The Tax Compromise

The so-called tax compromise looks sure to pass. It keeps tax rates where they have been for eight years for another two years, increases the death tax from its current zero percent to 35%, increases unemployment compensation by allowing those long term unemployed to receive benefits another thirteen months, and reduces the employee payroll tax by two percentage points. And this is all paid for by ......borrowing, printing money running higher deficits and increasing debt. And this is good? It seems to me that a better solution would have been for Republicans to demand spending cuts along with a permanent extension of income taxes. If businesses have been unwilling to invest because of uncertainty about taxes, how will this help. Invest now so tyhat in two years you might have significantly higher taxes? Doesn't make sense.

In the WSJ today, Jeremy Siegel says the Fed policy is working. The QEII is to print $600 billion (Bernanke says not print money but digitize it??) and focus on bringing long term rates down. But, the fact that long term rates have risen suggests the Fed policy is working -- quite convoluted, but Siegel says that the rates are rising due to expectations of an improving economy and future inflation. I am a little confused over this, although the expectations of future inflation surely have to be there. However, with that debt ratio (debt to GDP) getting higher, I don't see how expectations of strong economic growth can exist.

I just finished a fascinating book titled "Capitalism with Chinese Characteristics". Not easy going but explains how the state continues to control things in China, how the entrepreneurial spirit that developed in the 1990s in the rural areas has been taken over by state spending in urban areas. I mention this because so many people are arguing that the US should follow the Chinese example of state capitalism. With the tax compromise and Fed policy, the US is doing just that -- the state continues to grow.

China: Should we Copy It?

So many commentators these days are comparing our "capitalism" to China's "state capitalism" or "capitalism with Chinese characteristics and saying we should emulate theirs or that theirs is the model of the future. In the 1970s the same comments were being made about Japan's system. Japan has now been in a no growth period for two decades. China has grown significantly, doubling its GDP every decade for three decades or so. This while the U.S. has slugged along at 2.5% or thereabouts.

What people seem to ignore is that the central planner can not better the invisible hand. In turn, China's malinvestments will come home to roost. The government controls where resources are allocated and thus misallocates and is inefficient. An example is the stark ghost city, Kangbashi, in Inner Mongolia. The government built Kangbashi in just five years. It was designed to be the showcase urban center of Ordos City, a relatively wealthy coal-mining hub that's home to 1.5 million people. A public-works project worthy of Kubla Khan, Kangbashi is filled with office towers, administrative centers, government buildings, museums, theaters and sports fields and acre on acre of subdivisions overflowing with middle-class duplexes and bungalows. The only problem is that no one lives there. The district was originally designed to house, support and entertain 1 million people. Now, only a handful of cars drive down Kangbashi's multilane highways, a few government offices are open during the day and an occasional pedestrian can be seen trudging down a sidewalk. It looks like a Will Smith movie lot.

Government inefficiency is sure to come home to roost in China.