Tuesday, September 27, 2016

Chemical activity still increasing

A quick update: Last month I had a post titled "Chemical activity continues to increase" that was well-received since it is not commonly followed. The latest data, released today, continue to show improvement and the observations I made last month still hold. Here are some updated charts:

The CAB index is up 4.1% in the past year, for the best showing in the past two years. This suggests that the oil production slump is washing out of the data, and cheaper oil prices are resulting in stronger production of related chemicals.

The year over year change of the 3-month moving average of the index is now up to 3.7%, and a similar measure of industrial production is showing an uptick as well, and that is in line with historical experience—with chemical activity tending to lead industrial production.

I'm not convinced any of this points to a significant acceleration of economic growth. But it does argue convincingly that the economy is not turning down or slumping. Most likely, it just means that the economy is still growing slowly but on the margin it is doing slightly better.

For more detailed information, see Calculated Risk.

Sunday, September 25, 2016

Kill the estate tax

Caroline Freund writes at PIIE that the estate tax is a key tool for fighting US inequality. I strongly disagree. It's easy to rebut her main points, since they defy logic and are based on faulty statistics. What follows are some quotes from the article and my rebuttals:

This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy.
–Not true. Narrowly defined, the US estate tax affects only people whose estate currently exceeds $5.45 million, or couples whose estate exceeds $10.9 million. However, that is hardly a reasonable definition of "ultra-wealthy" in a era when it takes a net worth of at least $1.7 billion to make the Forbes 400 list. More broadly, the estate tax affects anyone who is wealthy or hopes to one day become wealthy—and those are the people who are most likely among the most productive members of society. The estate tax is effectively a punishment on success, since it amounts to the legalized theft by the state of money people have worked hard to accumulate, and upon which they have already paid tax at least twice (once when they paid income tax on their earnings, and a second time when the equity investments they made with their after-tax earnings had their profits taxed). Punishing success is like cutting off your nose to spite your face.

There is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
-On the contrary, the estate tax creates huge distortions in the economy. How else to explain the virtual army of accountants and lawyers who toil to reduce the estate tax liabilities of their clients? How else to explain why the insurance industry—which sells a legal run-around to the estate tax in the form of life insurance policies—fights so hard to keep the estate tax in place? How else to explain why today's mega-billionaires (e.g., Bill Gates and Warren Buffett) are directing that their estates be donated to charitable foundations? I don't know anyone who wants to give almost half of the wealth they have accumulated after a lifetime of work to the government.

Historically such taxes have worked well in the United States, raising revenue and redistributing wealth.
-No, the estate tax has hardly worked at all. In the most recent 12 months, the federal estate tax generated revenues of only $21.4 billion, a paltry 0.6% of total federal revenue. How does redistributing $21 billion qualify as income redistribution, when personal income is currently running at a $16 trillion annual rate? How can anyone justify having a behavior- and economy-distorting tax that redistributes only 0.13% of total income? How well will the mega-billion Gates Foundation fight inequality, when it is extremely likely that it will spend only 5% per year of its endowment on charitable activities (the legal minimum required of any charitable organization)? No one really knows, but that doesn't seem to worry the people who defend the estate tax.

The author laments the fact that the estate tax has been reduced in recent decades, erroneously claiming that the estate tax generated $216 billion in 2001, when in fact it generated only $28.2 billion at a time when personal income was $9 trillion (0.3%). In the past 35 years, the estate tax has never generated more than 0.35% of total personal income in any one year.

The author further erroneously claims that the estate taxes collected in 2001 could cover the cost of food stamps "14 times over." That is wildly off the mark, since the total cost of food stamps in 2001 was $18 billion, whereas estate tax revenues were $28.2 billion.

If we eliminated the estate tax in its entirety, the economy would most likely strengthen, living standards would rise, and the impact on the federal deficit would be nil. Eliminating the estate tax would increase people's incentives to invest and accumulate wealth—wealth which is enjoyed by everyone, just as we all benefit from the fruits of successful companies. And with increased wealth and incomes, federal revenues would increase. By making this assertion, I rely on nothing more than my strongly-held belief that people are able to invest their own money much more efficiently and productively than government bureaucrats and politicians can.

UPDATE: Scott Adams (Dilbert) recently posted a quick-and-dirty takedown of the estate tax and Clinton's proposal to raise it (in the same post he also explains why he is now endorsing Trump):

Clinton proposed raising estate taxes. I understand that issue and I view it as robbery by government.  
 ... under Clinton’s plan, estate taxes would be higher for anyone with estates over $5 million(ish). I call this a confiscation tax because income taxes have already been paid on this money. In my case, a dollar I earn today will be taxed at about 50% by various government entities, collectively. With Clinton’s plan, my remaining 50 cents will be taxed again at 50% when I die. So the government would take 75% of my earnings from now on. 
Yes, I can do clever things with trusts to avoid estate taxes. But that is just welfare for lawyers. If the impact of the estate tax is nothing but higher fees for my attorney, and hassle for me, that isn’t good news either. 
You can argue whether an estate tax is fair or unfair, but fairness is an argument for idiots and children. Fairness isn’t an objective quality of the universe. I oppose the estate tax because I was born to modest means and worked 7-days a week for most of my life to be in my current position.

Friday, September 23, 2016

The view from Argentina

We're in Argentina this week and next, visiting friends and relatives and looking forward to a big wedding this weekend that will be attended by 500+ people. Spring has just arrived, and the people and food are fantastic as always. Food, wine, lodging and taxis are delightfully cheap for American visitors, and now you can easily pay for things with credit cards or withdraw pesos from an ATM (last year both methods were subject to an unfavorable exchange rate), since money is freely exchangeable at a single rate (currently about 15 pesos to the dollar).

There have been many welcome improvements since Macri took over the reins of government from Christina Kirchner late last year. Unfortunately, there are still many head-scratchers: Argentina has uniquely refused to allow Uber to operate within its borders (hint: the taxi cartel is very powerful); it's impossible for Argentines to buy books from Amazon (because customs officials must check each book mailed into the country to make sure there is not too much lead in the ink, and they have no budget to do that, thus "protecting" the domestic publishing industry but intellectually impoverishing everyone in the process); Apple can't sell iPhones in Argentina (because they aren't made in South America, which means that scads of tourists entering the country and Argentines returning to the country carry at least one new iPhone for a friend or for resale); and the great majority of Argentines refuse to acknowledge that the Falkland Islands are British (even though they have been a British Protectorate for over 100 years and unanimously voted to remain one not too long ago). Macri—a successful businessman, an advocate of free markets, and a decent person of the sort I wish Trump were—isn't a miracle worker, but he has accomplished more than most would have hoped for so far and he hasn't given up. He knows that Argentina must regain the trust of the world, the rule of law must be the law of the land, and inflation must be brought under control if capital is to return and businesses are to invest and the economy is to grow.

I've been following the markets throughout the past week, but can't come up with any new or informed observations about what's happening. However, there's nothing wrong with a recap of how I see the economy and the markets, so here goes:

The economy is likely continuing to grow at a disappointingly slow pace, but we might see some modestly stronger GDP numbers in the second half as compared to the first half of the year. There are several reasons for sluggish growth, but monetary policy is not one of them. Tax and regulatory burdens are excessively high; confidence is still lacking; and business investment is weak despite strong corporate profitsRisk aversion, a lack of confidence, and weak investment have sapped the economy's productivity. More recently, the tremendous uncertainty surrounding the November elections—which could give us even higher tax and regulatory burdens and four more years of sluggish growth under a Clinton presidency, or reduced tax and regulatory burdens and four years of stronger growth under a Trump presidency—is most likely convincing risk-takers that it is better to wait until next year before deciding to undertake new investments, and that in turn is contributing to keep growth weak, especially this year.

The Fed has not been "stimulative;" rather, the Fed has been accommodating the world's almost insatiable desire for money and safe assets with its Quantitative Easing program. Short-term interest rates are not artificially low, and thus they are not artificially inflating the prices of risk assets and/or bonds. Interest rates are low because the economy is sluggish, inflation is low, and the market holds out very little hope for improvement in the years ahead. Rates are low because the world's demand for safe assets is very strong. In particular, the very low level of real yields on TIPS, combined with relatively low implied inflation, strongly suggests that the market is very pessimistic about the long-run outlook for economic growth. The Fed is not too tight, because real yields are very low and the yield curve is positively sloped. Deflation exists primarily in the durable goods sector, and China has been one of the driving factors behind ever-cheaper prices for the electronics that have boosted our standard of living—there is nothing wrong with that.

Stocks are no longer cheap, but neither are they obviously expensive. The current PE ratio of the S&P 500 (~20) is above its long-term average, but not excessively high considering how low interest rates are on notes and bonds. Key indicators of systemic risk (particularly swap spreads) are relatively low and stable, and this—combined with the absence of tight money—suggests that the risk of recession is low for the foreseeable future. The unusually wide spread between the yield on cash and the yield on risk assets is a compelling reason to stay invested.

The dollar is reasonably valued against most other currencies, according to the Fed's Real Broad Dollar Index, and my analysis of the dollar's PPP value against other major currencies is largely in agreement with this. Raw industrial commodity prices are neither very high nor very low, but they have been trending higher this year and this suggests some firming in the global economic outlook—which, like that of the U.S., has been unimpressive of late, if not a bit troubling.

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In the meantime, Trump's chances are improving daily and I think the election will soon be his to lose. On Monday I'll be scrambling to find a TV down here that will let me watch the first debate, or, failing that, an internet connection fast enough to live-stream the action.