The Woman in the Eye of the Storm – Video

BBC News – Christine Lagarde’s campaign to save the global economy.

Christine Lagarde, former swimmer, U.S. Capitol intern, and French finance minister who took over the International Monetary Fund last year is the woman trying to save the world economy. And she may succeed. Her goal is convincing world leaders to bankroll the formation of a new firewall to prevent the Greek crisis from spreading to other indebted economies. She is not asking for small change: Half a Trillion US dollars, mostly from the G20.

Her greatest challenge is not only to convince non-eurozone political leaders to contribute when their own economies are in trouble. It is also to sell the concept that the astronomical sovereign debt of some nations of the eurozone is not the main problem. Rather, It is the economic stagnation. Without economic growth, all the shoring up of the critical spots, Greece, Portugal, Spain, Italy will just accomplish gaining some breathing time.

The European economies must outgrow their debt and the first fundamental step should be devaluating the euro to make European exports more competitive and imports into Europe more expensive. Ideally, the euro should descend to parity with the U.S dollar.

EU Leaders Declare Crisis Turning Point as Focus Starts Shifting to Growth – Bloomberg.

Ironically, it is the strongest economy in Europe, Germany, that opposes devaluing the common currency. The first reason is that German exports are still strong . The second reason is historical: Devaluation of the Reichmark during the Great Depression led to high inflation and the rise of the Nazis to power in 1932.

Thus chancellor Merkel has made the point of blocking the reduction of the prime rate by the ECB while pushing the troubled neighbors to the south to adopt unpopular austerity measures. But the austerity measures reduce aggregate demand in those economies and such reduction is incompatible with growth. Short term spending with long tern austerity only works if the aggregate demand increase attained with the first is sustainable through the latter.

Private investors may be taking up to a 70% loss in the restructuring of the Greek debt. European banks are hoarding cash to withstand the blow. We may see how the rearrangement works out by mid March. There is a lot at at stake for everyone, including the United States, itself with a huge sovereign debt and anemic growth. Let’s all hope that Mme. Lagarde’s firewall stands.

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Two Years Into Christie’s Reign, New Jersey Still Worst State in Business Tax Climate Index

The Tax Foundation – 2012 State Business Tax Climate Index.

That comes as no surprise since the governor has his attention divided between New Jersey and flirting with a run for national office. Furthermore, that divided focus forces Christie to maintain a rigid ideological posture. He now has the gay marriage referendum to keep everyone distracted from the administration’s failures.

The Legislature, controlled by the democrats, does not fare any better. The current leadership of the Senate has set regional interests as priorities over state-wide concerns. Both branches of government are above all determined to maintain control: Their business is to remain themselves in business.

New Jersey could move from the 50th spot to # 1 in one single year if we eliminate all corporate taxes – as I propose. S corporations would no longer have to transfer earnings to personal N.J. income tax returns because their tax would be ZERO. The difference between spots 50 and 1 in the Tax Climate Index could translate into 100’s of thousands of new jobs in the state even while increasing the minimum wage with a real and economically effective increase of almost 150%.

Corporate taxes represent less than 10% of the state budget – about $2.8 billion. We can add another billion for small busnisses, professional employers, etc. Let’s round it off to a $4 billion price tag: That amount is less than what New Jersey would save just by eliminating the County governments – even when keeping county schools and some departments such as DPW’s and Counties’ Divisions of Taxation. 

Now I ask this: What would help New Jersey more?  ZERO corporate tax rate and increasing aggregate demand with the higher minimum wage OR maintaining the Medieval institution of county government?

New Jersey is a Fiscal Time-Bomb

NJ Spotlight | Budget Expert: Income Tax Cuts Will Benefit the Rich.

Christie and the democrats debate the merits of the proposed 10% tax cut and both miss the train. They want to make omelettes without cracking eggs, gain without pain, have the cake and eat it too.  As the Office of Legislative Services points out: The Tax cut as proposed will produce an insignificant benefit for all but a small minority.

Let’s forget about fairness for a moment:

From the strictest economic viewpoint, the 10% tax cut would fail to create the additional aggregate demand needed to stimulate the economy and I am presuming that that is the ultimate goal. Why would it not work? Because the immense majority of consumers would see their finances hardly changed by it – apparently Christie’s goal: The 10% cut is designed so that most people see almost nothing of it.

But even if we put that billion – following the democratic recipe – toward property tax relief, it amounts to approximately 2.2% of the total property tax paid by New Jersians – the equivalent of freezing property taxes for one year; again hardly worth to write home about.

Since the 2% cap is rather flexible, municipalities would find ways to make up for the one-year freeze. In fact, they would be forced to do so by their obligations. Postponed obligations accrue more debt. On the other side, Christie and Sweeney can talk all they want about merging services: It will not happen to the extent or with the speed needed.

The ultimate purpose of any fiscal measure should be to stimulate growth. Even measures of austerity should have the long term goal of stimulating growth. With growth come jobs, better wages, better infrastructure, more accessible education opportunities and wider horizons for our youth, higher standards of living, etc. I presume we all want our children to live better than we have. But everything that has been put on the table by both parties is insufficient: We have serious structural problems and among the main ones is the very expensive political class that permeates everything. We must address those structural problems with drastic reforms if we want to reverse an otherwise inexorable decline.

U.S. Economy Grows 2.8%, Less Than Forecast

U.S. Economy Grows 2.8%, Less Than Forecast – Bloomberg.

The data is telling the same story that I have saying for months: The basic element for growth is demand. Demand is for the economy what an amino-acid is for a protein: the Building Block. Very few economists recognized this and that is why the federal government embarked in the stimulus programs without taking the necessary steps for spurring demand – other that cheap credit. They also failed to recognize that cheap credit does not help when most consumers are maxed-out and have lost the sense of security in their jobs.

The data is also saying that most of the growth was in rebuilding inventories rather than consumption. Less than 1/3 of the growth was brought about by consumer spending. In an economy where consumer spending represents 70% of the total, the figures for 2011 are alarming indeed.

The pressure will be now to sell that inventory and businesses may have to offer extraordinary discounts to do so. This could lead to deflation – lower prices – which is a good thing for the consumer but also leads to reduction in supply and consequently more layoffs.

Even the president mentioned the other day the idea of taxing more those who outsource overseas and giving tax breaks to those who invest at home. The President did not offer any details and we do not know if there is any concrete plan in Washington. Rewarding those who invest in New Jersey is at the core of my reform plan with abundant specificity. I have introduced that proposal for one simple reason: It is indispensable. But to apply it, it must be defined.

New Jersey is a reflection of the national economic picture, perhaps a bit worse with respect to unemployment figures. The democrats in Trenton have proposed an increase in the minimum  wage and the governor has proposed a 10% tax cut which only has relevant impact on a minuscule portion of the population. Both measures are insufficient with regard to their intended purpose, and the state is hardly in the position to be able to afford them – without some other additional steps. But because the steps involve the dismantling of part of the political bureaucracy, neither party will hear of it in New Jersey.

Economists often use the term aggregate demand which simply means the sum of all demands. I have called it just demand although meaning the same. The economists term is perhaps clearer. Conditions must be created so that demand growth is universal. We can not expect  1% or 10 %, or even 25% of the population carrying the economy on their shoulders. It is not sustainable. For growth to rise, aggregate demand must behave like many Euclidean vectors – there must be a genuine general uplift of the standards of living.

New Jersey Needs Marshall Plan for Lower, Middle Classes; Not Antics

Gov. Christie will consider raising N.J.’s minimum wage | NJ.com.

The Oliver proposal or raising the minimum wage from $7.25 to $8.50 is a bad joke. For starters, most New Jersey employers pay more than the minimum wage and chances are that most people benefited by the increase would just see raises of $0,50 or less. Oliver is as out of touch as if she lived in outer-space.

Moreover, the proposal is insufficient to have any economic effect. It could truly lead to some layoffs or postpone hiring in some small businesses with marginal profits because the government is taking this step isolated. I have warned many times that the reforms to revitalize the New Jersey economy require a multifaceted approach. Throwing in one ingredient alone, just because it does not affect the political class, will not produce the desired results.

The principal elements missing here are that government must reduce its footprint in the form of eliminating entire subdivisions and all political patronage. Thus, Civil Service Law must be strengthened and teacher tenure must be maintained. The tax code must be drastically changed. Certain consolidations must happen.

The following all must be in: Education (for real; not the fake Christie/Cerf reform), infrastructure, and renewable energy as a growth industry.

That is the complex but apparently the only path to growth and prosperity. Complex problems are not solved with simple solutions.

The governor has graciously agreed to consider the idea of raising the minimum wage. No wonder; the legislature just opened most of the remaining rural areas of New Jersey to wanton development, regardless of any effects it may have on the state’s future in a number of vital factors, such as drinking water quality, infrastructure, and air pollution. He owes the democrats a brief cameo appearance in the theatrical stage of minimum wage increase.

The proposed increase is a political charade and it would be laughable if not because there are hundreds of thousands of New Jersians struggling out there. This irresponsible political gang has ruined the future of an entire generation of young people. I have sons and I can see. Oliver’s idea might have been provoked by my hammering on the self-evident economic law which says that without demand, we can not have growth. To bolster demand, wages must increase; a real increase.

Particulalrly in a depressed economy, demand determines supply; not the other way around.

N.J. Pension Funds Suffer as Markets Fluctuate, New Jersey Does Not Contribute

U.S. State, Local Pensions Drop 8.5 Percent – Bloomberg.

Despite the pension reform of the summer,  the Christie administration has followed the irresponsible steps of its predecessors and refused to fully fund the pension systems.

The deficit will negatively accrue and become a greater burden to New Jersey in the coming years. By 2018, the shortfall could reach the pre-reform figures.

Christie is just kicking the can down the road. Increasing un-met obligations of New Jersey could lead to further downgrades by the rating agencies. That in turn would increase the cost of borrowing, both short and long terms.

Mixed Messages on U.S. Economy – Who’s Right?

Economy ends tough 2011 on a surprising upswing – NorthJersey.com.

chart-gdp.top.gif

After healthy growth in 2010, thanks to the temporary government stimulus, the economy plummeted in 2011 but is has been creeping up from the pit of the 1st quarter. Will the upward trend continue?

I am not an economist but I believe the basic elements required for strong growth are missing: We do not have a surge in exports and we do not have increases in wages and the standards of living which would de-leverage the American consumer and stimulate internal consumption.

Then if we add to that the dismal political atmosphere in Washington, we must come to the conclusion that growth will remain anemic throughout 2012.

New Jersey will continue to lag behind the nation due to its enormous political overhead and antiquated tax laws. The number of foreclosed homes and high property taxes will continue to hinder the revival of the housing market.