57.4% Of Imports Are Industrial Supplies And Capital Goods

See this great graph by Mark Perry

Industrial Supplies-34.4%
Capital Goods-23%

Gary Becker On The Second Stimulus

See A Second Stimulus Package? Becker

"The recovery from the Great Recession has been slow and unsteady. Two years after unemployment peaked at 10.1%, it still remains over 9%, in contrast to the under 5% in 2007. GDP has grown very slowly during the past year, and is now more than 10% below its potential level. President Obama is rightly concerned about the large number of Americans who are unemployed, especially the longer term unemployed-those who have been without jobs for over six months. How successful will his proposed American Jobs Act be in getting the economy moving forward at a much faster clip?

Boiled down to its essentials, the proposed Jobs Act is a second stimulus package since most of the spending is supposed to take place soon (before the end of 2012), while it will be financed over the next ten years in ways that are unclear. At an estimated approximately $450 billion, this package is much smaller than the first stimulus package in 2009 that cost about $800 billion. The proposed structure is better than the first one since it relies more on tax cuts and direct subsidies to households: about 2/3 of the proposed spending comes from a temporary cut in (payroll) taxes and increases in benefits to the long term unemployed.

I am less negative on the extension of unemployment benefits than is Posner. I agree it will encourage some of the longer term unemployed to stop searching for jobs since they could then receive these extended benefits. On the other hand, an extension helps insure workers against long-term unemployment, which is the most difficult form of unemployment to finance out of own savings and borrowing. In an economy with a very slow recovery, extending unemployment benefits tailored to long-term unemployment may be sensible, although it is not an easy call.

The cut in payroll taxes is supposed to have two positive effects on the economy. It would temporarily reduce the cost of labor to companies and thereby encourage them to hire more workers, and it would increase the spending of workers through increasing their take home pay. Such temporary cuts in wage costs to employers will increase employment only a little, and it will be mainly for low skilled low wage jobs that can be easily eliminated after the cuts expire. Since spending by households responds much more to their long term income prospects than to short run changes in their incomes, households would tend to save rather than spend most of their higher incomes due to a temporary cut in social security taxes. Therefore, the employment bang for the buck will be small per dollar of tax cut.

Further lowering, and possibly reversing the sign, of any positive stimulus to the economy from a temporary tax cut and extension of unemployment benefits is that they must eventually be paid for: either through future higher taxes, lower government spending, or greater inflation (the inflation “tax” in the language of economists). These effects may not be fully anticipated, but surely businessmen and households who are making long-term investments will pay attention to future taxes and future government spending as well as to their present levels.

Most of the remainder of the president’s jobs plan is the $90 billion that will help finance infrastructure projects. While many infrastructure projects in the US might well have high benefit/cost ratios, it is doubtful whether these will be the projects selected by the political process. The president was well aware of this in his speech when he said he wanted “no more bridges to nowhere”, but I see no reason why this time will be different than much of America’s recent history on federal-supported infrastructure projects.

This recovery has been so slow in good part because small and large businesses are reluctant to hire workers for the long term and to invest in durable physical capital since they are concerned over the uncertainty and level of the long-term taxing, regulatory, and fiscal situation of the United States. The president partly addressed these concerns by calling for passage of the stalled free trade acts with Panama, Colombia, and South Korea, supporting patent reform, and advocating lower taxes on corporations. At the same time, however, he also raised concerns about the future economic environment by his proposed sizable increase in federal spending that would further weaken the fiscal position of the federal government.

The net effect on the short and long term health of the economy will depend on whether Congress supports those aspects that will improve the environment faced by households and businesses rather than the more prominent proposals that are likely to further weaken the economy."

Is Social Security a Ponzi Scheme?

Great post by Alex Tabarrok of Marginal Revolution.

"Matt Yglesias says anyone who thinks social security is a Ponzi scheme is nuts. So let’s take a look at some of these nuts. First up is Nobel prize winner Paul Samuelson who wrote:

Social Security is a Ponzi Scheme that Works

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

…A growing nation is the greatest Ponzi game ever contrived.

Samuelson wrote that in 1967 riffing off his classic paper of 1958. By “as far as the eye cannot see” he apparently meant not very far because it soon became clear that the system could not count on waves of youths or rapid productivity growth to generate the actuarially unsound returns that made the program so popular in the early years.

Milton Friedman and Paul Samuelson rarely agreed on much but Friedman also called social security a Ponzi scheme. In fact, he called it The Biggest Ponzi Scheme on Earth but perhaps Yglesias puts Friedman in the nut category so let’s go for a third Nobel prize winner who recognizes the Ponzi like nature of social security, none other than…..Paul Krugman (writing in 1996):

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in). (ital added, AT)

Of these, I agree the most with Krugman. Social Security is not necessarily a Ponzi scheme but it only generated massive returns in the past because of its Ponzi-like aspects. The Ponzi-like aspects are now over and social security is turning into what is essentially a forced savings/welfare program with, as Krugman recognizes, crummy returns for average workers. Social security is thus a Ponzi scheme which has not gone bust but it has gone flat."

The Lesson of Economic Damage From "Taxing the Rich" With the Punitive Luxury Tax in the 1990s

Great post by Mark Perry of "Carpe Diem."

"Flashback: Wall Street Journal editorial on January 6, 2003

"Most Americans celebrated as the ball fell in Times Square New Year's Eve. But for auto dealers this new year is especially sweet. January 1 marked the expiration of the federal luxury tax on cars, the last vestige of the destructive luxury tax package in the infamous 1990 budget deal.

Starting in 1991, Washington levied a 10% luxury tax on cars valued above $30,000, boats above $100,000, jewelry and furs above $10,000 and private planes above $250,000. Democrats like Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share and privately about convincing President George H.W. Bush to renounce his "no new taxes" pledge.

But it wasn't long before even these die-hard class warriors noticed they'd badly missed their mark. The taxes took in $97 million less in their first year than had been projected -- for the simple reason that people were buying a lot fewer of these goods. Boat building, a key industry in Messrs. Mitchell and Kennedy's home states of Maine and Massachusetts, was particularly hard hit. Yacht retailers reported a 77% drop in sales that year, while boat builders estimated layoffs at 25,000. With bipartisan support, all but the car tax was repealed in 1993, and in 1996 Congress voted to phase that out too. January 1 was disappearance day.

The end of any federal tax is such a rarity that it's well worth celebrating. And the luxury tax lesson of economic damage is worth keeping in mind as politicians begin to wail that President Bush's new tax proposals aren't punitive enough on the rich.""

Mark also adds this 1992 NY Times article with lots of data on the issue Falling Tax Would Lift All Yachts.

"The nation's luxury-boat builders, many clinging to their businesses after two years of plunging sales, finally got some good news last week.

President Bush, in his budget proposals, asked Congress to repeal the 10 percent luxury tax on yachts priced at more than $100,000 (and also on private planes that cost more than $250,000). The repeal, which Congress is likely to approve, would be retroactive to Feb. 1.

Since the tax took effect in January 1990, hundreds of builders of large and small boats have spoken of it as a stake driven into the heart of an industry already suffering from the recession, tighter bank rules on financing and fallout from the gulf war.

In the last two years, about 100 builders of luxury boats -- recreational craft costing more than $100,000 -- cut their operations severely and laid off thousands of workers. Some builders filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code.

Now, sales personnel and owners of marine companies are hoping they will be swamped by buyers who have held off in the expectation that the tax will be repealed.

The 10 percent tax applies to the amount of the cost above $100,000, so that a boat selling for $300,000 carries a $20,000 luxury tax. That tax is in addition to any state and local taxes.

Mr. Bush's proposals were endorsed by Senator George J. Mitchell, Democrat of Maine and majority leader, whose state is active in boat building. That increases the chances that Congress will accept the argument that repealing the tax will create jobs and promote economic growth. Overall employment in the industry, including the makers of smaller, less-expensive boats, has dropped to 400,000, from 600,000 in 1988.

Adding to the industry's optimism are signs of a small revival in boat sales. Most companies said they sold more boats at the New York National Boat Show earlier last month than at last year's show, when sales were very weak. They said the boat show also had good attendance during its run at the Jacob K. Javits Convention Center in Manhattan.

Also, boat prices have dropped as much as 40 to 50 percent, interest rates have fallen and some lenders have begun to offer financing, though on very strict terms.

In 1991, sales of luxury boats dropped 70 percent from 1990's level, while overall boat sales fell 18 percent. Relies on Foreign Customers

"The luxury tax really hurt us," said William J. Healey, the president of the Viking Yatch Company in New Gretna, N.J."

Cosmic Rays Might Be Responsible For Global Warming

See The Other Climate Theory by Anne Jolis, WSJ, 9-7-11. Excerpts:

"But a few physicists weren't worrying about Al Gore in the 1990s. They were theorizing about another possible factor in climate change: charged subatomic particles from outer space, or "cosmic rays," whose atmospheric levels appear to rise and fall with the weakness or strength of solar winds that deflect them from the earth. These shifts might significantly impact the type and quantity of clouds covering the earth, providing a clue to one of the least-understood but most important questions about climate. Heavenly bodies might be driving long-term weather trends.

The theory has now moved from the corners of climate skepticism to the center of the physical-science universe: the European Organization for Nuclear Research, also known as CERN. At the Franco-Swiss home of the world's most powerful particle accelerator, scientists have been shooting simulated cosmic rays into a cloud chamber to isolate and measure their contribution to cloud formation. CERN's researchers reported last month that in the conditions they've observed so far, these rays appear to be enhancing the formation rates of pre-cloud seeds by up to a factor of 10. Current climate models do not consider any impact of cosmic rays on clouds.

Scientists have been speculating on the relationship among cosmic rays, solar activity and clouds since at least the 1970s. But the notion didn't get a workout until 1995, when Danish physicist Henrik Svensmark came across a 1991 paper by Eigil Friis-Christensen and Knud Lassen, who had charted a close relationship between solar variations and changes in the earth's surface temperature since 1860.

"I had this idea that the real link could be between cloud cover and cosmic rays, and I wanted to try to figure out if it was a good idea or a bad idea," Mr. Svensmark told me from Copenhagen, where he leads sun-climate research at the Danish National Space Institute."

"There's good evidence that pre-industrial climate has frequently varied on 100-year timescales, and what's been found is that often these variations correlate with changes in solar activity, solar wind. You see correlations in the atmosphere between cosmic rays and clouds—that's what Svensmark reported. But these correlations don't prove cause and effect, and it's very difficult to isolate what's due to cosmic rays and what's due to other things.""

"In 2006 we had our first results: We had demonstrated the mechanism" of cosmic rays enhancing cloud formation. The IPCC's 2007 report all but dismissed the theory.

Mr. Kirkby's CERN experiment was finally approved in 2006 and has been under way since 2009. So far, it has not proved Mr. Svensmark wrong. "The result simply leaves open the possibility that cosmic rays could influence the climate," stresses Mr. Kirkby,..."

"But while the cosmic-ray theory has been ridiculed from the start by those who subscribe to the anthropogenic-warming theory, both Mr. Kirkby and Mr. Svensmark hold that human activity is contributing to climate change. All they question is its importance relative to other, natural factors."

Total State Spending Has Not Been Cut

Great post by Chris Edwards of Cato

"Expressing his Keynesian view of the economy, Federal Reserve Board Chairman Ben Bernanke said this yesterday:

While the weakness of the housing sector and continued financial volatility are two key reasons for the frustratingly slow pace of the recovery, other factors also may restrain growth in coming quarters. For example, state and local governments continue to tighten their belts by cutting spending and reducing payrolls in the face of ongoing budgetary pressures…

Mr. Bernanke made a boo-boo. Overall state and local government spending has not been “cut” any year in the last decade. In recent years, spending has been flat at about $2.2 trillion, but it has not been cut.

I think the Keynesian formulation that government spending equals economic growth is bizarre. But even if true, Bernanke’s concern that state and local governments aren’t profligate enough is strange because spending is up about 60 percent over the last decade, as shown in the chart below. The chart shows “total expenditures” for state and local governments from BEA Table 3.3. The figure for 2011 is the 2nd quarter value, which is up 3.1 percent over 2nd quarter 2010. So, despite Benanke’s claim, spending is (unfortunately) growing again."

The Source of the Problem Ain’t Inadequate Aggregate Demand

Great Post by Don Boudreaux of "Cafe Hayek."

"Neal Phenes sent me this item from The Daily Ticker.

Mr. Task and his interviewees should check the data before concluding that the problem with today’s economy is inadequate demand – that is, before concluding that what today’s economy needs above all is “demand stimulation.”

Inflation-adjusted personal consumption expenditures in the U.S. today are higher than they were in the third quarter of 2007 (the quarter before the recession began). True, these expenditures are only about one-percent above their pre-recession level, but higher they nevertheless are – a fact that requires some twisting of Keynesian dogma in order to continue making a case for more government ‘stimulus’ spending.

The problem isn’t that consumers aren’t spending; it’s that businesses aren’t investing. And businesses aren’t investing because Congress and, especially, the administration exhibit a ceaseless fetish for top-down, command-and-control, debt-financed ‘governance’ of the economy – an enterprise-quashing recipe made only more poisonous by Mr. Obama’s soak-the-rich speechifying."