By Winton Bates, on April 16th, 2010
Having just finished reading Gregg Easterbrook’s new book, ‘Sonic Boom’, I think he would say that we should welcome globalization. He sees fantastic potential for social progress, but improved living standards are likely to be ‘wrapped with ribbons of stress, anxiety and dissatisfaction (p.34). His bottom line seems to be that globalization is inevitable and that we just have to learn to live with it.
Easterbrook expects the forces of globalization to grow stronger. That means that the insecurity that people often associate with globalization is likely to accentuate:
‘Job turmoil, the economic roller-coaster, financial bedlam, media superficiality, celebrity inanity, political blather, targeted advertising, scream-and-shout discourse, the paving over of nature – they’re all going to get worse. A lot worse in some cases. Most likely, global economics will be blamed for whatever about coming decades we don’t like.’
He also suggests, however, that much of what people tend to like about life will get better:
‘Prosperity will increase, especially in the less affluent nations where improvement is most needed. Democracy will flourish on five and perhaps six continents … . Information and knowledge will proliferate as never before, while art and culture become available to everyone. Many aspects of this evolving sonic boom will be really terrific.’
Then comes the recommendation:
‘The terrific aspects and the anxiety inducing aspects will be intertwined and we’re just going to have to live with this’ (p. 209).
Why is globalization inevitable? I think Easterbrook discusses this in several places but I have noted one place in particular. (I’m glad I made notes as I read the book because there are few clues offered in the contents page about where to find stuff and the index doesn’t seem to be as helpful as it could be. But I digress!) Easterbrook suggests that we can’t stop global change because it is associated with the spread of freedom – ‘most of the world’s nations are acquiring the same core structures (democracy, free-market economics, emphasis on education) that makes the United States the current world leader … . The more America-like the world becomes, the faster the pace of economic change will be’ (p. 192).
I think Easterbrook is basically right about this. It would probably take a world war to stop globalization and there doesn’t appear to be one of those on the horizon. Perhaps some people said similar things around 1900 – prior to a few decades of disruption in global trade and investment. Even so, the main point is that the forces shaping the future of the global economy are beyond the control of any individual, firm or government. At a national level it is possible to shield some groups from the forces of global change but only by reducing the opportunities available to others.
Easterbrook acknowledges that it is possible for governments to provide a safety net that will provide citizens with some degree of security, particularly in relation to health care. He argues that people in the U.S. suffer more stress than do people in western Europe because of problems associated with the U.S. health care system (pp. 200-202). I don’t know whether or not this is a valid point. Evidence from the Gallup World Poll suggest that people in the U.S. tend to experience more stress than do people in western European countries and Australia. But Mexicans report experiencing a lot less stress than Americans and less stress than Europeans and Australians – so there is probably more involved than health care.
My main reservation about this book, as with Easterbrook’s earlier book ‘The Progress Paradox’ (discussed here), is that I think he overstates the insecurity that people actually feel as a result of the forces of globalization. The book seems to be full of colourful phrases to describe this insecurity. For example, Easterbrook writes of ‘change-based anxiety’ (p.34), ‘Multiple Media Personality Disorder’ which he defines as a ‘a universal low grade nervous tension from which there may be no realistic escape’ (p.70), ‘the Super Bowl of stress’ (p. 72) and ‘collapse anxiety’ (p. 168).
I acknowledge that job insecurity has increased. Easterbrook makes a strong case that each year it gets easier for someone to come along with a superior idea and put an established firm out of business (p. 134). He could be right that in future there will be a greater risk that people who have risen to the middle classes will ‘fall back’ down the economic ladder and end up bitterly unhappy (p. 196). I also acknowledge that the insecurity of modern life is a popular topic of conversation, particularly in the media. But I don’t think insecurity is having a large impact on behaviour and the way people feel about their lives. If a lot of employed people were feeling a high degree of insecurity about their jobs I think they we would see more precautionary saving and less willingness to go into debt than we have seen in recent years. Survey evidence suggests that the vast majority of people in high-income countries feel that they have a great deal of control over their lives.
My conclusion is that there must be a huge gap between the fears that a lot of people express when they talk at a superficial level about the challenges and insecurity of modern life and the deeper feelings that they have about opportunities and threats in their own lives.
By Richard Daughty, on April 16th, 2010
The Financial Times had the article “Greenspan Mauled Over Role In Meltdown”, which was about that loathsome, worthless lunatic Alan Greenspan testifying at the Financial Crisis Inquiry Commission, which is enough to make you laugh in itself; the morons who perpetrated constant deficit-spending are facing off with the guy who provided the money and credit with insane levels of monetary inflation to make it happen! Hahahaha!
For his part, Greenspan lamely admitted that he and the Fed had never tried to do anything other than keep creating money, day after day, month after month, year after year, to finance those boom-era boondoggles, like, for example, the housing bubble, a federal government idiocy of massive size and a particularly odious failure, a pungent stinkeroo made possible with the low, low, low, insanely-low interest rates and laughable banking changes that Greenspan, alone, provided.
Even worse, to make such low interest rates somehow defensible, Greenspan and Michael Boskin rigged up a slimy methodology (commonly referred to as “hedonic adjustments”) for “adjusting” both the price changes and the standard, measured market basket of goods and services, so that inflation in prices was always understated by, apparently, as much as they wanted! Hahaha!
For the Federal Reserve to do otherwise (to wit: not act like morons), says Greenspan, “Congress would have clamped down on us”, which means that he is admitting, on the record, that the fabled “independence of the Federal Reserve” is just another Stinking Load Of Lying Hooey (SLOLH), which I say means that he ought to be dragged out into the street and horsewhipped, along with all Congresspersons (except Ron Paul), either living or dead, meaning, of course, that if a former Congressperson was dead, then his or her dead body ought to be dug up, taken out into the street and whipped, too, and then all of them thrown into prison, except for the dead ones, of course, because that would look, you know, stupid.
Of course, DailyBell.com is too classy to get dragged into discussing the merits of Extreme Mogambo Retribution (EMR), and, instead, calmly says, “We start with Greenspan and his recent denial of any role in provoking the current financial crisis by keeping interest rates very low for an extended period of time. We are a bit baffled by his denials. He knew then and he knows now that paper money creates difficulties when issued by private/public central banks under the aegis of the state. He understands the business cycle, Austrian economics and how destructive publicly issued fiat money can be. First comes the boom – courtesy of an overprinting of paper money – and then the inevitable bust.”
Exactly! Almost taking the words out of my mouth, they continue that the boom-bust cycle is inevitable because “It always happens that way as Ludwig von Mises and FA Hayek showed us. Greenspan knows, and must know, for he wrote about it as a youth and supervised the mechanism as a mature economist and regulator.”
What to do? Lie! And just like most of us (me) lying at work about whose fault something was (me), and who ought to be fired for it (not me), and his future salary disbursed to the remaining workers (me), Greenspan denied everything, prompting Daily Bell to note “We suppose he must deny it. One doesn’t go to Capitol Hill and admit that one caused the undermining of the wealth of the Western world. And certainly it wasn’t Greenspan’s fault entirely.”
It was that last sentence, “And certainly it wasn’t Greenspan’s fault entirely”, where I saw my chance! An opportunity is dropped into my lap to get a little attention (and to probably commit professional suicide) by disagreeing with the Daily Bell!
Thinking that they would be persuaded if I couched my rebuttal in terms of Long, Loud And Rude (LLAR), I said “You’re wrong, you morons! Hahaha! You’re wrong and I’m right for once in my lousy life! It was all Greenspan’s fault! Greenspan is the one that created the money that made it possible! Don’t you see, you nitwits, that without him, and the monstrous mountains of money he created, none of this bad stuff would have happened!”
Well, I learned Long, Loud And Rude (LLAR) was not the ticket to recognition and acclaim at the Daily Bell, although I am right about Greenspan being singularly at fault, just as I am right about how you ought to be buying gold, silver and oil right now instead of sitting there reading my Stupid Mogambo Crap (SMC).
Perhaps, in hindsight, I should have taken the more up-tempo and literary road, and say, all sophisticated-like, “As P.J. O’Rourke, the famous writer, might have put it if he was paraphrasing himself, just because teenage boys want whiskey and car keys doesn’t make them guilty of anything, especially when it was their own stupid dad that gave them the whiskey and car keys while telling them to have a good time because there was nothing to worry about!”
Still no response from Daily Bell, even when I offered that “Maybe if he was sending the kids out to buy more gold, silver and oil because he was unable to go himself, then maybe Greenspan could be forgiven. But he didn’t, and now look at the mess we are in!”
Again, nothing. So, I surmise that the lesson for today is that nobody cares about how I feel about the odious and satanic Alan Greenspan, who is the lying, repulsive turd that caused the booms and the busts.
And, apparently, nobody cares for my constant exhortations to buy gold, silver and oil, either, which they must do to survive financially as a result of the insane Federal Reserve creating so insanely much money so that the insane federal government could borrow and spend an insane $1.6 trillion this year, and trillions and trillions more borrowed and spent dollars for at least 10 years, which will double, triple, maybe even quadruple the money supply, which will cause such ruinous, catastrophic inflation in consumer prices that you can hear me, way off in the distance, screaming “We’re freaking doomed!”
And if you do you decide to get some gold, silver and oil, go and get it yourself, and not trust some drunken kids to get it for you. We’ve seen what happens!
Alan Greenspan and the Ruination of the US Financial System originally appeared in the Daily Reckoning.
By B.P.T., on April 16th, 2010
At 8:30 AM EDT, the Housing Starts report for March will be released. The consensus is that construction on 605,000 new homes was started last month, after a weak February due to poor weather.
At 9:55 AM EDT, Consumer Sentiment for the first half of April will be announced. The consensus is that the index will be at 75, which would be an increase of 1.4 points from the second half of March.
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By Claus Vistesen, on April 15th, 2010
With so much going on at the moment and so many themes fighting to claim the main market discourse, I am in the mood for some random shots. First of all and to my continuing regret I have never actually got to thank Niels C. Jensen from Absolute Return Partners for the nice coverage I got way back in October 09 when Mr. Jensen discussed my thoughts on demographics and the life cycle.
So, let me repay by pointing towards Jensen’s recent two monthlies which form the basis for this round of random shots. Both are very much worth reading and in some sense they go together to form a common narrative, but especially the second one where Niels is blowing echo bubbles is mandatory reading I think. The themes taken up by Niels are well known and so is the underlying narrative, but this does not mean that it is not worth repeating; I will Niels set the scene;
In last month’s letter I looked at the challenges confronting the world’s baby boomers based on the assumption that we are in a structural equity bear market, which implies below average returns for equity investors for several more years to come. Central to this forecast is my expectation that household de-leveraging, which is now underway on both sides of the Atlantic, has much further to run. In other words, we are in a balance sheet recession. When that happens, debt reduction becomes the priority. Savings rise and consumption falls at the expense of economic growth.
Please note that this forecast is predicated on a 5-10 year time horizon. Within a structural bear market – which is characterised by falling P/E ratios – it is certainly possible to have cyclical bull markets, so it is by no means one-way traffic. As you can see from chart 1, since the 1982-2000 structural bull market came to and end, we have enjoyed two powerful cyclical bull markets; however, global equity prices remain at 2000-levels.
(…)
However, this is not the same as saying that it will always be a losing proposition to invest in equities. Equities can, in fact, do quite well for long periods of time despite the negative undercurrent. This is what the perma-bears do not understand. They assume that structural bear markets equal negative returns and that is not necessarily the case.
Thus and to clarify, what is referred to here as an echo bubble is the rally we have seen since March 2009 and thus evidence that while structurally, deleveraging and low trend growth will be the main driving force, that does not mean that equities cannot and will not perform extraordinarily well for long passages of time. I mean, who wouldn’t wish that they bought with everything they got back in March (I know I myself feel a bit peeved over not piling in).The broader issue of course is that while smart money may very well learn to navigate such an environment the smart dumb money (i.e. those who buy and holds the market) may realize that the reward from such a strategy may turn out to be less than splendid. And since this is basically a proxy for the return on savings, it means that permanent income will fall which means that consumers will need to save relatively more to compensate, and then we get the problem of a lack of consumption and aggregate demand and … on and on we go!
On this, I agree that deflationary v inflationary forces will feature a tug-of-war for many years to come and, like Niels, I tend to favor the former. However, when pointing to Japan as an example of how continuous attempts have failed to spur inflation (and is still failing) I do think it is important to qualify that this goes strictly for domestic inflation. In this sense, what has become known as the Yen carry trade (and recently USD carry trade perhaps?) is merely a proxy for much broader and structural tendency which signifies how central banks have lost control over where the liquidity they provide is applied. This goes in both direction. In Japan, the liquidity create slips through the back door and ends up e.g. in Brazil or New Zealand who, in order to combat domestic inflation, are busy increasing interest rates only to that it sucks in more liquidity (or, if you will, purchasing power).
Clearly, with US rates stuck at near zero this provides a huge push for global liquidity and even though I think that the US (and the UK) will eventually succeed in getting inflation (and quite possibly, a lot of it), the fact that these economies may withdraw liquidity slower rather than faster represents strong sheet anchor for excess global liquidity and thus although we may be in a structural bear market, it is also a market with a high level of volatility.
This leads me to the following three themes I am following at the moment inspired not only by Niels’ thoughts but also by the recent themes laid out in Variant Perceptions monthly (which is sadly not available online).
1. I accept the idea of a structural bear market but interpret it as investment lingo I guess for broader macro reality that we are now in a situation where we need to delever and that will be deflationary in domestic OECD economies (i.e. this is German austerity writ large). This, I would assume, is tightly connected to lower trend growth. In this sense, demographics (which I tend to focus on) and the defacto excess leverage (regardless of underlying capacity) serve as a ball and chain and it represents a structural break both in terms of behaviour by part of economic agents but also in terms economic growth.
2. Higher volatility. Why? Because just as Japan may fail in creating domestic inflation and just as the US/UK may find it hard to create domestic inflation (although at some point they will, for sure!) they may all create inflation and bubbles elsewhere. Please do read this again if you did not have the chance.
I guess it goes back to the premise that while we may in a situation where growth and equity returns (beta!) are sluggish, we will still see bull markets that lasts (well the current one is running on a year now no?) and more importantly; there will be economies who are able to suck up excess liquidity but they are outnumbered by economies with a desire of excess (external savings) and this is what leads to volatility in asset markets and the real economy.
3. Who is running the deficits? This is an old time hobby horse of mine, but still one which is extraordinarily important. In short; where will bubbles form and why? Emerging markets seem certain. But more importantly and using demographics as a yardstick the equilibrium is changing. Thus, we are all ageing, so we are all moving towards the same “preferences” for a high level of desired external savings as well as more and more economies will struggle with domestic deflation. How this ends is still an open question and it is also the straight line my theoretical work draws into the real world.
Lastly, and now moving with some truly random shots, I think Niels has some interesting points on investors and commodities and how these markets are not really suited for the kind of activity they are seeing. This is of course a direct effect of all those who really think that we are heading to hell in an express elevator and that the fiat system is collapsing etc. You all know the story I guess. Yet, after having looked recently at Chile and thus copper, I am sure that here is a metal which looks very, very bubble prone! Finally, Niels touches on China and the fact, as we have talked about, that as China moves into a trade deficit would a freer Yuan actually appreciate? Or would it in fact depreciate? Well, we will see soon enough I guess since it turns out that Niels was right here. Consequently, news has just come in off the wire that China posted its first trade deficit in six years in March as the trade print came in at a $7.24 billion deficit. Q1-10 is still a surplus but is this the first signs of true and real rebalancing? Well, color me (very) skeptical here that China will be pulling the global economy anywhere through a trade deficit that is not based e.g. on stockpiling of base metals and other commodities, but the ball is in my court as a skeptic with these latest numbers I fully accept this.
By Eldon Mast, on April 15th, 2010
What a difference a year can make. The improving economy in 2010 now has J.P. Morgan Chase & Co.’s (JPM) growing earnings again, with loan delinquencies declining, and steadily decreasing allocations for bad loans.
On Wednesday the second-largest bank in the U.S. said that its net income rose by 55% from a year earlier and that its provisions for credit losses on all the loans it manages shrunk by 30% — an improving metric that helped overall results in several of its business units.
“There is clear and broad based improvement” in the economy in the U.S. and around the world, possibly resulting in a “strong recovery,” said JPM Chairman Jamie Dimon. “Chances of a double dip [recession] are rapidly going away.”
But perhaps the best news for the battered financial sector was Dimon’s announcement that J.P. Morgan has plans to hire at least 9,000 new staff in the U.S., and aims for further additions worldwide.
With these types of results, it is not hard to imagine an economy that is on track to net more than 4M new jobs by year end.
By B.P.T., on April 15th, 2010
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 440,000 new jobless claims last week, which would be slightly less than the higher than expected number reported last week.
Also at 8:30 AM EDT, the Empire State manufacturing index will be released. The consensus is that the index value will be 25, which would be an increase of more than 2 points from March, because new orders were much higher in March than February.
At 9:15 AM EDT, the Industrial Production report for March will be released. The consensus is that there will be a gain 0f 0.8% in production and a gain of 0.7% in industrial capacity utilization.
At 10:00 AM EDT, the Philadelphia Fed Survey report will be released. The consensus is that there will be a gain of 1.1 points from last month, reflecting improving business conditions.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
At 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
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By Ajay Shah, on April 14th, 2010
The recent rupee appreciation, followed by rumours of RBI appreciation, has set off fears that we’re in for a repeat of the sad episode of monetary policy 2006/2007 all over again.
Writing in the Business Standard, Shankar Acharya repeats the advice that he gave RBI in 2006 and 2007. But new perspectives are now visible: see a striking piece by Ravi Jagannathan in DNA, and Pratap Bhanu Mehta in the Indian Express.
Ila Patnaik, in the Indian Express, emphasises that monetary tightening and exchange rate appreciation go together.
By Eldon Mast, on April 14th, 2010
Singapore Dollar Jumps, South Korean Won Up, and Intel Beats Yet Again.
The Singapore government announced early Wednesday that its economy is likely to expand by 9% this year. Coincidentally, South Korea also announced that its economic growth is accelerating. Meanwhile, economists surveyed by Bloomberg have estimated that China’s economy probably grew by 11.7% in the first quarter, the fastest rate in nearly three years. Stocks rallying in early Wednesday trading as Intel’s global sales performance release late Tuesday continues to show Intel on a blistering growth trajectory. Intel shares rose as much as 3.6% in extended trading after the chip giant beat the street yet again.
The growth results in Singapore and the largest reported drop in Korean unemployment in a decade underscored Asia’s leadership in the global recovery. Stateside, Intel’s new forward-looking estimates punctuate a recovery that is taking solid root.
“Companies are demonstrating that economic conditions are improving, and the data points to an ongoing theme of recovery,” said Prasad Patkar, at Platypus Asset Management Ltd. in Sydney.
“Risk appetite is improving, buoyed by solid economic data and corporate profits,” said Norihiro Tsuruta, chief strategist in Tokyo at Shinko Research Institute Ltd.
And the U.S. Economic engine driven primarily by retail sales is also revving up. On Tuesday the ICSC-Goldman report registered a very strong plus 4.0 percent year-on-year pace. According to Goldman forecasts, strength in April will prove to be a key indication of U.S. consumer strength. Their forecasters expect a “very healthy” plus 4.0 percent year-on-year rate for the months of March and April combined.
An acceleration in the U.S. GDP would mean (by definition) that Q1 GDP will be above the rate measured in Q4.
By B.P.T., on April 14th, 2010
The Mortgage Bankers’ purchase index was released at 7:00 AM EDT, and there was a week to week decrease of 10.5% last week, due to an increase in FHA mortgage premiums and causing concern about the housing market as the second federal stimulus program comes to an end.
At 8:30 AM EDT, the Consumer Price Index report for March will be released. The consensus is that CPI will be up 0.1% for last month, with a 0.1% increase in CPI when food and energy are removed.
Also at 8:30 AM EDT, the Retail Sales report for March will be released. The consensus is that retail sales increased 1.2% from February because of poor weather in February, strong auto sales, and an early Easter.
At 10:00 AM EDT, the Business Inventories report for February will be released. The consensus is that inventories increased 0.5% from January, after no change in the previous month.
Also at 10:00 AM EDT, Federal Reserve Chairman Ben Bernanke will testify to the Joint Economic Committee about the economic outlook in Washington.
At 10:30 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories as oil prices continue to move higher.
At 2:00 PM EDT, the Federal Reserve will release its next Beige Book report, providing reports on economic conditions in each of the 12 Federal Reserve districts.
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By Rok Spruk, on April 13th, 2010
Dan Mitchell wrote an interesting op-ed in NY Post (link) concerning the prospects of adopting a European-style value-added tax (VAT) in the United States.
Imposing a VAT would be detrimental to economic growth and productivity performance. If the U.S imposed the VAT, its spending levels would quickly approach the European spending levels. Indeed, the VAT is already used by OECD nations. In European Union, European Commission’s Directive requires each country to harmonize value-added tax rate at the level of at least 15 percent. Federal spending in the U.S has already escalated. The consequence of $787 billion of stimulus measures is high public debt. Congressional Budget Office has forecasted the public debt to approach 70 percent of the GDP by 2012 and remain constant until 2020 (link). Rising costs of health care, entitlement spending and aging population have triggered government spending (link) and tax burden on the U.S firms and households. By 2020, health care spending is expected to reach 20 percent of the U.S GDP (link). Historical figures suggest a rather glimmering fiscal scenario for the United States in the next decade. In 1965, before the VAT spread across the European community, average tax burden of EU15 reached 27.7 percent of the GDP versus 24.7 percent in America. In 2006, the average tax burden for 15 developed European countries reached 39.8 percent. In United States, where VAT has not been introduced, average tax burden in 2006 remained close to the level of 1960s – at 28 percent of the GDP. The immediate consequence of VAT introduction in Europe was a surge in government spending. From 1965 to 2006, average government spending (as a share of the GDP) in the European Union increased by 17 percentage points while in America it increased by 7 percentage points. The total increase of spending growth in Europe and America is attributed to the widespread growth of the welfare state which includes entitlement spending and a growing cost of health care.
The economics of tax system is pretty straightforward. Alan Viard of the American Enterprise Institute (link) has outlined basic features of the VAT system. Contrary to the income tax system, VAT is a consumption tax. From the economic perspective, consumption tax is less distorting to economic behavior than the income tax. A pure VAT is tax at each stage of the supply chain. The taxation of individual income is a major distortion mostly because the source of direct taxation is labor supply. Introducing a tax on labor supply creates the so-called substitution effect where lower wage (w’=w(1-t)) is offset by a decrease in working hours and an increase in leisure hours either in pure leisure time or working more in household production or in the informal sector of the economy. Higher tax wedge in net wages has been the major factor behind fewer working hours in slow-growth European countries (Italy, France, Germany, Belgium etc.). The VAT is not as damaging as the income tax since the tax rate on individual consumption is applied when the income is already earned, so that income earning is not distorted. From a pure economic perspective, consumption taxation is more appropriate than income taxation mostly because the price elasticity of consumption goods is lower than price elasticity of labor supply. The consumption tax is based on the so-called Ramsey rule which states that the optimal tax rate is the inverse of the price elasticity of demand for a particular good ((t*=1/-dQ/dP*(P/Q)). It follows that on consumption goods with lower elasticity of demand, higher tax rate should be applied since the deadweight loss is smaller than in consumption goods with high price elasticity of demand. For example, price elasticity of demand is very low in goods such as gasoline since there’s no close substitutes to gasoline. On the other hand, the elasticity of demand is pretty high in goods such as Big Mac or Coca Cola since there’s a lot of substitutes for these goods (Subway snacks, Pepsi etc.) and a tax rate on Big Mac or Coca Cola can easily divert consumers to consume more Subway snacks, Pepsi or other goods.
While the introduction of a VAT is less income-distorting than a direct income tax, the imposition of both tax structures is a negative effect on economic growth, productivity and employment. Aside from the harmful taxation of income, the introduction of the VAT would further hamper individual consumption, raise consumer and producer prices and harm the manufacturing activity. One advantage of the VAT is a low cost and easy way of raising revenue. In economic theory, a uniform consumption tax is preferable to the income tax mostly due to fewer distortion in generating income which is the key feature of economic growth. A VAT also avoids imposing additional penalizing disincetives to labor supply and productivity.
Congressional Budget Office (link) has recently released Budget Outlook 2010, in which it laid out future perspectives of America’s fiscal policy. Assuming an exerting pressure of tax burden in the coming years, the CBO has predicted the individual income taxes to grow from 6.4 in 2009 to 10.9 percent of the GDP by 2020. Imposing a VAT on top of the existing income tax would further reduce real disposable income and individual consumption. If a VAT were implemented on the federal or state level, there would be a significant and immediate increase in effective tax rates. The evolution of federal effective tax rates from 1970 to 2001 (link) shows a trend of decreasing effective tax rates and a growing after-tax income in all income quintiles.
The introduction of a VAT would dramatically change the US fiscal map. An article from OECD Observer (link) shows a comparative tax revenue distribution for the U.S, Europe and Japan. Back in 1999, the U.S was the only global economic giant with tax revenue from goods and service taxation of less than 30 percent of all tax revenues. The share remained steady until now. The non-existence of the VAT in America has contained the growth of overall tax burden. In 2004, total government revenues were 32 percent of the US GDP, far below the shares of high-tax countries. In Sweden, government revenue presented 59 percent of the GDP. While the U.S tax burden, measured as a share of government revenue in GDP, stayed below the level of France (50 percent), Germany (43 percent), Italy (45 percent), the introduction of a VAT may quickly turn America into a European-style country with high tax burden and benign economic growth. The international data (link) on total tax revenue in 2007 show that total tax revenue in the U.S presented 28.3 percent of the GDP. In 2007, taxes on goods and services presented about 4.7 percent of the US GDP; about three times less the level in Sweden (12.9 percent of the GDP) and four times less the level in Denmark (16.3 percent of the GDP). If a revenue from a VAT captured approximately 9.5 percent of the US GDP, America’s tax revenue from a VAT would present about 14.2 percent of the GDP (9.5+4.7=14.2) comparable with high-tax countries such as Finland, Austria or Belgium and even more than in France.
Although the VAT is an easily applied method of taxing general consumption, imposing a VAT on the federal and state level would seriously harm America’s future growth, investment, personal consumption, manufacturing activity and productivity. It would make America look like a typical slow-growth European welfare state for the first time.
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