Friday, January 20, 2017

Eastern Panhandle Independent Community (EPIC) Radio:The Age of Trump begins on Paris on the Potomac

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Post: The Age of Trump begins on Paris on the Potomac
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Thursday, January 19, 2017

Tackling West Virginia’s Budget Crisis [feedly]

Tackling West Virginia's Budget Crisis
http://www.wvpolicy.org/tackling-west-virginias-budget-crisis/

In less than a month, West Virginia's new governor, Jim Justice, will release his FY 2018 state budget that aims to close an estimated budget gap of $497 million or about 11 percent of the state general revenue fund (before leaving office outgoing Governor Tomblin released a FY 2018 state budget).

While Governor Justice has said "we have to raise revenue," the GOP controlled legislature has vowed they will not enact any tax increases and seem more inclined to push for more tax cuts, such as eliminating the business personal property tax that would reduce state and local revenues by $388 million. In order to tackle West Virginia's budget crisis effectively, it is important to understand how the state landed in this crisis. We need to look at the spending side and the revenue side of the ledger.

Big Budget Cuts Over Last Five Years

West Virginia's budget problems are nothing new, the state has had sizeable budget gaps that have ranged from $75 million in 2014 to over half-a-billion in 2016. Over this time, lawmakers have cut millions out of the budget each year. Former Governor Tomblin estimates that the state has cut over $600 million from the budget over the last five years alone. Between 2012 and 2017, the only two major expenditure increases have been in Medicaid (mostly due to growing healthcare costs and utilization) and foster care services (mostly due to substance abuse and expensive out-of-state placements) while most agencies have been severely cut (e.g. Higher Education has been cut by over $55 million since 2012). All together, general revenue fund expenditures have grown on average by less than 1 percent annually since 2008.

Tax Cuts and Weak Energy Markets Have Severely Depressed Revenues

If we look at general revenue fund collections between 1990 and 2007 – before major tax cuts where enacted – they average about 6.8 percent of our state's economy or total personal income. Today, they are just below 6 percent. If general revenue collections were at the historical average of 6.8 percent, the state would have about $628 million in additional revenue. This is pretty close to what Tomblin said we've cut from the budget since 2012.

If you adjust for inflation (CPI), estimated general fund revenue collections for the current fiscal year (FY 2017) are down about $570 million from where they were in 2008. If you look at general revenue collections during the first six-months in FY 2017, they are at the same level today as they were nine years ago (FY 2008). Either way you cut it, it seems pretty clear that West Virginia is collecting far less revenue than it should be. In other words, we have a major revenue problem – not a spending problem.

The state's revenue problem stems from two primary factors, one that's self-inflicted and one that is not. In 2007, the state started a series of tax cuts. The cuts totaled at least $425 million annually. This includes phasing out the grocery tax on food and the business franchise tax, while lowering the corporate income tax rate from 9 percent to 6.5 percent.

While the business tax cuts were sold on the idea that they would boost jobs, the state had more private sector jobs before the business tax cuts than we do today. In fact, one of the only areas of private-sector job growth over the last 10 years has been in health care services, which is mostly because of our growing elderly population and the infusion of federal money from the Affordable Care Act.

The other major factor has been the decline in the coal industry – which was foreseeable at least back to 2011 – and the major drop in natural gas prices. Both of these energy industry factors have not only suppressed severance taxes (state severance taxes are down $243 million between 2014 and 2016), but have also lowered other revenues at the state and local level.

On the coal side, production has dropped from 158 million tons in 2008 to an estimated 80 million in 2016. The stems from stiff competition from cheaper and more abundant natural (shale) gas, a huge decline in coal mining productivity in southern West Virginia (thinner coal seams), increased competition with Western coal in Wyoming and Illinois, sluggish international metallurgical coal markets, and growing demand for cleaner energy at the federal (EPA regulations) and state level (renewable energy portfolio standards).

In summary, because of major tax cuts and a weak energy sector the state has seen a large drop in revenue collections that have resulted in hundreds of millions in budget cuts over the past several years.

Closing the $400 Million Budget Gap

Going forward, it is clear the state will have to raise revenues in order to pay for vital public services such as schools, roads and bridges, public safety, and health care. This could include applying the sales tax to cell phones ($70m), digital downloads ($4m), grocery items ($170 million), and more personal services ($5.8m) while also increasing the sales tax rate to 7 percent from 6 percent ($200m). Other revenue options could also include raising the natural gas severance tax rate to 6 percent from 5 percent ($19m), reinstating the state estate tax ($20m), adding a 3 percent income tax surcharge on incomes over $200,000 ($96m), and reinstating the business tax cuts ($219m).

The good news is that a large majority – 70 percent – of West Virginia voters are willing to pay more in taxes if the money goes toward maintaining these key priorities.

While it is unclear how lawmakers will close the nearly $500 million state budget gap during the 2017 legislative session, a cuts only approach would be devastating to vital public programs and services that all West Virginians rely on each day. The most prudent approach would be to raise revenues and then set in motion some long-term government reforms (e.g. criminal justice reforms) that could reduce expenditures over time and improve our workforce. If we continue to just cut and our public structures continue to deteriorate, there is a good chance more people will leave the state and far less will make our state their home.

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Links for 01-18-17 [feedly]

Links for 01-18-17
http://economistsview.typepad.com/economistsview/2017/01/links-for-01-18-17.html

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Brad Setser (CFR): China’s Reserves Fell by Around $45 Billion in December

China's Reserves Fell by Around $45 Billion in December (Using the PBOC Data)

by Brad Setser
January 17, 2017

The pace of decline in China's foreign reserves matters.

Not because China is about to run out.

But rather because China will at some point decide that it doesn't want to continue to prioritize "stability" (against a basket) and will instead prioritize the preservation of its reserves, and let the yuan adjust down. Significant voices inside China are already making that argument.

And I fear that if the yuan floats down, it will stay down. China will want to rebuild reserves, and—if exports respond to the weak yuan—(re)discover the joys of export-led growth. Relying on exports is easier than fighting the finance ministry's opposition to a more expansive (on-budget) fiscal policy, or seriously expanding the provision of social insurance to bring down China's savings.

I thus disagree with those who argue that the "China" shock is over. It depends a bit on the exchange rate. China's exports of apparel and shoes have probably peaked. But China's exports of a range of machinery and capital goods continue to remain strong—and at a weaker exchange rate, China could supply more of the components that go into our electronic devices, and export far more auto parts, construction equipment parts, engines, generators, and even finished autos than it does now. "Mechanical" engineering writ large continues to be a significant part of the U.S. economy, and even more so the European economy.

china-fx-settlement-cny

One of the main indicators—PBOC balance sheet reserves—that I follow for tracking China's reserve sales is now out for December, and it points to around $45 billion in sales. I prefer to look at all the foreign assets the PBOC reports on its balance sheet rather than just its reported foreign exchange reserves. That variable was down $43 billion in December, and $133 billion for q4. Actual foreign exchange reserves fell by a bit more—$46 billion in December and $141 billion in q4. The difference between foreign exchange reserves and all of the PBOC's foreign assets is primarily the foreign exchange the banks hold at the PBOC as a result of their reserve requirement.
The loss of reserves in December was a bit smaller than in November. But only just. The average monthly fall in q4 was over $40 billion.

That is a pace that is ultimately unsustainable. I think China would be fine with $2 trillion in reserves, given how little foreign debt it holds. Others say $2.5 trillion. If reserves are falling by a steady $40 billion a month/$500 billion year, it is only a matter of time before China hits its limit. With China, it may be a long time though…

However, there are two reasons why I am not yet convinced that it is only a matter of time before outflows overwhelm the PBOC's reserves and other exchange rate defenses.

First, reserve loss and thus the scale of outflows remains correlated with movements in the yuan against the dollar. In quarters with significant yuan depreciation against the dollar, reserve loss—using the PBOC's foreign assets as the measure—has varied between $100 billion and $225 billion (q3). In the two quarters during the past year when the yuan was stable or appreciating against the dollar (q2 of 2015 and q2 of 2016) the quarterly reserve loss was very modest—under $20 billion.

china-cny-v-assets-reserve-change

So if the PBOC was serious—and that might mean losing a bit of face by moving away from the basket peg—and let the yuan strengthen against the dollar, my guess is that outflow pressures would fall significantly. It would help if the PBOC allowed a bit (more) upward drift against the basket—and thus reinforced expectations of two-way risk against the dollar.

Remember that the PBOC took advantage of dollar weakness in the first half of 2016 to reset the yuan's level against the basket. I understand why, but that reset had a price—it reinforced expectations that the yuan only will move one way against the dollar.

The second is that a lot of the outflows so far in 2016 have come through channels that I think the State Administration for Foreign Exchange (SAFE) can effectively control, if it was determined to do so. A surprisingly large share of the outflows last year come from balance of payments categories that I think the authorities can control, and can control without too much administrative difficulty, as they ultimately require supervising a relatively small number of accounts at a manageable number of large state institutions (of course there are political difficulties here, but the administrative complexity should be lower).

A bit of balance of payments math:

China runs a goods surplus of around $500 billion (in BoP terms) annually.

And—even with the fall off in FDI inflows—should get another $100-$150 billion in FDI ($250 billion would have been more typical a few years back).

So China has over $600 billion/6 percent of GDP in inflows from FDI inflows and the goods trade to finance its services imports (which likely include a lot of hidden outflows through the tourism side), its FDI outflows, and non-FDI outflows, without having to dip into its reserves.

Of course, China has dipped into its reserves in 2016. Based on the PBOC balance sheet data, reserve outflows in the balance of payments for 2016 should be about $450 billion (I am assuming a $150 billion fall in reserves in the q4 balance of payments).

But I can count outflows of roughly equal size that seem to me relatively easy for the PBOC—really SAFE—to control if they really want to.

In 2016, the banks have been adding to their foreign exchange reserves (other foreign assets) at the PBOC at a roughly $25 billion a quarter pace. That slowed in q4, so let's call it about $75 billion a year in outflows. That easily could be put to an end; the share of the banks regulatory reserves held in foreign exchange is totally determined by the PBOC.

In 2016, the build-up of portfolio debt and equity assets abroad—almost certainly by a few state institutions or major financial institutions that the state regulates—has been a bit under $25 billion a quarter. Call it $100 billion a year. China knows how to put a stop to these flows; outflows in these line items were essentially zero from 2010 to 2014.

In 2016, overseas lending—long-term loans made by the Chinese state banks to the rest of the world—have averaged a bit over $25 billion a quarter, or $100 billion annualized. These all come from the big state commercial and policy banks. They could be slowed with a bit of regulatory supervision.

And FDI outflows have averaged about $60 billion a quarter in the first three quarters (roughly $250 billion annualized). A more normal number—judging from the numbers seen before the devaluation—would be maybe $25 billion a quarter ($100 billion a year). Reducing outflows there back to the norm—as seems likely to happen—might reduce total outflows by $150 billion.

Sum up these line items, and that takes away $425 billion in outflows—a sum almost equal to the projected fall in reserves in the balance of payments.

And I suspect that if China's reserves fell by $25 billion a year, no one would care that much (even if such a number implies an ongoing outflow of between $400 and $500 billion, depending on your view of how much of the services deficit is "real").

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

7-9 AM Weekdays, The EPIC Radio Player Stream,

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Piketty: Long live populism !

Long live populism !

Thomas Piketty

In less than four months, France will have a new president, but will the president be a man or a woman? After Trump and Brexit there is a risk that the opinion polls will be wrong once again and that Marine Le Pen's nationalist right wing will come close to winning. Even if the cataclysm is avoided this time there is a real risk of her succeeding in appearing to be the only credible opponent to the liberal right for the next elections. On the radical left, hopes are of course pinned on Jean-Luc Mélenchon but unfortunately he is not the most likely winner.

These two candidates do have one point in common: they both challenge the European treaties and the present system of cut-throat competition between countries and territories, which does attract many of those who have been left behind by globalisation. They do also have fundamental differences: Mélenchon, despite divisive rhetorical outbursts and at times an alarming geo-political imagination, does nevertheless tend towards a progressive and internationalist approach.

The risk of this presidential election is that all the other political forces – and the mainstream media – will simply castigate these two candidates and put them in the same box labelling them as 'populists'. This new ultimate political insult, which has already been used with notable success in the United States in relation to Sanders, may blind us to the fundamental issues. Populism is merely a somewhat confused but legitimate response to the feeling of abandonment experienced by the working classes in the advanced countries in the face of globalisation and the rise of inequalities. To construct specific answers to these challenges, we have to build on the most internationalist populist elements – therefore on the radical left – represented here and there by Podemos, Syriza, Sanders or Mélenchon, whatever their limits; otherwise the retreat into nationalism and xenophobia will prevail.

Unfortunately it is the strategy of denial which the candidates on the liberal right (Fillon) and centre (Macron) intend to adopt as both are going to defend the integral status quo of the 2012 European Budgetary Treaty. There is nothing surprising about this: Fillon negotiated it and Macron applied it. All the opinion polls confirm that these two candidates appeal primarily to those who have gained from globalisation, with interesting differences (Catholics rather than the trendy middle classes or 'bobos') but which are, in the last resort, secondary in relation to the social question. They claim to represent a rational approach: once France has regained the confidence of Germany, Brussels and the markets, by opening up the labour market, reducing expenditure and deficits, eliminating the wealth tax and raising VAT, the time will have come to invite our partners to show some goodwill in matters of austerity and the debt.

The problem with this apparently rational rhetoric is that it is not in the slightest rational. The 2012 Treaty was a monumental mistake which has ensnared the Euro zone in a fatal trap, by preventing it from investing in the future. Historical experience demonstrates that it is impossible to reduce a public debt of this size without resorting to exceptional measures. The only way out is to forcibly produce primary surpluses for decades which puts severe pressure on any investment capacity.

Thus from 1815 to 1914, the United Kingdom spent a whole century in achieving huge primary surpluses to repay its own annuitants and reduce the massive debt which was the outcome of the revolutionary wars (over 200% of GDP). This ill-judged choice contributed to the under-investment in education and the later slow-down in productivity of the country. On the contrary, between 1945 and 1955, a combination of debt cancellations, inflation and one-off levies on private capital enabled Germany and France to quickly get rid of a similar debt. This meant they could invest in growth. The same thing should be done today, by imposing on Germany a Euro Zone Parliamentary Chamber to reduce the debts with full democratic legitimacy. If not, the lag in investment and the slowdown in productivity already observed in Italy will end up by spreading to France and the whole Euro zone (there are already signs of this).

It is by going back into the depths of history that we will overcome the current stumbling blocks, as we have just been reminded by the authors of this magnificent 'world history of France' (Histoire mondiale de la France, edited by Patrick Boucheron, Seuil, 2017), a real antidote to the identity-related tensions in France.

From a more mundane and less rosy point of view, we do also have to accept participation in the primary organised by the left wing of the government (we refer to it in these terms since the attempt to organise a joint primary with the radical left was unsuccessful, with the risk that it may be permanently excluded from government). It is essential that this primary designate a candidate who is committed to an in-depth review of the European regulations. Hamon and Montebourg seem closer to this line than Valls or Peillon, provided that they go beyond their positions on the universal income and the 'made in France' and that they finally formulate specific proposals in place of the 2012 Budgetary Treaty (hardly mentioned in the first televised debate, perhaps because they all voted it five years ago: but this is precisely why it is all the more urgent to clarify things by presenting a detailed alternative). All is not lost, but it is urgent to act, if we wish to avoid putting the FN (Front National) in a position of power.

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

7-9 AM Weekdays, The EPIC Radio Player Stream,

Check out Socialist Economics.

Check out The EPIC Radio website

Eastern Panhandle Independent Community (EPIC) Radio:Labor Beat On The Air -- Jan 19, 2017

John Case has sent you a link to a blog:

Blog: Eastern Panhandle Independent Community (EPIC) Radio
Post: Labor Beat On The Air -- Jan 19, 2017
Link: http://www.enlightenradio.org/2017/01/labor-beat-on-air-jan-19-2017.html

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Wednesday, January 18, 2017

The Economics of the Affordable Care Act [feedly]

The Economics of the Affordable Care Act
http://economistsview.typepad.com/economistsview/2017/01/the-economics-of-the-affordable-care-act.html

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