Shouldn’t We Get Something For Our Money?

It’s hard to keep up with the Biden debacles. While we wait for the administration to explain the latest fiasco, the raid on Trump’s Florida residence, we need to continue evaluating Build Back Better, oops, the Inflation Reduction Act. While the Congressional Budget Office (C.B.O.) points out that the legislation does nothing to reduce inflation, the claim is it will save the planet. Just ask the New York Times columnist, Paul Krugman. 

Too bad the $380 billion spent on this march to the Green New Deal will make no noticeable difference in the earth’s temperature by the end of the century. Wall Street Journal contributor Bjorn Lonberg ran the numbers and found that the most optimistic case lowers the temperature by 0.028 degrees Fahrenheit. The pessimistic case is 0.0009. 

This result is understandable once you realize nothing we in the U.S. does will make any difference in the earth’s temperature as long as the third world, China, and India continue to expand the use of fossil fuels massively. Nations desiring to improve the lives of their people understand the need for cheap reliable energy. Suppose it’s locally sourced; so much the better. That isn’t the windmills and solar panels we’re pushing.  

To make the pain equal worldwide, The World Bank is lobbying for a single world carbon tax. Even though this idea has support in some quarters, the National Bureau of Economic Research (NBER) finds a slight increase in world G.D.P. at the turn of the next century from a lower temperature wouldn’t be worth the pain getting there. 

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Widget’s Revenge

Senator Joe Manchin and Senate Majority leader Chuck Schumer have agreed on what they call “the Inflation Reduction Act.” This bill is a slimed down but a still expensive version of the multi-trillion dollar “Build Back Better.” At the core is a minimum of 15% tax on over-billion dollar corporations. The revenue from this tax pays for much of what’s in the legislation.

Democrats and much of the media have applauded this provision as only fair. After all, many big corporations pay no tax. How can that be fair? At least they can give a pittance. !5% isn’t too much to ask from these wealthy corporations. 

Maybe there is more to the story. Let’s look at what I’ll call The Internation Widget Corp (IWC). In my days in Business school, a widget was the stand-in for anything produced. Company A Turns out 100 widgets an hour, but company B only 75. How can B match or exceed A?  

How would this “Inflation Reduction Bill” affect this mythical company? Demand for widgets outstripped production, leading to inflationary supply-chain disruptions. Investment in increased production is necessary to fill orders and maintain the company’s competitive position. IWC will post a profit in 2022 of a billion dollars from selling this essential to many industries.

IWC is investing $4 billion in plant and equipment to meet the challenge. Three billion borrowed. Trump’s 2017 tax reform let it offset its tax liability by rapidly depreciating this investment resulting in zero tax. It’s committing all the company’s profits and the maximum money it can borrow without losing its excellent credit rating.

Expansion means more jobs and economic activity- More taxable income down the road. Trump understood it takes invested capital to create viable employment. Business investment underpinned the Trump boom before the pandemic. In any case, expanding supply to meet demand curtails inflation.

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Stopping Inflation IV

In the face of the administration’s claim, there is little it can do about inflation; I’ve pointed out how changes in energy and regulatory policy will change the price trajectory. We also have a labor shortage adding to the upward cost pressures. Only now we’re matching the number of employed before Covid. Yet, we are at a 3.6 unemployment rate, which means upward pressure on wages.

Coupled with lower birth rates, we are facing labor force problems. Baby boomer retirements, already shrinking the labor force, gained momentum during the pandemic. Higher transfer payments, commuting, and childcare costs keep others from returning to work. The result is a labor participation rate of just over 62%, down from over 66% at the turn of the century.

Its possible inflation may force more people to return to the workforce, but this is far from certain. We have to look to solutions that worked in the past. The United States led the world in welcoming legal immigrants, but lately, not so much. The Trump administration made sizable cuts in new legal arrivals. So far, The Biden administration has continued the reductions rather than expanded immigration. 

The inability of both parties to confront our longstanding legal and illegal immigration problems provides little hope for relief from that direction. We forget that along with higher interest, lower taxes, and less regulation, Ronald Reagan signed the last major immigration reform. All these things combined to subdue our worst inflation until now. An increase in green cards would help, but nothing gets done. The present administration largely ignores the problem. 

If we can’t increase the labor force, we must make our workers more productive. Historically machines have multiplied labor output. However, our progress on that front leaves much desired—the U.S. lags on machination. This lack is true even though there is plenty of investment capital. We aren’t matching our competitors.

While other advanced nations with slow-growing populations have replaced workers with robots, The U.S. isn’t among the leaders, lagging in seventh place:

What explains our reluctance to mechanize? Our ports are far less efficient than other major world ports. This failure has added to supply chain disruption. The slow pace, in turn, added to our current inflation.

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Stopping Inflation III

In the previous two posts, I pointed out how we have restricted instead of expanded the supply of crucial commodities leading to higher prices. Higher prices are just another way to say inflation. Another way to raise prices is to add to costs. According to Forbes, the United States is no longer in the top 15 countries to do business. While U.S. News & World Report rates us the 6th best nation overall, it drops us down to #45  in their “open for business” category. Why isn’t the the top of the business-friendly? What does it mean for prices now and into the future?

I discussed Ezra Klein’s lament that the Government couldn’t do things reasonably a few posts ago. Government policy determines whether a place is an excellent place to get things done. Comparing a Government-sponsored high-speed rail in California and a private venture in Florida, the latter exists while the other is a rumor. Already owning the right of way, the private railroad didn’t have to deal with governments. Unfortunately, most businesses don’t have that luxury. Hence our poor ratings.

Two things vex people in dealing with governments: who are the responsible person I can deal with, and how much time will it take to get approvals? Faced with these hurdles, it’s no wonder many businesses decide to set up shop elsewhere. Being bounced from one agency to another while being hit with lawsuits from environmentalists, nimbies, native Americans, and preservationists have been the fate of far too many ventures.

For those unable to go elsewhere, costs can be open-ended and only recovered at higher prices—a housing project scheduled for one-year development that takes three results in expensive houses. How we can turn this around while still respecting the concerns of others is the challenge. 

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Stopping Inflation II

In my last post, I pointed out we weren’t making enough effort to expand supply to curb inflation. Similar to oil, the prospective future product increase will work to lower prices today and into the future. Energy, so essential to the World’s economy, is the starting point, but other building blocks, commonly called commodities, face the same hurdles for expansion.

Blessed with a wealth of minerals and highly productive farms, the U.S. is a commodity powerhouse, or at least it was in the past. Look around and almost everything you see originated in the ground. To expand oil production, you need steel and lots of other stuff. Want clean energy? You have to have everything from rare earths to a mountain of copper. 

The same attitude stifling increased oil production is evident in our ability to increase the supply of other commodities. Instead of maximizing our resources, we depend on others, some unfriendly, for basics. We have set up a world-class obstacle course to open a mine in the U.S.

In the past, I’ve pointed to Arizona’s Resolution deposit’s decades-long, unresolved journey to yielding copper. It’s not as if Arizona is new to copper mining. The state is the nation’s leading producer. The Resolution mine is potentially the largest ever in the state. A combination of environmentalists and Indian tribes have litigated the project to a standstill.

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