by Jacquelyn Horkan, Editor
February 2002

How Much Growth Do We Want?

In the middle of January, Sen. Ted Kennedy (D-Massachusetts) proposed a tax increase on the rich. His command performance followed one by U.S. Senate President Tom Daschle (D-South Dakota) calling for a repeal of President Bush’s 2001 tax cuts.

The economic nostrums they recommend are based on two separate yet related propositions 1) a healthy economy depends on a wealthy federal government, and 2) the rich aren’t paying enough taxes. Let’s first concentrate on the second assumption.

A report by Congress’s Joint Economic Committee compiled data provided by the IRS and found that in 1999 the top one percent of earners accounted for 19.5 percent of all adjusted gross income reported to the tax collectors, yet paid 36.2 percent of all federal income taxes. In other words, the very wealthy paid twice as much in taxes compared to their share of income.

The report also found that the top 25 percent of earners -- whom you might call the sort-of wealthy -- took home 66.5 percent of all income and paid 83.5 percent of all taxes. According to the 1999 IRS numbers, an income of $52,965 earned a family a spot in the top 25 percent. That means that the top 25 percent includes everyone from Bill Gates to a cop-and-teacher couple raising two children. Those in the bottom 50 percent -- with paychecks of $26,415 or less -- earned 13.2 percent of adjusted gross income and paid only four percent of taxes.  

Now let’s consider the first assumption -- that higher tax collections translate into a healthy economy -- in light of one of Sen. Daschle’s proposals for economic stimulus. Daschle believes that we can get the economy moving by transferring income to the jobless, in the form of extended unemployment benefits and subsidized health insurance. In theory, putting more money into the hands of the unemployed would boost personal consumption, giving the economy a jump start.   Personal consumption expenditures, although the largest segment of the economy, are not the problem. Instead, lagging investment is providing the drag that is pulling us down. Businesses and wealthy individuals put the brakes on investment in 2000. Putting federal tax dollars in the hands of the unemployed is a temporary fix, even if they do take that money and go on a spending spree. The unemployed need jobs, not handouts.

The private sector is where jobs are created, but right now businesses are shedding employees, not hiring them. So how do we reverse that?

The economy does need some medicine, but not the prescriptions offered by the Daschle Democrats. The nation’s high tax rates increase the cost of capital and lower after-tax profits. The average rate of corporate profit after taxes has been dropping since the third quarter of 1997 when it was just over nine percent; by the third quarter of 2000 it had dropped to just under five percent. When profits are low, companies cut their investments in new technologies, new equipment, new product lines, and new employees. Unless profits strengthen, investment will remain weak.

It looks like the economy is now recovering. The question is: How much? The 1991 recession brought a slow recovery -- in the two to three percent range -- until Republicans took over Congress and investors regained their optimism. Unless Congress enacts pro-growth tax cuts -- accelerating depreciation, speeding up last year’s rate cuts, suspending corporate and personal alternative minimum taxes, cutting the capital gains tax rate -- the nation’s economy will remain moribund, stalled in slow or no growth.

The Ministry of Silly Labels

If you’ve ever read a silly warning on a product and wondered, “What were they thinking?,” the answer is lawsuits.

Every year Michigan Lawsuit Abuse Watch (M-LAW) conducts a Wacky Warning Label Contest to illustrate the humorous side effects of the litigation frenzy. This year’s first-place award, most likely bestowed because of its bizarreness, went to the following alert on a CD player: “Do not use the Ultradisc 2000 as a projectile in a catapult.” Now aren’t you curious about the warnings on the box the catapult comes in?

The runner-up this year was a fireplace log: “Caution -- Risk of Fire.”  One would certainly hope so.

A box of birthday candles came in third, with the welcome reminder,  “DO NOT use soft wax as ear plugs or for any other function that involves insertion into a body cavity.” Ouch.

The contest was inaugurated in 1997 when the grand prize went to a label advising, “Never use hair dryer while sleeping.” The following year brought two classics: one on the cartridge for a laser printer that read, “Do not eat toner,” and another on a baby stroller that advised parents to “Remove the child before folding.”

All hilarity aside, the contest has a serious purpose, explained by Robert D. Dorigo Jones, M-LAW’s president: “The contest was created to reveal that frivolous lawsuits have become such a problem in our society that common-sense warnings are necessary.”

This year’s winner was supplied by Mary Beck Eckberg of Medina, Ohio, who received $500 and a copy of attorney Philip K. Howard’s book,  The Death of Common Sense. If you have a candidate for next year’s contest, visit M-LAW’s Web site (http:www.mlaw.org).

Home Run in Math

Could it be that football and basketball’s eclipse of baseball as America ’s pastime contributed to declining math scores?

Years ago American boys and girls -- including this author and Federal Reserve Chairman Alan Greenspan -- honed their arithmetic skills by calculating batting averages, the ratio of a baseball player’s hits to his plate appearances. According to Greenspan, his love of baseball gave him an incentive to learn the tools of the financial trade.

“If you don’t understand arithmetic -- if you don’t understand how to multiply -- divide, you are not going to understand finance, period,” the Fed chairman told the U.S. Senate Banking Committee in February.

Financial statistics are no longer the domain of Wall Street whiz kids. Thanks to mutual funds and 401(k)s, more than half of all Americans now own stocks, creating an investor class that may soon challenge soccer moms in terms of political clout.

Greenspan suggests that grade-school and high-school students begin writing about arithmetic, so that they can understand how such concepts as compound interest actually work.

If nothing else, think of the pain it would eliminate for the parents of college kids with their first credit cards.

Patience

“When you see ten problems rolling down the road, if you don’t do anything, nine of them will roll into a ditch before they get to you.”

Attributed to Calvin Coolidge (1872-1933), 30th President of the United States of America

Appliance Mountain

What hath the bureaucrats wrought? Mountains of discarded refrigerators blighting the English countryside.

According to a European Union (EU) regulation, beginning on January 1, 2002 , all of the ozone-depleting substances in refrigerators, freezers, and air conditioning units manufactured before 1994, have to be destroyed before the appliances can be scrapped. The regulation ruined a thriving British industry that refitted old refrigerators and sold them to Third World countries. Now, anyone who buys a new fridge is left with an old unit that nobody wants.

Since European Union bureaucrats waited until six weeks before the regulation went into effect to finalize the rules for compliance, the development of standards for recycling plants to remove and destroy refrigerants has yet to be finalized in Great Britain . No one knows how much recycling in the United Kingdom will cost since the late-term EU decision applied a more rigorous standard than the one for which British officials had planned. As of now, the technology to meet those standards does not exist in the British Isles .

There is irony here because the theory behind the regulation -- that common refrigerants were destroying the ozone layer -- appears to have exaggerated both the problem and the cure. Nevertheless, local British governments find themselves burdened with the cost of storing millions of old refrigerators -- estimated in one county as the price of hiring 40 more school teachers -- until recycling plants come on line.

The people of Britain have no political recourse, however, because the decision-making ability rests not in the hands of their elected officials, but in a crop of unelected bureaucrats in Brussels Belgium .

The Enron Blob

The tentacles of Enron’s splashy collapse are stretching across the land The lawsuits and government investigations are just starting. The blaming and scape-goating are in full swing. Increased federal regulation is sure to follow.

Enron ripples throughout the stock market as traders back away in horror from any company with any seemingly inscrutable financial reports. The Detroit News targeted the Houston-based energy trader as one of the primary culprits in Kmart’s decision to file for bankruptcy. According to a January 27 story in that newspaper, speculation about accounting shenanigans, disappointing holiday sales, and uncommunicative executives all bore an eerie resemblance to Enron in the minds of investors and lenders.

The final nail in Kmart’s coffin was by hammered in by Enron’s rampage through the surety market. Kmart purchased surety bonds to back its workers’ compensation program and to cover liability arising from the sales of guns and liquor. According to the newspaper article, Kmart found itself in a cash-flow crunch when it had to put up $300 to $600 million to cover the bonds at the same time that invoices for merchandise purchased for the holiday season were coming due. There just wasn’t enough money to pay off everybody.

According to eMarketer, which provides analysis of the Internet and e-business, Enron will leave one positive mark on the business world. eMarketer senior analyst Steve Butler credits the company with “transforming commodity-based products trade” by luring the market away from phone and fax networks and onto the Internet.

Butler reports that Enron’s trading operations made up an estimated 90 percent of the company’s revenues in 2000; by September of 2001, the Internet accounted for 60 percent of all of its trading deals. Unlike most other on-line energy traders, however, EnronOnline acted as more than a marketplace; it also provided credit and settlement arrangements to buyers and sellers. In an ironic twist, Butler concludes that Enron’s role as counterparty to each transaction led to its “highly leveraged position, which in turn resulted in the company allegedly pushing a great deal off its debt of its books.”

Enron is also supplying a lesson to the corporate world: stamp out hubris, simplify accounting, remember economic basics, and, above all, integrity and ethics create long-term market value.

Jacquelyn Horkan is editor of Florida Business Insight, Associated Industries of Florida’s on-line magazine (e-mail: jhorkan@aif.com).