Mark Steyn Says America is Committing “Slow Suicide”

While I haven’t had a chance yet to read Mark Steyn’s new book “After America,” from what I’ve read and heard about it he is right on. Below is a 10 minute interview that he did with Sun News that does an excellent job of summarizing his positions. BTW, Mark Steyn lives in New Hamsphire . . . where America’s few remaining tax havens still exist.

Wyoming Prepares for the End

Pacific Mushroom
Creative Commons License photo credit: Steve Snodgrass

With federal and state debt loads exploding, Wyoming is preparing for the worst:

State representatives on Friday advanced legislation to launch a study into what Wyoming should do in the event of a complete economic or political collapse in the United States.

House Bill 85 passed on first reading by a voice vote. It would create a state-run government continuity task force, which would study and prepare Wyoming for potential catastrophes, from disruptions in food and energy supplies to a complete meltdown of the federal government.

I’m all for preparedness, but even this statement has me puzzled:

The task force would look at the feasibility of Wyoming issuing its own alternative currency, if needed. And House members approved an amendment Friday by state Rep. Kermit Brown, R-Laramie, to have the task force also examine conditions under which Wyoming would need to implement its own military draft, raise a standing army, and acquire strike aircraft and an aircraft carrier. [emphasis added]

An aircraft carrier? Really. They do realize their state is landlocked . . .

New Estimate Shows Public Pension Shortfall Ballooning to $4.4 Trillion

Creative Commons License photo credit: emsphotonut41

Joshua Rauh just blogged on “Everything Finance” a new estimate of the current unfunded public pension liability for both state and local governments:

Using June 2009 data, Robert Novy-Marx and I measured a $3.1 trillion gap in state and local pension systems, arising from $2.3 trillion in assets and $5.4 trillion in liabilities.

Since then, the situation has evolved in several ways. First of all, the stock market continued to recover from the financial crisis . . .

More importantly, the true financial value of the liabilities that have been promised have grown substantially due to much lower bond yields . . .

the total unfunded liability is $4.4 trillion.

And folks are wondering why consumers aren’t spending?! Until policymakers come up with definitive solutions to these massive unfunded liabilities (that don’t involve raising taxes), then the uncertainty it creates will force consumers to pay down their own debt (or save) and restrain consumption.

These are structural issues that can not be fixed by monetary policy actions from the Federal Reserve. Ironically, as pointed out by Rauh, loose monetary policy is worsening the situation by keeping interest rates low and ballooning these unfunded liabilities. The Fed needs to stop babying politicians with cheap money and let them take their Castor Oil (via higher interest rates).

Capital Gains Roller-Coaster and the Size of Government

New 2009 data from the IRS shows how foolish it is for government to tax capital gains income.  As shown in the chart below, capital gains income for 2009 is now back to 2002 levels ($224 billion).  Of course, thanks to the housing bubble, this is after a massive run-up in capital gains income to $819 billion in 2007.  This led to a whopping 73 percent drop in capital gains income from 2007 to 2009!

The capital gains roller-coaster also has a disproportionate effect on government budgets, especially Uncle Sam’s.  The IRS data shows that, in 2009, 87 percent of all capital gains income was claimed by those folks with income (as measured by Adjusted Gross Income) over $200,000.  That means these folks are paying at the highest marginal tax rates which can lead to rapid increases/decreases in government revenue.

This revenue volatility should also concern good/small government folks.  According to Dr. W. Mark Crain in his book Volatile States: Institutions, Policy, and the Performance of American State Economies:

 . . . uncertainty is the enemy of efficiency in public as well as private enterprise.  Budget volatility precludes efficient planning and adds significantly to the cost of government-provided services.  Put differently, a reduction in spending volatility would be equivalent to a funding increase.  The empirical evidence indicates that a 10 percent reduction in budget volatitlity generates efficiency gains comparable to a 3.5 percent increase in the level of funding . . .

The analsysis suggests that the reliability of tax revenues influences the size of government.  Greater instability in tax revenues contributes to spending instability that impedes the efficiency of long-run state government operations.  With less efficient planning, the level of government spending increases, which of course requires additional revenues. [emphasis added]

So in the long run, the volatility in the capital gains tax is helping to increase the size of government at all levels . . . with the exception of those states without an income/capital gains tax.  Um, like New Hampshire 🙂

There is, however, a silver lining in the capital gains volatility.  With capital gains income at such a low level, now is the time to ax the capital gains tax at the federal and state levels.  Not only is the cost of doing so minimized to government coffers, but it would also boost the incentive to invest in new capital which is exactly what the economy needs in this so-called “recovery.”

Chart Showing Capital Gains Income from 1997 to 2009

Back to Business Fundamentals

Creative Commons License photo credit: pquan

This is a guest column from my friend J Dwight of Dwight Investment Council on “Back to Business Fundamentals” in light of the recent stockmarket roller-coaster:

Whenever the market tanks, it is helpful to remind oneself of what business fundamentals work and how businesses create products and services and translate revenues into cash that can be deployed to increase jobs and security, and, dare it be said, increase wealth, all of which helps society.

First, it takes savings and capital to create jobs.  Savings is defined as intellectual capital (ideas and innovations), physical effort (hard work or sweat equity), thrift (cost savings and productivity), and capital (land and resources and money and machinery).

Second, in order to create jobs people need to have capital to deploy, and the relative certainty that if they take hard earned money and apply their time, effort and ideas, they have a reason to believe that their capital will be returned and that that capital will earn a return, and it will not be denigrated, thwarted, destroyed, taken or expropriated by governmental inaction, intervention or attack.  Changing the ‘playing field’, the rules of the game or the costs of taxes or regulation destroys the inclination of individuals to even put in the effort to create.

Moreover, the Laws of Physics, and economics, cannot be changed by government fiat.  It is time to assert that the policies of Keynesian Economics operate to destroy this effect in the private sector, especially when continuously used, and, some would say, abused.  The past four years have shown that policies backed by Keynesian Theory have not succeeded and have harmed the United States and the world.  They have no legitimate reason to be continued.

Third, once capital is deployed, and begins to return cash to the inventor/owner/managers of businesses, there are five basic choices:

1)     Invest to develop more ideas and innovations, land and buildings, machinery and equipment, people and products.  (Capital Investment)

2)     Buy an existing stock of capital that is generating an predictable revenue and cash flow stream (Merger and Acquisition, M&A)

3)     Pay more to employees, owners and shareholders. (Increase pay and dividends)

4)     Reduce shares outstanding.  Internally, this changes the denominator part of the earnings per share equation, and also the dividends per share equation meaning that the remaining shareholders can get more of the cash in the future. (Share buybacks)

5)     Pay down debt. If debt were used to develop, or buy a stream of income and cash, then the cash return from the business can be used to pay down debt.  This choice, when completed, has a marvelous effect on free cash flow. When debt is paid down or off, then the cash that had been used for this purpose can be redeployed in any of the other four choices. However, this choice, while in action, does little to actually grow the company or business.  It increases the value of the business by unencumbering the cash flow and assets, but does not actually increase the active potential of the business, only its latent potential. (Debt reduction)

Of the five choices above, the question must be asked about risk and uncertainty?  Empirically, the least risky is to pay down debt; the most risky is to invest to develop new ideas into products or services.  Mergers and Acquisitions can prove to be the most rewarding, or the least effective, depending on the execution of the combination of the companies, their cultures and employees.  Paying more dividends and buying back stock rewards shareholders and employees compensated by equity participation.

When business managers perceive increased risk, they rationally choose the least risky thing to do: pay down debt.  This rational action deceases macroeconomic growth, while increasing business value by increasing cash flow earnings and shareholder return in well managed companies.

Underlying the concept of dividend yield, and shareholder return/yield, are the concepts of return on equity (ROE) and return on investment (ROI).  We won’t get into the application of compound return to these in corporate (or personal) balance sheets here, but suffice it to say dividend yield is a crude (and conservative) approximation of real and relative value to an investor comparing returns among various asset classes.

For example:  The dividend yield of the Standard & Poors 500 is currently about 2.9%, while the yield on the 5 year US Treasury is about 2% (ten year 2.25%)  The historic rate of the S&P 500 to increase dividends is 5%.  Thus buying a solid dividend paying company yielding 2.9% and increasing that dividend 5% annually means that after five years the yield is 3.70% after five years and 4.72% after ten years.  Some high quality dividend paying stocks can be had today at considerably higher yields than the average yield of the S&P 500.  All things relative, if one expects low growth (and low interest rates/inflation) over the next ten years the rational investor would choose sound equities.