Commentary by Kevin Hassett
Feb. 2 (Bloomberg) -- As bad as the news has been this year, for taxpayers there is much worse news to come.
Economists who study fiscal-policy history divide the world’s governments into two categories. There are the so-called Ricardian governments, which wisely plan their taxes and spending so that they balance over time. Then there are the Nonricardian governments, which spend and borrow until they collapse.
Ricardian governments borrow in bad times and lend in good. Nonricardian governments look like a Madoff investment pool and borrow themselves into oblivion.
The category names refer to the 19th-century economist David Ricardo, who pioneered the study of government finance. His ideas have such resonance that they continue to animate one of the hottest corners of economics.
The bottom line from the latest work is simple: economies of Nonricardian governments can malfunction in bizarre ways. If capital markets lose faith in a government’s long-run commitment to fiscal discipline, it’s the economic equivalent of a meteor strike.
As bad as things have gotten, the good news has been that the world’s investors have been lining up to purchase U.S. Treasuries. The problem for American taxpayers is that the world’s investors have been doing so because they believe the U.S. government is a Ricardian one. That means markets expect U.S. taxpayers to pick up the bill for this mess. Anything else would, of course, be unthinkable.
But oh, what a bill it will be.
Dream On
When the stimulus package, the SCHIP expansion and whatever else our representatives in Washington dream up are on the books, it seems likely that the deficit for this year will approach $1.7 trillion. This is an enormous swing in the U.S. fiscal condition.
Under President George W. Bush -- a big spender in his own right -- the federal budget deficit reached a record $455 billion in fiscal 2008, more than double a year earlier. Government bailouts of banks and other industries that started under Bush, and may accelerate under President Barack Obama, will help push the deficit toward that $1.7 trillion mark.
That is $1.7 trillion in future taxes. Nobody knows exactly when the tax hike will come. It might even be that we shall try to foist the costs on our children. Still, those planning their financial futures should account for the dramatically higher taxes that will be the result of this year’s policies.
Check the Numbers
Suppose the government eventually decides to allocate the bill according to the latest distribution of taxes. In 2006, for example, people with incomes between $50,000 and $75,000 paid about 10 percent of all income-tax revenue. As a thought experiment, how much would those people’s taxes go up if Uncle Sam raises 10 percent of $1.7 trillion from them?
If you run the numbers for that and other income brackets, you’d better sit down. Our spending policies are not digging a hole, they are conjuring up a Stygian abyss.
If your family income in 2006 was between $75,000 and $100,000, the extra taxes that you will have to pay at some point in the future add up to about $14,000.
If your income was between $100,000 and $200,000, your future tax hike will be about $28,000. If your income was between $200,000 and $500,000, then your future tax bill just went up by $90,299.
Everybody Pays
While our tax system is heavily tilted against the rich, even those with relatively low incomes will eventually have to pay. The extra tax bill for someone with 2006 income between $25,000 and $30,000 will be about $2,500.
These numbers are in present value. If government puts off sending you the bill -- and thus must pay interest between now and then -- the bill will be higher. How much higher? If the government waits 10 years to collect the $14,000 from the person with income between $75,000 and $100,000, the bill a decade from now will be about $22,800.
To put these numbers in perspective, suppose that the U.S. government decided that it was going to stimulate the economy by ordering individuals to purchase stuff. Ever attentive to distributional issues, this mandatory purchase program would require less of poorer individuals.
A government program with about the same distributional consequences as this year’s fiscal policy would require a person with an income between $25,000 and $30,000 to buy a really nice 52-inch flat-panel television. Those with incomes between $75,000 and $100,000 would be required to purchase a brand new Chrysler PT Cruiser. Those with incomes between $200,000 and $500,000 would have to purchase a midsize recreational vehicle.
Keep It
The difference between this hypothetical program and what we got, of course, is that in the hypothetical, at least you get to keep the stuff.
These tax bills are also large relative to the typical wealth of individuals in most income brackets. For example, recent Federal Reserve data suggest that the typical person with income around $100,000 has about $300,000 in assets. The new tax liability associated with this year’s policies is a little less than 10 percent of their wealth.
So when you get your tax rebate in the mail after the stimulus package becomes law, do yourself a favor and put it in the bank. Given the big tax hike that is coming, anything else would be irresponsible.
Feb. 3 (Bloomberg) -- Republican Senator Judd Gregg will be named today by President Barack Obama as his choice for commerce secretary, filling the last Cabinet position, according to two White House officials.
The announcement, set for later today at the White House, marks another demonstration of Obama’s attempts to advance his agenda by reaching across political lines. If confirmed by the Senate, Gregg would join Defense Secretary Robert Gates and Transportation Secretary Ray LaHood as the third Republican member of Obama’s Cabinet.
Gregg’s acceptance of the post suggests he has reached a deal with the administration and New Hampshire’s Democratic governor, John Lynch, to keep the Senate seat in Republican hands. Gregg said yesterday he wouldn’t accept the post at the risk of handing Democrats a 60-vote majority that potentially could force legislation through the Senate.
“I have made it clear to the Senate leadership on both sides of the aisle and to the governor that I would not leave the Senate if I felt my departure would cause a change in the makeup of the Senate,” Gregg, 61, said. “The Senate leadership, both Democratic and Republican, and the governor understand this concern and I appreciate their consideration of this position.”
Economic Plan
From the commerce post, Gregg could become a critical voice in the administration to vouch for the president’s economic policies at a time when Obama’s two-year, more than $800 billion plan to pull the nation out of a recession has run into resistance from congressional Republicans.
Gregg “gives the Obama administration a new and valuable conduit to centrist Republicans in the Senate,” said Charlie Cook, publisher of the nonpartisan Cook Political Report.
The appointment also is likely to be “very pleasing to business groups” because of Gregg’s record, said Linda Fowler, a professor of government at Dartmouth College in Hanover, New Hampshire. Opponents also know him as easy to work with, she said.
“He has a very low-key non-confrontational style,” Fowler said. “He gets along with Democrats.”
In the Senate, Gregg is regarded as a deficit hawk and an independent-minded fiscal conservative.
He has voiced concerns about the size and makeup of Obama’s stimulus package that may reach $900 billion.
TARP Vote
Still, he has shown willingness to work with the new administration. Last fall, then-candidate Obama, 47, spoke with Gregg during negotiations over the Treasury’s financial-rescue plan and the two talked before the Senate’s vote last month to release the second half of the $700 billion Troubled Asset Relief Program fund. Gregg was one of six Senate Republicans who voted to release the money.
Gregg, who chaired the Senate Budget Committee from 2005 to 2007, has called for reining in government spending on Social Security and other federal entitlement programs, which Obama has promised to address.
He also helped champion a five-year, $39.7 billion package of cuts to such programs proposed by President George W. Bush. In 2003, he voted against creation of a Medicare prescription drug program for seniors proposed by Bush.
He parted with Bush on some social policies, including votes in favor of expansion of federal funding for embryonic stem-cell research, which the president opposed.
Iraq War Support
At the same time, he was a staunch supporter of Bush’s Iraq policy. Two years ago, he engineered a Senate vote on a resolution he sponsored keeping in place funding for U.S. troops in Iraq.
As commerce secretary, Gregg would lead a Cabinet department of about 40,000 people, whose role is to boost the U.S. economy, compile economic data, monitor the weather, adjudicate trade complaints and oversee the Census Bureau.
Obama’s first pick to lead the department, New Mexico Governor Bill Richardson, withdrew last month amid a federal investigation.
Democrats currently have 56 seats in the Senate and two independents caucus with them. If Lynch were to appoint a Democrat to replace Gregg and if Democrat Al Franken prevails in the disputed Minnesota race, the party would have a margin to big enough overcome Republican attempts to stall legislation.
Next Election
The seat would be up for election in 2010. Steve Duprey, former New Hampshire Republican Party chairman who was an adviser to Senator John McCain’s presidential campaign, said Democrats will have a shot to claim it then if the Republican appointee doesn’t run.
“In essence it would be a completely open seat and we have no incumbent Republican serving either statewide or from a congressional district,” Duprey said. “It will be a significant challenge” to keep it Republican.
New Hampshire Republicans speculate Gregg’s most likely replacement would be Bonnie Newman, a Gregg family friend who was also served as his chief of staff when he was in the House. She was executive dean at Harvard University’s Kennedy School of Government in Cambridge, Massachusetts, from 2000-2005, and served in the administrations of former presidents Ronald Reagan and George H.W. Bush.
Other Republican possibilities include Tom Rath, a former state attorney general, former Representative Charles Bass, former Governor Walter Peterson and former State House Speaker Doug Scamman.
Feb. 3 (Bloomberg) -- Rafael Ramirez, president of Petroleos de Venezuela SA, takes the stage at a stadium packed with thousands of beneficiaries of the state oil company’s schools and health clinics, known as missions.
“The social missions, the revolutionary missions, will defend the revolution!” shouts Ramirez, 45, before introducing Venezuelan President Hugo Chavez, campaigning for a Feb. 15 referendum to end term limits so he can serve through at least 2019.
Ramirez, who’s also the country’s oil minister, supplied his government with $34 billion in royalties and taxes in the first nine months of 2008, more than half the national budget. Such funds have enabled Chavez to provide education, health care and low-cost food for what he terms the “Bolivarian Revolution.”
As Chavez drains cash from PDVSA, as his company is known, the Western Hemisphere’s biggest petroleum exporter is falling behind on investment and output targets, said Jorge Pinon, an energy fellow at the Center for Hemispheric Policy at the University of Miami. With crude down 73 percent from a July 11 peak of $147.27 a barrel, Ramirez will have to further trim oilfield spending to maintain payments to his boss, Pinon said.
“He is willing to compromise PDVSA’s role on behalf of the political mission of the state,” Pinon said.
Ramirez declined two written requests for an interview. Chavez wasn’t immediately available to comment, said an official in the presidential press office who declined to give her name because she isn’t an authorized spokeswoman.
Missed Targets
Venezuela’s 2009 budget is based on an oil price of $60 a barrel. Crude fell $1.60 to $40.08 a barrel in New York yesterday.
Oil’s decline comes as PDVSA seeks to boost production, which has missed its growth targets. The company said it pumped 3.27 million barrels a day last year before the Organization of Petroleum Exporting Countries decided to cut production in October.
In 2003, PDVSA forecast that it would be producing 4.4 million barrels a day by 2008.
Output is even lower than the company says, according to a Bloomberg News survey of oil companies and analysts. They estimate it has fallen to 2.15 million barrels daily from 2.61 million barrels since Ramirez took charge in 2004.
Ramirez is seeking investment from foreign oil companies to meet his goal of 4.94 million barrels a day in 2013. On Oct. 30, PDVSA opened bidding to find partners for ventures in the Orinoco Belt, which rivals Saudi Arabia’s and Canada’s tar sands among the biggest petroleum deposits.
Chevron Corp. of the U.S., Britain’s BP Plc, Royal Dutch Shell Plc and Colombia’s Ecopetrol SA each paid $2 million for information on the contracts, which will be auctioned this year, PDVSA said Dec. 2.
Higher Taxes
Chevron, Shell, and Ecopetrol didn’t immediately return calls seeking comment. BP spokeswoman Maria Viso confirmed that the company had purchased and is analyzing the data.
Since coming to office, Chavez forced private oil companies and PDVSA to pay higher taxes and royalties. When he took over operating control of joint ventures and cut off companies’ rights to international arbitration in 2007, ConocoPhillips and Exxon Mobil Corp. left the country and sued for billions of dollars. They’re excluded from new bidding rounds while pursuing lawsuits.
“It’s very unlikely” that PDVSA can fulfill the 4.94 million-barrel goal, said Roger Tissot, an associate consultant in Vernon, British Columbia, with Gas Energy Latin America.
“Chavez’s priority is to focus spending on areas where he can maximize political benefits, and all of them are financed by PDVSA,” said Tissot. “So there is nothing left for the company to increase productive capacity.”
Unlimited Terms
For the past four months, Ramirez has campaigned alongside Chavez, 54, for a constitutional amendment that would let the former lieutenant colonel seek an unlimited number of terms after his current mandate expires in 2012.
Chavez, who has been president for 10 years, was re-elected in 2006, winning 61 percent of the vote.
Much of the president’s popularity stems from his efforts to improve health care and access to higher education, especially among Venezuela’s 9 million poor, said Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington.
“Any government that has presided over this huge an improvement in living standards would be very popular,” Weisbrot said.
Head Taller
Ramirez, who at about 6 feet 6 inches (2 meters) stands a head taller than the president, has worked for Chavez since 2000, when he was appointed to run the government’s newly created natural gas agency, Enagas.
Before that, the engineering graduate from Los Andes University in Merida, who also holds a master’s in energy studies from Central University of Venezuela in Caracas, ran the pipeline department at Inelectra SACA, the country’s biggest engineering company.
In 2002, Chavez named Ramirez and other supporters to the PDVSA board. Protests by company managers against the appointments escalated into a military coup that unseated Chavez for two days.
When Chavez returned to power, he accepted the board’s resignation. Ramirez became Minister of Energy and Mines three months later. An advocate of OPEC output reductions, Ramirez saw oil rise fivefold from 2002 to its July 2008 peak. He opposed adding production as prices climbed last year and was among the first to call for a cut as crude fell.
Budget Soars
As crude surged, Venezuela’s budget soared to 167.5 billion bolivars ($77.9 billion) for 2009, from 26.4 billion bolivars in 2002. Oilfield investment almost doubled to $10.5 billion in the first nine months of 2008 from $5.3 billion a year earlier.
PDVSA’s employee roster rose to 61,900 at the end of 2007 from 45,700 in 2002. Under Ramirez, the company expanded social programs including literacy classes and subsidized food. His wife, Beatrice Sanso, runs La Estancia, a Caracas arts center funded by the oil producer.
The company sends 90,000 barrels of oil a day to Cuba in exchange for visiting health workers, sports trainers and zoo animals. PDVSA’s Citgo Petroleum unit in the U.S. provided 2.67 million barrels of below-market-price heating fuel to low-income households last winter.
Citgo Chief Executive Officer Alejandro Granado began this year’s program on Jan. 29 and said falling oil prices wouldn’t reduce the company’s donations.
Joint Currency
Ramirez’s twin roles involve him in global diplomacy as well as domestic politics and management.
On Nov. 26, he spent the morning with Chavez and chiefs of state from Ecuador, Bolivia, Dominica, Nicaragua, and Honduras discussing the creation of a joint currency. That evening, after a meeting between Chavez and Russian President Dmitry Medvedev, Ramirez signed accords that opened Venezuela’s oil industry to more investment from the country.
At 10 p.m., 12 hours before the federal budget was to be presented to the country’s legislature, he joined Finance Minister Ali Rodriguez at his offices in downtown Caracas.
Rodriguez, 71, a former guerrilla who served as oil minister, OPEC president and foreign minister before his current post, helped Ramirez gain Chavez’s trust.
‘Close Friend’
“I’ve known him since he was a child,” Rodriguez said in a Jan. 8 interview. “His father is a very close friend of mine.”
Ramirez’s lack of political ambition helps him keep his jobs, said Patrick Esteruelas, a Latin America risk analyst with Eurasia Group in New York. He is the longest-serving cabinet member under Chavez, who has dismissed more than 100.
“He has always portrayed himself as a technocrat and servant of state, and so is no threat to Chavez,” Esteruelas said. “He’s been one of Chavez’s longtime supporters. He’s willing to write blank checks.”
Feb. 3 (Bloomberg) -- Democrats and Republicans are seeking changes worth tens of billions of dollars to President Barack Obama’s economic-stimulus package as the U.S. Senate began debate yesterday on the plan.
Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said lawmakers from both parties are developing plans to redirect at least $50 billion to aid the ailing housing industry. Another Democrat, Ben Nelson of Nebraska, said he and other senators are preparing an amendment to cut “tens of billions” of dollars in spending in the plan, saying they doubt it would do much to help the economy.
Senate Minority Leader Mitch McConnell, a Kentucky Republican, said Democrats are ignoring Obama’s call, made in an interview with NBC television, to incorporate Republican ideas in the plan. “The way to build this package is, indeed, to do it on a bipartisan basis, which doesn’t mean just talking to us but including ideas that we think would work,” McConnell said.
Obama discounted the differences over the stimulus legislation, calling them “very modest.” Democratic congressional leaders met with him yesterday at the White House about the measure. A White House statement said, “They agreed on the urgency of passing effective legislation in the short term and committed to continue working together to achieve the bipartisan consensus” that Obama has sought.
Governors Urge Passage
Obama’s plan won backing from a bipartisan group of 19 governors that included Democrats and Obama allies Jon Corzine of New Jersey and Tim Kaine of Virginia and Republicans such as Arnold Schwarzenegger of California and Charlie Crist of Florida.
The governors’ backing came in a letter released this morning by the administration that expressed support for the $819 billion package the House passed last week.
The Senate began work on the bill in hopes of getting a measure to Obama’s desk by mid-February. Senate Majority Leader Harry Reid, a Nevada Democrat, said there will be a number of votes today on amendments. The House passed its version of the bill without any Republican votes.
Democrats, buffeted by complaints the House plan would take too long to boost the economy, got some good news yesterday when the nonpartisan Congressional Budget Office said the Senate’s version would have a quicker impact. The agency said the Senate’s plan, which it estimated would cost $885 billion, would pump about $700 billion into the economy by the end of next year.
Obama’s Goal
That would amount to almost 80 percent of the package. Obama has said his goal is to have three-quarters of the money funneled into the economy within 18 months. The CBO said the House bill would inject about 64 percent of its package into the economy by the end of 2010.
Reid said lawmakers will vote first on an amendment sponsored by Senator Patty Murray, a Democrat from Washington State, which would increase funding for highway, mass transit and water infrastructure projects by $25 billion. That would boost highway funding in the bill to $40 billion from $27 billion.
“Construction projects across the country have been put on hold because states simply don’t have the money,” said Murray. “This amendment invests in tried-and-true projects that get laid-off workers back on the job.”
Jim Manley, a Reid spokesman, said he didn’t know what other amendments would get a vote today.
Fighting Foreclosures
Conrad said he and about eight other senators form a bipartisan group of lawmakers who want at least $50 billion within the stimulus package for programs aimed at fighting housing foreclosures.
“We are really trying to reduce things that have less value in terms of stimulus and investment and move it into a place where we know we really need the money,” he said. Conrad said the lawmakers haven’t agreed on what they would try to cut in the bill to make room for their proposal.
Nelson, who complained the plan includes funds to develop environmentally sensitive spacecraft, said “more than a handful” of lawmakers are working on a plan to reduce spending. Nelson, who said he won’t support the stimulus plan as it is currently written, declined to provide specifics.
McConnell said the plan doesn’t include enough tax cuts or mortgage relief. Republicans are considering offering an amendment that would temporarily offer mortgages with fixed rates between 4 percent and 4.5 percent to homebuyers and homeowners wanting to refinance. The plan would direct Fannie Mae and Freddie Mac to buy the loans to encourage banks to make them.
Republicans believe “that a stimulus bill must fix the main problem first, and that’s housing -- that’s how all of this began,” he said.
McConnell warned Democrats against expanding the stimulus package, saying many of his colleagues believe it is already too big. He also criticized “Buy American” provisions in the bill that would require iron and steel used in projects funded by the measure to be American-made.
“I don’t think we ought to use a measure that is supposed to be timely, temporary and targeted to set off trade wars,” he said. “It’s a very bad idea.”
Feb. 3 (Bloomberg) -- More Americans signed contracts to buy previously owned homes in December for the first time in four months, signaling slumping prices may be boosting demand.
The index of pending home resales climbed 6.3 percent to 87.7, the first increase since August, from a revised 82.5 in November, the National Association of Realtors said in a report today in Washington. Pending sales rose in two of four regions.
Record foreclosures are pushing down home values, making homes more affordable for those buyers able to get financing. Still, restrictive lending rules and further price declines are likely to scare away the majority of purchasers, indicating the real-estate recession will persist for a fourth year in 2009.
“Lower prices probably have attracted some buyers,” said David Sloan, a senior economist at 4Cast Inc. in New York, who projected an increase. Still, “the rise may be difficult to sustain.”
Stocks rose following the report, reversing earlier losses, while Treasury securities dropped. The Standard & Poor’s 500 index was up 0.1 percent at 824.89 at 10:28 a.m. in New York. The builder composite index jumped 6.1 percent. The yield on the 10- year note was 2.80 percent, up from 2.72 at the close yesterday.
Economists forecast pending sales to be unchanged in December after an originally reported drop of 4 percent in the prior month, according to the median forecast of 28 economists in a Bloomberg News survey. Estimates ranged from a drop of 5 percent to a 2 percent increase.
Record Vacancies
A record 19 million U.S. houses stood empty at the end of 2008, the U.S. Census Bureau said in a report today. The vacancy rate, the share of empty homes for sale, rose to 2.9 percent in the last quarter, the most in data that goes back to 1956.
The pending purchase report showed resales jumped 13 percent in both the South and Midwest regions. Signed purchase contracts declined 3.7 percent in the West and 1.7 percent in the Northeast.
“The biggest gains were in areas with the biggest improvements in affordability,” Lawrence Yun, the group’s chief economist, said in a statement. The NAR’s affordability index reached a record high in December.
The Realtors group, whose pending sales data go back to January 2001, started publishing the index in March 2005. The gauge was up 2.1 percent from December 2007.
Pending resales are considered a leading indicator because they track contract signings. Closings, which typically occur a month or two later, are tallied in the Realtors’ monthly existing-home sales report. That report for January is scheduled to be released Feb. 25.
December Jump
Purchases of previously owned homes, which account for about 90 percent of the market, climbed 6.5 percent in December from the prior month as foreclosures helped drive median prices down 15 percent from a year earlier.
December sales of new homes, which account for the remainder, dropped to a record low, a report from the Commerce Department showed last week.
The Obama administration is considering giving government guarantees to mortgage holders that modify the terms of their loans to stem the record surge in foreclosures. The proposal, which may also have the taxpayer share in the cost of reducing mortgage payments, is aimed at shielding lenders from default after they loosen loan terms for struggling borrowers.
Lower mortgage rates are already making homes more affordable. The rate on a 30-year fixed mortgage averaged 5.33 percent in December, down from 6.09 percent the previous month, according to data from Freddie Mac.
Still, foreclosures continue to mount. Delinquency filings increased 41 percent in December from a year earlier, RealtyTrac Inc., a seller of default data, said last month.
Prices Drop
Average house prices have fallen by about a quarter from their peaks in mid-2006, according to the S&P/Case-Shiller home price index. Property values in 20 U.S. cities declined 18.2 percent in November from a year earlier, the fastest drop on record, according to a report last week.
The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth, according to a report today from Zillow.com. The median estimated home price declined 11.6 percent in 2008 to $192,119 and homeowners lost $1.4 trillion in value in the fourth quarter alone, the Seattle-based real estate data service said.
The slow pace of sales is hurting homebuilders. Ryland Group Inc., based in Calabasas, California, reported its eighth straight quarterly loss on Jan. 28. October and November were “two of the slowest months I’ve ever experienced,” Chief Executive Officer R. Chad Dreier, who has been in the business almost 32 years, said on a conference call with analysts.
Cutting Costs
D.R. Horton Inc., the third-largest U.S. homebuilder by revenue, today reported its smallest loss in five quarters as costs and charges fell faster than revenue.
“Market conditions in the homebuilding industry continued to deteriorate during our first fiscal quarter,” Chairman Donald R. Horton said in the statement. “Rising foreclosures, high inventory levels of both new and existing homes, increasing unemployment, tight credit for homebuyers and eroding consumer confidence” were to blame, he said.
A majority of banks made it tougher for consumers and businesses to get credit in the past three months even as lenders received infusions of taxpayer funds, a Federal Reserve report showed yesterday.
The pain is reverberating beyond builders. DuPont Co., the third-biggest U.S. chemical maker, last week reported a fourth- quarter loss of $629 million.
Profit in the Wilmington, Delaware-based company’s safety and protection business fell 62 percent as sales declined for housing products such as Tyvek weather barrier and Corian countertops. DuPont said it will eliminate 8,000 contractor jobs, twice the target announced in December.
A report from the Commerce Department yesterday showed spending on U.S. private residential construction fell 3.2 percent in December after a 4.1 percent decline the previous month. Last year, spending on home building plummeted a record 27 percent.
Feb. 3 (Bloomberg) -- U.S. stocks drifted between gains and losses as better-than-estimated earnings at Merck & Co. and Schering-Plough Corp. offset disappointing results at Motorola Inc. and SanDisk Corp.
Merck climbed as much as 5.3 percent after savings from job cuts boosted profit, while Schering-Plough added 3.1 percent on earnings helped by cost reductions and added sales from an acquisition. Motorola, the second-biggest U.S. seller of mobile phones, tumbled 14 percent after suspending its dividend and forecasting a wider-than-estimated quarterly loss. SanDisk, the largest maker of memory cards for cameras, tumbled 22 percent.
The Standard & Poor’s 500 Index slipped less than 0.1 percent to 825.37 at 10:30 a.m. in New York after gaining as much as 0.6 percent. The Dow Jones Industrial Average added 5.73 points, or 0.1 percent, to 7,942.56. About four stocks retreated for every three that rose on the New York Stock Exchange.
“It’s the more defensive companies that are producing better earnings,” said Jonathan Armitage, head of U.S. large- cap equities at the American unit of Schroders, the U.K. manager of $259 billion. “Poorer numbers are coming from anything that’s remotely economically sensitive or cyclical.”
U.S. stocks declined for a third day yesterday after consumer spending slumped for a sixth straight month and companies from Mattel Inc. to Rockwell Automation Inc. posted lower-than-estimated profit. The S&P 500 has retraced more than half of its 24 percent rebound from an 11-year low of 752.44 on Nov. 21.
Stocks in Asia climbed today after governments from Japan to Australia widened efforts to revive economic growth. The MSCI Asia Pacific Index rose 0.5 percent. Europe’s Dow Jones Stoxx 600 Index added 0.7 percent.
Merck, Schering-Plough
Merck, the third-largest U.S. drugmaker, rose 77 cents to $29.20. Income excluding one-time items was 87 cents a share, beating the 74 cent average estimate of 13 analysts surveyed by Bloomberg. Sales fell 3.4 percent to $6.03 billion.
Schering-Plough gained 54 cents to $18.01. The maker of Vytorin and Zetia for cholesterol, for which it shares revenue with Merck, had fourth-quarter profit excluding one-time items of 39 cents a share, topping the 30 cent average estimate of 13 analysts surveyed by Bloomberg.
Earning Slump
Profits decreased 37 percent for the 237 companies in the S&P 500 that have released fourth-quarter results since Jan. 12. Last quarter is projected to mark the sixth straight period of decreasing profits, the longest streak on record.
Motorola slid 65 cents to $3.89 after forecasting it will lose at least 10 cents a share this quarter, excluding some costs. That trailed the 4-cent average of estimates compiled by Bloomberg. The prediction follows a $3.6 billion loss in the previous period amid weak consumer demand for devices such as the touch-screen Krave.
SanDisk slumped $2.47 to $8.81 after saying first-quarter sales will be as low as $475 million, or 25 percent less than the average analyst estimate in a Bloomberg survey.
Aflac Inc. climbed 1.3 percent to $23.32. The largest provider of supplemental insurance said it has sufficient capital after fourth-quarter profit fell 48 percent on investment losses tied to European lenders.
United Parcel Service Inc., the world’s largest package- delivery company, said U.S. volume plunged 3.9 percent in the fourth quarter, the biggest drop since 1999. UPS domestic volume typically mirrors the performance of the U.S. economy. The shares rose 5.4 percent to $44.70 after UPS said it’s freezing management salaries and suspending retirement contributions.
Worst January Losses
The S&P 500 and the Dow posted their worst January losses on record as companies reported disappointing earnings and the economy shrank at the fastest pace in 26 years.
Analysts now forecast a 32 percent drop in earnings for companies on the U.S. benchmark, after saying in March 2008 that net income would rise as much as 55 percent, according to Bloomberg data.
Anadarko Petroleum Corp. climbed 4.1 percent to $37.58. The largest independent U.S. oil and natural-gas producer said fourth-quarter net income more than tripled to $824 million.
Automakers may report a tumble in new vehicles sold today. An average of 30 analysts and economists surveyed by Bloomberg forecast a seasonally adjusted annualized rate of 10.2 million units. In October, the sales rate was 10.6 million, the lowest rate since February 1983, according to Autodata Corp. of Woodcliff Lake, New Jersey.
An Internet KGB for Europe
French political elites are pushing through, at home and abroad, the most unscrupulous law project on copyright: HADOPI, which stands for Haute Autorité pour la Diffusion des Œuvres et la Protection des droits sur Internet (high authority for the distribution of works and the protection of rights on the Internet).[1]
Its other names are "the three strike approach" or the Orwellian "Creation et Internet." State-capitalist Denis Olivennes, the former president of FNAC and head of the group appointed by French President Sarkozy to elaborate the HADOPI project, is highly recommending the spread of this KGB-style solution either to neighboring countries or directly to the European Union. (Europe's budding superstate is meeting some token nationalist resistance, so, for the time being, it is only agreeing to do things the French way when "state security" is threatened — whatever that means.)
However, it is naïve to think that this law will succeed at the national level and not eventually be included in the European Telecoms Package.
The project is supposed to replace an older law that stipulated a huge fine for copyright infringers. That law proved inefficient, since it required prosecution, defense of the accused, and a judge's decision — much too slow for the copyright police. Instead, HADOPI can act without any traditional legal ties. The High Authority abolishes private-property rights in a widespread a priori presumption of guilt against all users of the Internet. This is generalized aggression. However, the accused can try to avoid the "copyright crime" punishment by seeking a solution through the plodding judicial system of the same state that concocted the HADOPI project. Good luck!
Let's take a chilling look at the nascent High Authority.
The bill presented to the French senate gives the High Authority these duties:
The task of protecting works and objects subject to copyright or to any similar rights as regards the infringements of these rights committed on electronic communication networks used for the provision of online public communication services;
The task of observing the legal supply and illegal use of these works and objects on electronic communication networks used for the provision of online public communication services;
The task of regulating in the area of technical measures for the protection and identification of works and objects protected by copyright or other similar rights.[2]
A KGB for the Internet?
The broad powers that will be given to the High Authority have to be read to be believed. Here are a few examples:
In the exercise of its competence, the members of the college and of the Commission for the Protection of Rights shall receive no instruction from any other authority.
In order for the Commission for the Protection of Rights to exercise its competence, the High Authority shall have at its disposal public agents…
They may, for procedural necessity, obtain all documents, of any format, including data kept and processed by operators of electronic communications…
They may obtain from electronic communications operators the identity, postal address, electronic address and telephone numbers of the holder of the subscription […] without the consent of the bearers of the rights…[3]
How far down the road are sleep deprivation and waterboarding?
The bill's "Mode d'emploi" reveals that after a year of warnings — one e-mail and one snail mail — the High Authority will be unleashed: it is given the power either to suspend the subscriber's Internet service for three months and to ban the subscriber from contracting with any other Internet provider during that time, or to issue "an injunction to take measures to prevent the renewal of the established breach and to give account to the High Authority, where necessary upon penalty."[4]
Furthermore, although the subscriber no longer has Internet access, he is still responsible for paying for the service.[5]
In addition, the ISPs will bear the financial burden of enforcement, one way or another. First of all, they must ensure that no copyrighted material is distributed through their services. Does this mean that the ISPs are to check data packets, one by one, the same way the post office opens letters in wartime or under communism? But at what cost?
Then, if the Authority discovers a copyright "crime," the ISP will be notified about the punishment of one of their contractual parties and ordered to enforce the 3 month Internet suspension. If the ISP does not acquiesce, the Authority may "levy a financial penalty on the service provider of a maximum of € 5,000 per breach recorded."
Even more troubling is the fact that not all of the High Authority's powers are delineated by the bill so that other means of enforcement could be a surprise to everyone involved: "The High Authority shall establish the list of security means accepted as effective in preventing the breaches of obligation."[6]
History Will Teach Us Nothing — with Special Interests Around
The analysts of the present economic crisis are wondering whether we have learned anything from 1929. Or the 1970s. Or the 1990s. But what about 17th-century France?
In his Austrian Perspective on the History of Economic Thought, Murray N. Rothbard tells us of Louis XIV's assault on freedom and prosperity, shortly after the death of his famous finance minister, the wide-scale interventionist Jean-Baptiste Colbert:
More important in stunting France's industrial growth was the disastrous prohibition of the popular new cloth, printed calicoes. Cotton textiles were not yet of supreme importance in this era, but cottons were to be the spark of the Industrial Revolution in eighteenth century England. France's strictly enforced policy made sure that cottons would not be flourishing there.
The new cloth, printed calicoes, began to be imported from India in the 1660s, and became highly popular, useful for an inexpensive mass market, as well as for high fashion. As a result, calico printing was launched in France. By the 1680s, the indignant woollen, cloth, silk and linen industries all complained to the state of 'unfair competition' by the highly popular upstart. The printed colours were readily outcompeting the older cloths. And so the French state responded in 1686 by total prohibition of printed calicoes: their import or their domestic production. In 1700, the French government went all the way: an absolute ban on every aspect of calicoes including their use in consumption. Government spies had a hysterical field day: 'peering into coaches and private houses and reporting that the governess of the Marquis de Cormoy had been seen at her window clothed in calico of a white background with big red flowers, almost new, or that the wife of a lemonade-seller had been seen in her shop in a casquin of calico'.…
Literally thousands of Frenchmen died in the calico struggles, either being executed for wearing calicoes or in armed raids against calico-users. Calicoes were so popular, however, especially among French ladies, that the fight was eventually lost, even though the prohibition stayed on the books until the late eighteenth century. The smuggling of calicoes simply could not be stopped. But it was of course easier to enforce the prohibition against domestic calico manufacture than against the entire French consuming population, and so the result of the near-century of prohibition was to put a total stop to any domestic calico-printing industry in France. The calico entrepreneurs and skilled craftsmen, many of them Huguenots oppressed by the French state, emigrated to Holland and England, strengthening the calico industry in those countries.[7]
Let us now turn to the preamble of the HADOPI project: it declares that the new Internet era has finally arrived and that it is a wonderful opportunity for the dissemination of cultural works, "unprecedented since the invention of the printing press." But, if intellectual property rights are not respected, "never have the conditions for creating these works been so much under threat." Indeed,
the recorded music market has fallen by 50% in volume and in value during the last five years which is reflected by a serious impact both on employment in the production companies and on artistic creation and renewal, with the cancellation of many performers' contracts and a fall of 40% in the number of new performers "signed up" each year. Cinema and television are beginning to feel the first effects of this change in habits and books will probably quickly follow this trend.[8]
The similarities between 17th-century and present-day France are striking: Calico garments — copyrighted goods; strictly enforced policy — HADOPI law; government spies — the High Authority; French ladies — Internet downloaders; domestic calico manufacturing — domestic ISPs; calico entrepreneurs and skilled craftsmen — Internet entrepreneurs and skilled IT specialists; Holland and England — (Fill in the blank, please!)
Error and Aggression
In the case of 17th-century France, economic policies were justified by what we now call mercantilism. Rothbard argues that it was not an economic theory unto itself but only a set of fallacious pleas made by businessmen and their paid bureaucrats to get a bigger piece of the pie at the expense of neighbors, be they individuals or countries. Mercantilism was based on the idea that exchange is "zero sum": one party wins and the other loses. In fact, however, both parties gain from any peaceful exchange.
Regardless of its underlying ideas, the calico all-out ban was instrumental in protecting the less efficient members of an industry from those whose investments were not trapped in old technologies — those who stood ready to come to the profitable service of "French ladies," whose rights were also trampled upon in this process. The old industry wanted to put a stop to this new development, and Louis XIV's army of bureaucrats was set to the task.
In the case of the 21st-century hunt for downloaders, we have, instead of mercantalism, the underlying ideology of IP, the theory that "intellectual property" is akin to real property, and that the rightful owners are deprived of their rights by the masses at large — with the help of new information technology and the development of the Internet.
An international host of lawyers, rent seekers, and bureaucrats are working for the development and enforcement of IP laws. But they labor under the false assumption — as N. Stephan Kinsella shows — that there is a scarcity of ideas.[9]
Ideas are not scarce, and therefore cannot be the subject of property rights. To consider ideas to be property leads logically to actions that will affect the distribution of existing legitimate property. The error of IP, in other words, entails aggression. In fact, "anyone has the right to structure or format his property any way he wishes and this right cannot be severed from him by the way others choose to use their property."[10]
Again, irrespective of the underlying ideas, the download ban is instrumental in protecting the less efficient members of the intellectual and artistic industries at the expense of the entrepreneurs whose investments are not buried in old technologies, who can use the "information era" to obtain profits from their customers. And, of course, the rights of the end users are again trampled. Adapting to new technologies can prove expensive. It is much cheaper to "convince" politicians to pass laws that protect the old-fashioned way of doing business.
State capitalists are again playing the externalities card. After, all, who else is going to pay for the adventures of the High Authority if not the taxpayers, and who else is going to profit from its doubtful success if not the older industries?
Where previously we may have had, in the words of Kinsella, "factual ambivalence" on the consequential merits of IP laws in producing more wealth (intellectual or not), new studies show pure stagnation, deserving not ambivalence but censure.[11] In the case of downloads, the great hunt promises to cripple the Internet. And HADOPI is only one of the state's tentacles.
Tudor Smirna was a summer fellow of the Ludwig von Mises Institute in 2001
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