This Just In: D&S Reads the News (#2)

by Dollars and Sense

Before getting into the econ nitty-gritty, I'm going to take this opportunity to briefly lay out my plans for this series of blog entries, and invite suggestions, criticisms, and comments. It's my impression that lots of people aren't aware of the diversity of opinions and magnitude of the disagreements that characterize academic and policy discussions in economics, finance and business, even among conventional practitioners. That being the case, it behooves all of us, and especially those of us who consider questions of justice to be an essential motivator in our thinking about such issues, to attempt to maintain as broad an overview of the subject as we can.

Accordingly, I propose, in this series of blog entries, to use my familiarity with the literature to trawl, two or three times a week, for stories, especially in the mainstream press, but also in academic papers and longer articles, that seem to me to be emblematic of how the economy interfaces with questions of justice in its current conjuncture. In addition, I hope to find stories that aren't widely disseminated or discussed in the mainstream press (though they are, in many instances, mined from it).

In short, I hope to provide a useful reference and summary for those who, while interested in economic issues in general, aren't familiar with all the facets of the controversies that animate—or should animate, from the perspective of those for whom social justice issues are important, or indeed paramount—its public debates.

As for a name, I propose two candidates: "Moral Hazards" and "Lagging Indicators." If anyone has any strong feelings about the name, or proposes an alternative, I'm all ears. Otherwise I'd probably go with the former.

Oh—then there's me. I'm a very recent addition to the D&S collective, and am a member of the Union for Radical Political Economics (URPE). I'm not a professional economist or journalist, but have studied all aspects of economics, finance and business pretty intensively for about fifteen years now. Hey, that was good enough for Marx, right (forgive me, Karl!)?

Alrighty (to use the favorite expression of our esteemed co-editor here): I'm going to focus today on two issues: trade with China and the housing bubble (so much for all the bit about attempting to publicise what often gets overlooked, I know). Last week the administration slapped import duties on certain Chinese manufactured goods, claiming they were the beneficiaries of improper subsidies. And today, reports The New York Times (U.S. Toughens Its Position on China Trade), a World Trade Organization complaint is being prepared against China which will center on trade barriers and the piracy of goods. The Times notes that the recent aggressiveness towards China in trade matters stems from an increasing impatience in the Democratic-led Congress for action. In this light, the Bush administration appears to be attempting to prevent Congress from taking even harsher actions in the future, if nothing is done now. The administration is particularly keen to avoid such a scenario while Treasury Secretary Henry Paulson is engaged in sensitive ongoing talks about revaluing China's currency in an attempt to reverse the humungous US trade deficit with China. The Times also says that China is trying to ease tensions by committing to more large bulk purchases of US imports, which the administration no doubts hopes will keep select members of Congress quiet while softer diplomacy is given a chance to work.

The reason I picked this article to comment on is that it's interesting to juxtapose it with a piece that appears in today's Asia Times (How Foreign Firms Dodge Taxes in China). The article, by Olivia Chung, begins with a paradox: "It seems strange that while Chinese enterprises, including state-owned, joint-stock and private companies, have been making profits in recent years, nearly half of all foreign owned-businesses have been losing money. Yet while so many foreign enterprises claim to be losing money, China witnesses a continual rise in its foreigh direct investment (FDI)." The article goes on to present some pretty astonishing statistics (mostly from official Chinese sources): two-thirds of foreign companies in China report "extraordinary losses;" of the top 10 countries or regions investing in China in 2005, many were offshore financial centers (including Hong Kong) customarily grouped as tax shelters, and that these foreign funds often outstripped those provided by major trading partners, including the US; and finally, the kicker: "…foreign funded companies contributed to one-third of China's industrial output, but generated one-fifth of the total tax revenues." The upshot of the story is clear: foreign investors in China are being accused of using all manner of devices to transfer costs to their Chinese subsidiaries while repatriating profits without paying tax. That being the case, the US complaints about China may not resonate as much with trade negotiators in Beijing (though the article also mentions how Chinese firms game the system by registering as foreign, and that local officials encourage foreign investors to play the tax-avoidance game to pad the books on local production.

Now to the housing bubble. The Washington Post had an article today which suggests that one of the most alarming, yet underappreciated aspects of the housing bubble is the prevalence of fraud. It notes that a confluence of developments led to a situation rife with opportunities for criminal gain, from lax-or no-oversight of new mortgage companies to the huge demand for bonds made up of repackaged mortgage loans (a good deal purchased by the very Chinese we want to stop from buying our bonds now). Much of this stuff is common knowledge now, so I'll simply let the follwing comment from the article speak for itself: "No one knows exactly how extensive the crime has become, but new data from the federal government suggest that it has jumped tenfold since 2000 (another bubble year, recall, LP). Prosecutors are finding cases all over the country in which sham transactions, based on fraudulent appeals, led to homes changing hands at far above their real value." If such homes were purchased far above cost, that must have driven up the values of surrounding properties in to a similar extent. And that means there may be more-perhaps far more air left in the housing bubble than we care to imagine. This is particularly so inasmuch as investment in industrial property, which offset losses in the constructions sector for a while, appears to be tapering off as well. (Note also the April 7th op-ed piece on the housing crisis by Dean Baker of the left-leaning Economic Policy Institute (and also an occasional D&S contributor.)

Oh—one last thing. The New York Times reported yesterday (Democrats Seek to Lead the Way in Tax Overhaul) about Democratic efforts to abolish the alternative minimum tax. This tax is slated to fall on unprecedented numbers of Americans in coming years (as their nominal incomes enter brackets set long ago, before the inflations of the ‘seventies and ‘eighties), and most politicians want to avoid this at all costs. The Democrats, while deserving applause for attemting to shield middle-class families from the incidence of this tax, propose no new taxes to offset the losses in revenue. The Times notes that this amount "…would be far bigger than Democratic initiatives to provide money for children's health care, education or any other spending program." Scared of their obscenely wealthy donors, ir seems the Dems are all too willing to shelter the rich by abolishing the AMT altogether, rather than for families earning up to, say, $250,000 a year (or raising other taxes on them). This inn is already full.

Labels: alternative minimum tax, China, fair trade, housing bubble, subprime lending, URPE

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4/10/2007 10:03:00 PM