Saturday, June 06, 2009

Inflated expectations?

RATE FUTURES REPORT: Markets In Free-Fall, See '09 Rate Hike
Traders sold U.S. interest rate futures contracts in droves Friday, sending prices so low that participants now believe the Federal Reserve will start raising its key short-term funds rate by the end of this year.

Late-2009 and early-2010 fed-funds futures prices fell by unusually large margins. The December contract was down 23 basis points, or almost a quarter percentage point lower, in the closing minutes. It was fully priced for the Federal Open Market Committee to raise its target to 0.5% by the end of this year.

Fed's Yellen: US Treasury yield rise disconcerting
A senior U.S. Federal Reserve official said on Friday that a recent surge in long-term interest rates would be worrisome if fueled by anxiety about inflation but that does not seem to be the case.

Speaking at a conference sponsored by the Fed and the Journal of Money, Credit and Banking, San Francisco Federal Reserve Bank President Janet Yellen did not close the door on the possibility inflation concerns were driving up yields, but made clear she was doubtful.

Fed Chairman Ben Bernanke on Wednesday said worries about skyrocketing U.S. government debt appeared to be a factor behind the rise in long-term rates and he said getting budget deficits under control was an economic necessity.

In an interview with The Economist magazine, New York Federal Reserve Bank President William Dudley also acknowledged that nervousness about budget deficits may be behind the rise in yields, but he said there is little to evidence a dangerous jump in inflation is on the horizon.

If inflation is not a worry, why this quote from that last article?:
[Yellen] was re-thinking her support for a an inflation target of 1.5 percent, and noted that "most" FOMC members now see a rate of 2.0 percent to be most consistent with the panel's dual mandate of fostering sustainable growth and low, stable inflation.

Wouldn't be dead for quids

Often enough, but mainly from fellow oldies in Australia, Guambat was amused to hear the phrase, "I wouldn't be dead for quids." It was a phrase uttered usually in the midst of a distressing and challenging situation requiring full attention and effort, but sometimes in a moment of exuberance.

Guambat recalled that phrase, though for no particular reason, when reading the following story using the phrase quid pro quo. It just amuses to see the bared thinking process of a political mind trying to squirm out of a hole dug entirely by himself to place blame elsewhere: the pot calling the kettle unethical.

Law Dean’s E-Mail Shows Distaste for Clout-Heavy Admissions Decisions
"She won't hurt us terribly, but she certainly won't help us," Dean [formerly of the School of Law at the University of Illinois] Heidi Hurd wrote in reference to the applicant, in an e-mail to Chancellor Richard Herman. "If you tell me we need to do this one, we will. We'll remember it though!"

"Please admit," Herman replied. "I understand no harm."

The Chicago Tribune obtained Hurd’s e-mail and hundreds others under a Freedom of Information Act request that showed “an ongoing power struggle between educators who want to protect the integrity of the state's most prestigious public university and administrators who also feel compelled to appease powerful lawmakers.” The article notes that lawmakers making requests on behalf of constituents oversee educational budgets, creating pressure to acquiesce.

The state senator making the request, Chris Lauzen, told the Tribune his request was part of delivering good service to constituents, and the student he recommended was highly qualified. He said the upsetting part of the e-mail exchange was the tone of Hurd’s e-mail. "If it were me, I'd fire her, maybe for insolence," Lauzen said. "If she doesn't believe the person is qualified, she should say no. Instead, she asks for a quid pro quo. Where are her ethics?"

Her ethics??

The Tribune article goes on to say,
subpar applicants gained admission to the U. of I. with the sway of state lawmakers and university trustees. The investigation revealed that acceptance decisions at times occurred over the objections of admissions officers in deference to power brokers.

Further analysis of the 1,800 documents reveals how intertwined admissions decisions were with political maneuverings in Springfield. The Tribune found instances in which the school's lobbyists overrule rejections, "blow up" at admissions staff and forward veiled threats from politicians who want candidates admitted.

Documents show both Democrats and Republicans asked lobbyists to track the status of more than 500 applicants, accounting for well more than half of the names on a clout list maintained during the past five years.

But this is probably only limited to the State of Illinois and does not represent any degradation of the American education system, neh?

Friday, June 05, 2009

Der Homeland

The notion of der Homeland was created in the Bush administration, and nurtured to do the bidding of the Cheney Patriots through relentless fearmongering.

But fear wasn't its only tool. The civic Patriots who lived large off the fears of the common Patriots also came up with grandiose schemes to siphon off the Federal treasury and the nation's savings, which ended up with the climactic crash of the global financial system.

One such group of civic Patriots was called the Homeland Investment Coalition. This group lobbied successfully to establish the Homeland Investment Act of 2004. Big supporters were Big Pharma and Big Tech.

The idea behind the Homeland Investment Act of 2004 was to allow America's largest companies to reduce the taxes that would have been due on their overseas earnings from 35% to about 5%, so they could then dole out that untaxed gain to their shareholders. Sweet.

But, of course, the Bush administration would find the going a bit ragged if they actually told Americans that that was the real purpose of the Homeland Investment Act. Americans generally have felt for at least a century that corporate income taxes should be fairly assessed and paid, and this was too obvious a means of making an end around such an ideal goal.

So, the spinmeisters sold this piece of Homeland largess for the Homeland security holders as a means of re-investing the untaxed profits in real Homeland improvements and jobs for the common Homeland Patriots. The Homeland Coalition used these talking points to advance their agenda:
* Increasing domestic investment in plant, equipment, R&D and job creation;
* Increasing investments in business ventures in emerging technologies,
* Increasing funding for pension plans depleted by declines in the stock market;
* Improving the long term financial strength of U.S.-based companies by reducing domestic debt loads, strengthening corporate balance sheets, and lowering corporate bond rates; increasing dividends to shareholders (which can be productively redeployed); and raising equity market valuations by increasing funds available for share repurchases.
Actually, that last point was rather right on the main purpose of the supporters, and perhaps too blatant.

Michaele L. Morrow did a PhD dissertation at Texas Tech University on the effect of corporate earnings repatriation of overseas earnings on taxes at the state level. In it he discusses the Homeland Investment Act (see from page 3 - 10, and again, from page 32 onward for an excellent account of its history, context and supporters). He notes the regulations associated with the Act "identified specific investments that were permitted and not permitted under the Act, [but] it provided no penalties for not complying with these directives".

He said that the final legislation had rather more limited conditions, intended to increase the effect of the first 3 talking points above and minimize the benefits of the 4th. He says,
to be eligible for the deduction, extraordinary dividends received from the controlled foreign subsidiaries had to be reinvested ―in the United States (other than as payment for executive compensation), including as a source for the funding of worker hiring and training, infrastructure, research and development, capital investments, or the financial stabilization of the corporation for the purposes of job retention or creation. (Page 32)
Back in the day (2005), the Wall Street Journal lauded the results of the Homeland Investment Act, in what it characterized as a "Homecoming Victory":
Supporters argued that this tax cut would lead to an "in-sourcing" of jobs by luring corporate income parked in foreign vaults back to America. Those repatriated dollars could then be put to work for R&D spending, plant expansions, capital and technology purchases, or merely to improve balance sheets to the benefit of American shareholders.

Well, here's what has happened: In nine months the law has increased the flow of repatriated foreign capital by a whopping $225 billion. J.P. Morgan estimates that another $75 billion will return to America in the fourth quarter. About half of these returning funds were profits from pharmaceutical companies and much of the rest from such high-tech firms as Dell, IBM and Intel. We can't resist noting that this $300 billion of repatriated capital is nearly double the estimate by Congress's hapless Joint Tax Committee, which had assured us this time last year that not a dime more than $165 billion would arrive.

Treasury has already collected some $12 billion directly from the 5.25% rate on the capital inflows, and the American Shareholders Association estimates that an extra $20 billion will be collected indirectly through the corporate income tax. So, just as supporters claimed, this act reduced the budget deficit and contributed to the boom of an estimated $274 billion in additional tax revenue in Fiscal 2005.
Guambat wonders how much more joy there would have been had the tax break been 50%, instead of the 85% break allowed. The deficit could have been reduced by 3 or 4 times more. But Guambat is known for being churlish.

And, speaking of churlish, the WSJ editorial finished thusly,
It's true that much of this cash has gone to clean up balance sheets, either buying back stock or retiring debt, but companies that are stronger financially tend to create more jobs. Intel CEO Paul Otellini says that some of the $6 billion that his company repatriated will finance expansions of semiconductor plants in Arizona, Colorado and Massachusetts, creating 1,600 new and high-paying jobs. Dell used $100 million of its capital to build a 1,500-worker factory in North Carolina.

We don't like temporary tax cuts, and we'd all be better off if Congress went to a territorial tax system that doesn't force companies to pay U.S. tax rates on profit earned overseas. Alas, all tax cuts in Washington these days are temporary, and the Homeland Investment Act will expire in January even though the new law aced its test: It raised revenues, lifted investment, and created thousands of jobs.
But not everyone back in that day of 2005 was so impressed. The NYT ran its own editorial calling the Homeland Investment Act "an unprecedented government giveaway", although Guambat would take issue with the "unprecedented" part:

So, now, looking back at the results of the Homeland Investment Act, did it do anything at all that it was cracked up to do, or did it do nothing much more than the original plan, to line the pockets of Homeland securities holders with tax free profits?

Well, the NYT has an article today reporting on a study at the National Bureau of Economic Research that finds the Homeland Investment Act did exactly as the supporters intended, and not at all as it was promoted:
Now the most detailed analysis of what actually happened — using confidential government data as well as corporate reports — has estimated what happened to the $299 billion companies brought back from foreign subsidiaries. About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends.

There is no evidence that companies that took advantage of the tax break — which enabled them to bring home, or repatriate, overseas profits while paying a tax rate far below the normal rate — used the money as Congress expected.

“The restrictions on how the money will be spent seem to have been completely ineffective,” Ms. Forbes [Kristin J. Forbes, a professor of economics at the Massachusetts Institute of Technology who was a member of the president’s council of economic advisers from 2003 to 2005] said in an interview this week.

“Dell was a great example,” she added, referring to Dell Computer. “They lobbied very hard for the tax holiday. They said part of the money would be brought back to build a new plant in Winston-Salem, N.C. They did bring back $4 billion, and spent $100 million on the plant, which they admitted would have been built anyway. About two months after that, they used $2 billion for a share buyback.”

One fact found by the study indicates that some of the repatriated money was not even really returned to the United States, contrary to the intent of the law. Companies knew of the tax holiday in 2004, and many of them chose to “invest” money that year in foreign subsidiaries that had profits subject to American taxes if they were brought back to the United States. They then brought the profits back in 2005, getting the tax break while not reducing the continuing foreign investment.

Ms. Forbes said about $100 billion left the United States and came right back, in a process the paper calls “round-tripping.”

The study might possibly be accessed here. The abstract of the paper claims,
Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders.