Topic: Government and Politics

What Is an American Car?

Before “loaning” billions more in taxpayer money to some very bad credit risks, simply because they are old American brands associated with Detroit, we might ask what distinguishes these companies from others.

The not-so-big three are certainly are no less global than, say, Honda.  General Motors gets 44% of its revenue from other countries and Ford gets 53%, according to Forbes (April 21).  A German company, Daimler-Benz, still owns a fifth of Chrysler, and a group of affluent private investors owns the rest.

An “American” brand tells you little about where all the parts in a car are made.  I was once at a dinner with Lee Iaccoca where I teased him about my Dodge Stealth, made in Japan by Mitsubishi.  Similarly, today’s Chevy Aveo is imported from Daewoo in South Korea.  Yet Hyundai has a plant in Alabama.

Cars.com found only four cars and six light trucks with a domestic content (meaning US or Canadian) above 75%.  That list includes the Toyota Tundra and Sienna and the Honda Odyssey.  Other Honda’s have a 60-70% domestic content, barely missing the cut.

The “Detroit” metaphor for primarily domestic vehicles is also inappropriate.  Among the remaining seven vehicles with a very high domestic content, three are made outside Michigan —the Chevy Malibu from Kansas and Cobalt from Ohio, and the Ford Explorer from Kentucky.  Ford’s F-150 truck might be made in Michigan or Missouri, the Chevy Silverado in Michigan or Indiana.

The only strictly “Detroit” cars with high domestic content are the Pontiac G6 from Orion MI and the Chrysler Sebring from Sterling Heights MI.  Consumer Reports says, “The G6 isn’t a very good car” and “The Sebring is one of the least competitive family sedans on the market.”   Yet these are the only Detroit-made sedans with a high domestic content.  Does anyone really think taxpayer subsidies can save cars like that?  And why should the federal government offer special deals for uncompetitive cars made in Michigan, thus tilting the playing field against better cars made in, say,  Ohio, Tennessee or South Carolina?

As a Chicago Fed study documents, “the auto industry is increasingly characterized by international carmakers, as well as by parts suppliers that operate in multiple countries. Against a background of global supply chains, it has become quite difficult to identify and label products such as autos by nationality. Overall, the processes of globalization of markets and supply chains have served to noticeably lower prices of new cars for American consumers and businesses. On a quality-adjusted basis, for example, new vehicle prices have been falling at an average annual rate of 0.5% over the current decade. Importantly, higher quality and gains in longevity are among the improvements in today’s vehicles.”

Lord, Make Me Chaste, But Not Yet

From a WSJ blog:

Former Treasury Secretary Robert Rubin, speaking at the same event, also pushed fiscal stimulus while stressing the importance of signaling concerns about the deficit. “The single most important thing we can do right now is a very large fiscal stimulus married with a commitment, once the economy is healthy again, to put in place a multi-year program to get back to a sound fiscal position,” he said.

Reply to Robert Gordon & James Kvaal’s WSJ letter

In a letter to the Wall Street Journal (Nov. 5), Robert Gordon and James Kvaal responded to my critique of their estimate that McCain’s tax plan would cut big oil’s taxes by $3.8 billion. They claim that “corporations as profitable as ExxonMobil pay a 35% rate on more than 99% of their profits.” Yet they also say, “Our code is riddled with special interest deductions, credits and exemptions that shield corporate profits from tax.” Well, which is it?

If big oil companies actually “pay a 35% rate on more than 99% of their profits,” then Gordon and Kvaal might be justified in ignoring McCain’s bold plan to end the oil companies’ “deductions, credits and exemptions.”

As the Committee for a Responsible Federal Budget noted, “Senator McCain … would repeal special expensing rules for oil and gas companies, eliminate the foreign tax credit for oil companies, disallow expensing of exploration and development costs, encourage an increase in royalty rates for drilling on public land, subject working interests in oil and gas to the passive loss rules, eliminate 15 percent tax credit for enhanced oil recovery costs for tertiary wells, and eliminate special depreciable lifetimes for certain assets used by oil companies.”

CFARB estimated that McCain’s plan to tighten up deductions and credits would raise oil company taxes by $6 billion in 2013. That would certainly be offset to some extent, of course, by lower tax rates—30% in 2010-11 and 28% in 2012-2013 (Gordon and Kvaal wrongly assumed the rate would drop to 25% in 2009).

If big oil really pays 35% tax on virtually all their profits, however, then such loophole-closing would simply be a waste of time.

If big oil does not surrender 35% of profits to the IRS, however, then Gordon and Kvaal’s estimates (which assume that statutory tax rates are the same as effective tax rates) are worthless.

Their estimates are based on earnings reported to the SEC — earnings as defined by Financial Accounting Standard Board (FASB) accounting rules, not by IRS reporting rules. Gordon and Kvaal acknowledge that “The figures reported on tax returns … may differ because corporations employ different methodologies for calculating income for accounting and tax purposes.”

If any corporation reported SEC/FASB earnings to the IRS, they would be in very big trouble with the IRS. If they reported IRS earnings to the SEC, they would be in very big trouble with the SEC.

FASB, for example, insists that the “fair value” of nonqualified stock options be estimated when the options are granted, regardless of their ultimate worth. The IRS, by contrast, is not about to let firms deduct the estimated cost of anything. The IRS insists that companies deduct the labor cost of stock options only if and when they exercised and therefore taxed as individual income.

Using a matched sample of financial statements with tax returns, George Plesko of the University of Connecticut business school found that “financial reporting information does not allow a user to infer important information about a firm’s tax attributes.”

Ignoring Plesko’s well-known point, Gordon and Kvaal report that ExxonMobil paid $4.3 billion in federal income tax in 2007, which they assume was 35% of their domestic profits as shown on SEC financial reports.

Their estimates then “present each corporation’s estimated savings from reducing the corporate tax from 35 percent to 25 percent.”

Since a 25% tax rate is 28.57% smaller than a 35% tax rate, they figured that ExxonMobil would have saved 28.57% of $4.3 billion, or $1.2 billion. They repeated such naïve arithmetic for the entire Fortune 200.

ExxonMobil’s accounting profits were almost $41. billion, worldwide, but 68% of their revenue came from overseas according to Forbes (Apr 21). If profits are roughly proportionate to gross revenue, then U.S. earnings would have been $13 billion (32% of the total), and a tax of $4.3 billion happens to be 33% of $13 billion.

At first glance, that might appear consistent with Gordon and Kvaal’s claim that companies as profitable as ExxonMobil really do pay 35% of profits to Uncle Sam. But that would contradict their other claim that “deductions, credits and exemptions … shield corporate profits from tax.”

If we repeat that same exercise for the least international oil companies on the Gordon-Kvaal list, it looks as if Valero paid 40% of domestic profits in federal tax and Conoco Phillips paid 47.6%. As economist and accountants understand, the reason accounting earnings generate such unbelievably high tax rates is that it is just not possible to infer effective corporate tax rates from accounting earnings as Gordon and Kvaal attempted to do.

As I wrote, “That is not economics; it is not even competent bookkeeping.”

Messrs. Gordon and Kvaal thought I was criticizing them for being lawyers rather than economists or competent bookkeepers. On the contrary, I was criticizing President-elect Obama for using estimates from John Podesta’s Center for American Progress Action Fund —a 501c4 political lobby with a rather obvious bias. Unlike any think tank, such political action funds are free to engage in lobbying and campaign activity. Indeed, Gordon and Kvaal boast that “our results have been featured in millions of dollars worth of advertising.” Well, that certainly adds credibility doesn’t it?

Why the GOP Must Stop ObauckennewydenCare, Part II

Paul Starr is an ardent advocate of (dare I say it?) socialized medicine. He co-founded the left-wing magazine The American Prospect. And he wrote the definitive history of the medical profession in the United States – seriously, you should read this book. Which is why Republicans should take heed when he writes:

Political leaders since Bismarck seeking to strengthen the state or to advance their own or their party’s interests have used insurance against the costs of sickness as a means of turning benevolence to power.

As noted earlier, the political survival of the Republican party probably depends on its defeating whatever health-care plan emerges from the scrum created by Messrs. Obama, Baucus, Kennedy, and Wyden.

If the GOP fails, the beating it took in 2008 will pale in comparison to the decades-long drubbing that will follow.

Everything Is a Security Issue

Anyone who sells to the Pentagon can claim that theirs is a strategic industry. In a war, enemies could cut off shipments from foreign producers, subsidy seekers say. Government then needs to protect American steel makers, shippers, shipbuilding, and so on. Those making these arguments avoid discussing the long odds that foreign supply will be interdicted or that the United States will fight a war that lasts long enough for it to matter.

Consider Wesley Clark’s op-ed in Monday’s New York Times. Clark notes that the Army buys a lot of vehicles from US automobile companies. Therefore, he says, bailing out the big three is a security issue. But letting US automakers go bankrupt does not mean they will stop making trucks. Even if they did, there are still foreign automakers that manufacture in the United States and would be happy to sell to Uncle Sam. And even if domestic automobile production disappeared entirely, we could still import. No imaginable enemy could close the sea-lanes that we use to bring in vehicles from Europe and Japan. Clark doesn’t address any of these holes in his argument. Nor does he let his lack of experience in the automobile business stop him from telling Detroit how to run its business.

In Sunday’s Washington Post, Joby Warrick offers similarly shaky analysis about the financial crises’ effect on US security.  Economic difficulty impacts every security issue, so you can always find an expert to tell you how the downturn heightens the odds of some particular nightmare.

Warrick suggests that lowered federal revenue could require cuts in defense spending, leaving us more vulnerable. Maybe, but the doubling of non-war defense spending since 2001 has bought us plenty of security to spare, by this logic. Warrick cites specialists who say increased global poverty will cause instability, which will cause terrorism. But there is no clear link between instability and terrorism. 

Warrick says “many government and private terrorism experts say the financial crisis has given al-Qaeda an opening,” which they may use to “probe for weakening border protections and new gaps in defenses.” Does anyone know what that means? The article never explains what defenses we’re talking about, let alone what gaps a downturn will open in them. It does not tell us why we should we view Al Qaeda as a carefully reckoning organization that probes and times its attack to US events, rather than groups of guys who attack when they can. The article cites analysts who say that the downturn could speed the day where China overtakes us economically. But China is not immune from economic distress. Nor it is clear that China’s rise is bad for US security.

The article could be turned on its head: “Global Downturn likely to slow China’s rise, undermine terrorist fund-raising, and eliminate wasteful defense spending, experts say.”