done to the citizenry. That we were, in effect, bailing out ourselves.

I think we can close the book on that one as a big fat lie. The private sector has done very little, especially considering how much they were given, to get the jobs market back to health. Hiring’s going nowhere and wages are going nowhere. But corporate profits have soared. Meanwhile, with the government picking up the slack for what the private sector isn’t doing, federal debt has soared. But GE can work the tax code to the point where it effectively pays no corporate tax.

Gluskin Sheff’s David Rosenberg lays it out for you:

The U.S. corporate sector gets bailed out by the taxpayer in unprecedented fashion, to only then see said corporate sector experience a surge in profits without having to increase the size of the workforce very much, if at all, or increase pay to their staff so they can share in the spoils, for that matter. What the government then does is replace the business sector’s role in doling out wage increases to the working class to the point where a record 20% of personal income is now derived from federal transfers.

This is the principal cause of the U.S. deficit soaring to unprecedented heights of $1.5 trillion and it is so obvious from the latest White House budget that there is no realistic plan to redress the rising tide of fiscal red ink. But the major point here is Uncle Sam’s generosity has given the proletariat the leeway to spend, thereby helping support volume growth in the corporate sector and further widening out profit margins, which were already underpinned by declining unit labour costs. And the stock market rallies to new cycle highs. What an economy! What a market! Boom times with a 9%+ unemployment rate and a 16%+ underemployment rate.

(Photo: Library of Congress)

One of the reasons I got so irate yesterday about this whole corporate-tax reform thing that the President brought up is because we’d been working on today’s Upshot column, which happens to be about corporate taxes, so I was sort of amped up on the topic to begin with.

The reality of the tax code is that it’s been getting bigger and bigger, with more deductions, more loopholes, more carve-outs that save companies money. The bottom line of that expansion is that the effective tax rate, what companies pay after winding their way through the byzantine tax code, has been steadily falling since at least the mid-’90s. So companies are paying less in taxes to Uncle Sam, while they’re earning more. How you feel about that trend probably is influenced greatly by whether or not you’re a stockholder. Or a Republican.

So here’s the thing: any earnest reform of the tax code would be aimed at making companies pay more, not less, by stripping out of a lot of the loopholes. If that’s what Obama was really after, I doubt the U.S. Chamber of Commerce would be applauding him; more likely, they’d be screaming that he’s a socialist out to steal their wealth. They’d be manning the ramparts.

Something tells me this is all just more noise, more distraction to make us think the government’s got a plan. Anybody or any company that can afford a good accountant likes the current tax code just fine, and has about, oh, I dunno, a trillion reasons to oppose any meaningful reform.

Anyhow, that wasn’t the point of the column. The point of the column was that the lower tax rates are a boost to the bottom line. From today’s column:

As President Obama asks businesses for assistance in revamping the corporate tax code, it’s worth examining the helpful role of research and development and other tax breaks on fourth-quarter corporate earnings.

Chemical maker DuPont Co., conglomerate General Electric Co., software giant Microsoft Corp. and others are noting the boost provided by lower taxes on earnings in the final quarter of 2010. Two were key: an extension of a federal credit for research and development spending, and the benefit of production in low-tax countries.

DuPont, for instance, said a favorable tax rate contributed more than a quarter of its fourth-quarter per share profit. The company said its full-year tax rate was lower than expected, reflecting “a more favorable geographic mix of earnings in low-tax jurisdictions outside the U.S.” It credited U.S. tax law changes, including the R&D tax credit, for the improved results.

Um, what?

WASHINGTON—President Barack Obama on Monday told corporate leaders they must shoulder responsibility for lifting the shaky economy and vowed to “knock down” government barriers that hamper business growth.

That’s the lede (that’s how we spell it in the news business) of the Journal’s story about President Obama’s speech today to the U.S. Chamber of Commerce.

But here’s my question: at a time when corporate profits are near their all-time peak, when profit margins are near their all-time peak, when we just pointed out how much the government has already done to goose corporate profits, exactly what government barriers are there to business growth?

Here’s a few more grafs (yeah, more newspaper stylings) from the story to flesh this thing out:

Mr. Obama, speaking to the U.S. Chamber of Commerce, the large business lobby, said he wants the business community’s help in revamping the corporate tax code, expanding the economy and making government run more efficiently.

“We’re trying to run the government more like you run your businesses—with better technology and faster services,” Mr. Obama said at the Chamber.

In exchange for their help, Mr. Obama said, to applause, “I’ll go anywhere anytime to be a booster for American businesses, American workers, and American products.”

So what this largely boils down to is that the administration is going to lower corporate taxes. Great, one more giveaway. Now, what could possibly be the justification for that? Do not tell me high taxes are killing profit growth. Profit growth is doing just fine. Better than fine, actually.

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The most important piece of news this week wasn’t the ADP report, or the weekly jobless claims. It wasn’t the ISM’s service-sector report, or the latest updates on BP’s Gulf oil spill. It wasn’t the Gore’s split-up, or even Armando Galarraga’s stolen perfect game, and it won’t be Friday’s jobs report for May. No, the most important piece of news this week, the one that will have the most lasting impact, was this:

The national debt crossed the $13 trillion mark.

It wasn’t a surprise, of course. Anybody who walks on 45th 44th Street by Sixth Avenue has seen the big debt clock there over the IRS office. It’s been rising steadily. But crossing another milestone, and so quickly after we crossed the $12 trillion mark, really should be yet another wake-up call for the nation. You think the Macondo well’s a real gusher?

Gross domestic product in 2009 was about $14.4 trillion. That puts the national debt at roughly 90% of GDP. That’s a danger zone beyond which nations don’t generally recover. Even for the world’s largest economy, we are passing the point at which we can still earn our way out of our debt, no matter how many jobs we create.

Now, obviously, nobody but nobody wants to call the government of the United States to the mat about its debt. A sovereign debt crisis in the world’s largest by far economy would be like dropping a dozen nuclear bombs on the global economy. Nobody would recover. So expect the world to nervously play along as our duly elected leaders pretend to have a firm grasp on this problem.

But we are at the point where some painful choices are going to start forcing themselves on us (indeed, at the state level, this is already happening.) Higher taxes. Cuts in services. Cuts in benefits and entitlements. Maybe even a shrinking of the military. All the options are going to have to be on the table, because very soon, if not already, we won’t be able to just jawbone this problem any more.

(Photo: Paul Vigna)

This morning on the News Hub, we dig a bit into the earnings picture, the latest Greece and taxes (hint, they’re not going down.)

Opportunity knocks.

Look, times are tough, right? Governments from California to New Jersey are struggling to plug budget gaps. And from Philly to Manhattan (hey, when you live in Jersey, that spans your world,) politicians and would-be politicians are coming up with all sorts of novel fixes.

How about this one, out of the city of brotherly love and sent up to us from Dinah Brin, one of the reporters in our Philly bureau:

Philadelphia Mayor Michael Nutter would like the city to tame its, um, bottom lines, both fiscal and physical, with a 2c-an-ounce tax on sweetened beverages. The city faces a budget crisis, and in his budget address today, KYW reports, Nutter proposes the new beverage tax and a trash-collection fee to generate $184M annually and save city services. The drink tax, which could raise $77M of that amount, would cover sugar-sweetened beverages such as soda, sports drinks, chocolate milk and non-100% fruit juices, media reports say. The Pa. Beverage Association and a Teamsters local criticize the move.

Let’s get this straight: they want to tax soda, and charge a fee for a service for which residents already pay. That’s pretty desperate. Of course, if Nutter really wanted to raise some serious cash, he ought to tax cheesesteaks, although that might not go over so well. The point is, as was made rather effectively by New Jersey’s new governor, budgets have been frayed past the point of breaking, and some really, really new – or really old – ideas are needed to fix these problems.

Now, we’ve been getting emails this past week from somebody running for New York governor on a sort of peculiar agenda, but the more I read about stuff like the Philly soda-tax, the more I think this madam may be on to something.

“Women’s rights advocate Kristin Davis, a former Madam who supplied call girls for Eliot Spitzer and did time for her crime, announced her candidacy for Governor of New York on a reform platform of legalization and taxation of prostitution and marijuana.”

Hey, why not have a governor who’s already been convicted of a crime? Kind of get it all out of the way up front. That’s novel, right?

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Increased taxes for “high-income” citizens in order to provide health care for most Americans seems generally palatable to those of us who aren’t considered “high income.”

They’re rich, after all, so they can afford the extra burden.

But when one considers our trillion-dollar deficits as far as the eye can see, how long before the bar on what constitutes high-income starts to move lower…and lower? For purposes of the health-care bill, it starts for a couple who together make $350,000/year.

While the rich may easily afford the new surtax, it’s still likely to impact their spending, says Miller Tabak strategist David Greenhaus.

“With respect to spending, estimates suggest that the top 20% of income earners are responsible for around 40% of all consumer spending in the country, intimating that additional tax burdens will only hinder the very consumer spending the administration is trying to reignite,” he says.

John Jansen at Across the Curve agrees, calling the surtax proposal “another nail in the coffin of spending.” And are there even enough rich folk out there to soak with more taxes in order to pay for all the country’s mounting obligations?

At some point, “several years down the road ( I suspect) the financial markets will call for a healthy retribution for our profligate spending and in so doing will force additional rounds of tax hikes which can only be effective at raising revenue by reaching deep into the middle class brackets,” Jansen adds.

That’s right, citizen, the middle class. You and me. Feeling “high income”?