Nutter's Washington

What happened to the Economy? Where did it go?

In looking over the newspapers this morning, I was struck how the news has changed or has been changed for us. Not long ago, the major concern was the economy, unemployment, government spending and the deficit. Nary can such headlines be found now. 

Fiscal cliff went away in a whimper, federal debt ceiling has been suspended until May so government can continue to spend and spend. Stock market seems to be rolling along even with negative growth last quarter. However, have things really changed and is anyone paying attention to  what really matters?

Headlines and media focus seems to be on four main items:

Guns, guns and more guns. High profile hearings, lots of staged events, plenty of outrage. 

Same Sex Marriage. Got to be something more important on a national scale because it is a State issue

Illegal Immigration. This has been a problem left unaddressed with laws unenforced for the past 25 or more years. The failure of the government to prevent a tidal wave of people crossing the border has change the cultural of the country and placed enormous financial burdens on many states and localities. Business is also a culprit in its desire and use of cheaper "undocumented workers." It is a problem, it should be addressed in regular order not by some cabal but it is not an urgent, pressing national crisis being protrayed. The camera crowding 8 Senators who think they have all the answers will find this issue will not be so easy to resolve. 

Crazy nominations. Political rumblings on various nominations, particular ex-Senator Hagel to head the Defense Department. I suggest Mr Obama make him a recess appointment, oh yeah that did not work out so well. 

So, there you have it. The Federal Government will spend about $4 billion today, they have to borrow. Same guys are sitting somewhere today and tomorrow without work. The President is indifferent with the election over. He is focused on collective action, equality and justice. Forget that people are worried and in spite of declarations the economy is not OK or going to be OK.

It is very strange and interesting, indeed.. 

Inauguration One Week Later: What Can Be Expected Now?

It has been a week since Mr. Obama delivered his Inauguration address. I did not see it but I read it. The event was, of course, scripted to the lowest common denominator of his supporters and honed to a particular audience. It was unfortunately partisan, narrowly focused and mean spirited. Not an inclusive performance.

 

He announced in no uncertain terms he was an ultra-liberal (like that was any surprise) intends to confront those who do not share his views and push his programs onto the country one way or another by or executive order. He ignored the three most pressing issues facing the country. Massive and growing federal debt, the overall economy and unemployment. Things he does not seem to care much about after re-election, I guess.

Mr. Obama will start to think as all Presidents do about his legacy. His legacy if things do not change will be a country in a financial precipice, saddled by debt and programs that are unsustainable. He will have left the country in a sense in worse shape than when he took office. He will have left the country will decisions that will have to be made and eventually will do more damage than if they are addressed now. His only goal seems to be the feckless continuation of government growth. I wish I was wrong but I do not see evidence to the contrary.

His one big personal achievement will have been to move the country towards total dependence on  government health care. But I get ahead of myself. Let’s look at what he deems important in the speech.

Too Much Advertising: Nothing is Sacred, Nowhere is Safe from Intrusion in GSTV

This is off my usual beat, no politics, no taxes, no economics but I have to vent. Forgive me. 

I stopped at a gasoline station on my way home last evening. I stopped there for two reasons, the first was I needed gas with a storm approaching and I was eligible for a 40 cent per gallon discount earned by shopping at a local grocery store.

 It was beastly cold out but it got even worse. There was an 8-inch screen on the pump blaring out some awful advertisements and showing some idiotic talking head. I was a captive, a prisoner.  Is there nowhere we can escape from the constant bombardment of advertising, banners, slogans, noise, and promotions?

This was something called GSTV. There cannot be that many worse ideas around. What is the effectiveness of some ad while I am pumping gas in the freezing temperature? Am I likely to run out and go buy the useless product?

What is next? Television in the sanctity of the men’s room? Maybe, called T-TV? Pottyvision?

Everywhere the eye turns; there is some logo, sign message. Television programs carrying big symbols of the next show coming on at the bottom of the screen or advertising, some of them so big, you can not even seen half the screen.

Computer pop ups, rolling messages. Rotating signs at sports stadiums, billboards, advertising on sports jerseys, ads on clothing. Brand names everywhere. Product placement. Try to think of a place in life now that is uncluttered, that is visually pure? If there is an empty space somewhere, plaster it with something. 

I personally do not find any of these devices very effective to get me to do something, influence my behavior. I do find them intrusive, annoying, blight and demeaning to the human spirit. All I wanted to do was to fill up my vehicle in peace and quiet.

There are few places left where a person can get away from all of this. It is an insidious result of an overly hyped society, looking at some hand held machine instead of greeting a person or looking around with out sensory overload. A culture that cannot think for itself but relies on some visual intrusion for instructions on what to buy, eat, drive, wear, watch, think and act.

 

 

 

 

 

 

Encounter with an Unemployed "Progressive" Democrat

I was introduced to a man last week who had just been fired from his job. It was a fairly good paying job and one that he had held for some period of time. In our five-minute conversation in a small group, he announced on 6 or 7 times that he was a “progressive” Democrat. I really do not care about his politics and certainly did not mention mine (anarchist) but I thought it was offensive.

I am not sure even what a progressive Democrat is. I think it means big government, more taxes, massive deficits, entitlement oriented spending and generally intolerant of anyone who has a different opinion. He seemed like a decent chap, other than this label obsession, and I wish him well in joining the ranks of the other millions of unemployed and under employed Americans. Maybe that is progress.

Oh, by the way, his progressive national leader barely mentioned the economy in his Inauguration. Guess that issue does not matter anymore, except maybe now to this fellow. 

Carried Interest Revisited: Bullseye on its back

The New York Times in their Business section today published an informative article on “carried interest” and private equity. As could be expected this tax planning and financing technique is again on the radar screen for elimination due to a variety of factors, including the odorous lust of revenue by liberals, notions of tax fairness and a few other factors. Industries affected by a change are gearng up. The link to the piece can be found at:

http://dealbook.nytimes.com/2013/01/21/with-tax-advantages-looking-shaky-private-equity-seeks-a-new-path/

Carried interests are a business and financial arrangement that have been and form an essential structural element to almost every section of the U.S. economy including, real estate development, private equity, hedge funds, health care, mining, and oil and gas. Changes in the tax rules would have a profound impact on how these businesses operate and their structure

I have written on this subject several times. I thought it would be interesting to see portions of one of the articles, which shows how the subject is much broader than just some “fund manager” making more dough than the rest of us. This was done in 2011. Here is a shorten version: 

The Democrats are bent on raising taxes. Everyone knows that.  The list is long, the gimmicks plentiful and if you move the wrong way, you are in the sights to be taxed more. However, it was interesting to note Democratic leaders are again targeting repeal or at least a substantial modification of a “carried interest”, despite repeated failures to eliminate it in recent years. The concept has been in the President’s budget for some time and passed the Democrat-controlled House in the last Congress. 

 Goodness, what can that be? “Carried” what? Who is “Carrying” whom? Carried interests are a business and financial arrangement that form an essential element of business in almost every section of the U.S. economy (including, real estate, private equity, hedge funds, health care, and oil and gas.) See, there are those oil and gas boys in the sights again. Changes in the tax rules would have a profound impact. 

In brief, the tax treatment of carried interests allows managers of hedge funds, private-equity funds, venture-capital funds and others to pay a lower 15% income tax rate applied to investment income as capital gains, rather than higher income tax rates.

How do they do that? It is complicated and requires by starting with taxation of partnerships. If you have an interest in a partnership, you are allocated a share of that partnership's income.  The income to the owner takes on the same character, such as capital gains, that it does in the partnership's hands, and the partner is taxed on it accordingly. Some investment partnerships, particularly in the private equity industry, earn mostly capital gains by buying and selling shares in other companies.  The managers of these companies thus receive their carried interest in the form of capital gains and pay capital gains tax rather than ordinary income tax. 

What many policymakers object to is the fact the carried interest paid to partnership managers is really compensation for their management services.

It is hard to have crocodile tears for the hedge fund managers. However, there are other industries where the carried interest is engrained and useful. No one knows how any revisions, if included in the debt deal, will affect these other sectors but it is useful to examine to see how they work by showing an example involving the old whipping boy of oil and gas.

In oil and gas development (and in most extraction industries) the term "carried interest" refers to an arrangement where one co-owner of an operating interest (the " carrying party") incurs an obligation to pay all of the cost to develop and operate a mineral property, in exchange for a right to recoup this investment out of the proceeds from the first production. After the investment is repaid, any subsequent production is divided between the other co-owners. The co-owner, not obligated to pay for the development and operation, holds a “carried interest” in the mineral property until the carrying party's initial investment is repaid. There are many different types of carried interests, the details varying considerably from arrangement to arrangement.

A simple example is as follows:

Jack owns all the working interest in an oil and gas lease and wants to drill a well but cannot afford it. Jack assigns to Big Oil the entire interest in the property, and Big Oil agrees to drill and complete a well bearing all the costs. Big Oil will retain 100 percent of the working interest until it recovers its entire costs (drilling, completing, equipping, and operating the well) from the proceeds (or “runs” as they are called) of the production. After cost recovery, a percentage of the working interest in the property goes back to Jack with each party owning a share.

As far as tax treatment, Jack realizes no gain or loss on the transfer of the property even though drilling a productive well only increases the value of the property interest returned to Jack. Jack has a basis equal to his basis prior to transfer. Jack cannot deduct any of the cost incurred.

Jack can receive his share of production income and report it as such, or he can sell his interest as a capital asset. In this simple example, there is no tax partnership arrangement, which can change the tax treatment. However, the point being, this is a long-standing arrangement that serves a legitimate purpose. Big Oil helped Jack finance the drilling of his well which otherwise would not have occurred. Jack intends to take a well-deserved vacation.

The question being, how will this be changed if the carried interested is changed, decimated or otherwise hammered? Will the policymakers make an exception or is any thing fair game in getting at oil and gas. I Carried interests are a business and financial arrangement that have been and form an essential structural element to almost every section of the U.S. economy including, real estate development, private equity, hedge funds, health care, mining, and oil and gas. Changes in the tax rules would have a profound impact on how these businesses operate and their structure.

I can understand the reasoning against the equity firms that are also providing management services to earn their carried interest but I do not see the tax abuse for Jack in our example. 

Changes in the taxation of carried interests have passed a Democrat-controlled House of Representative three times since 2007 and the Obama Administration has included a carried interest tax increase in each of its annual federal budgets where the current law on carried interests was described as “an unfair and inefficient tax preference.”

 

Of course, the tax rate for capital gains has been increased reducing its benefit, but that is not enough for some. If tax reform goes forward this year, the carried interest is a likely target for major changes.

 

 

Inauguration: Celebration for some, Worry for others

The public Inauguration of Mr. Obama is on Monday. He won re-election and his supporters deserve to celebrate the moment. I shall not be attending or even watching as I have experienced this all before. I cannot imagine anything being said or done that will be of any productive consequence. Maybe, these events are just what they are supposed to be, shallow, empty and an opiate for the voters.

 

This is the point where I am suppose to write an Inauguration is the pinnacle of our republican government, the orderly transition and continuation of power. While this may be true, however, this is not a 5^th grade civics class if they even teach civics anymore is school.

Mr. Obama will thank everyone, say how far the country has come after being ruined by President Bush and mention a few things that need to be done. These would include more investment (aka spending) on education, job training, renewable energy, wipe guns out of America, amnesty for illegal aliens, defend us from evil, (however he views it) and a few other matters. He will say he is ready for a balanced approach, will work with the opposition and change Washington. The latter is, of course, hogwash but I am sure he will read his lines well.

It will be a day of reaffirmation for his believers and followers. A day, perhaps, 9 months ago was in doubt to happen. For those that are did not support Mr. Obama it is a day to wish the President well and then move on to other things.

I view the Inauguration in a different light, as just another day of feckless leadership on the part of those who the country has trusted to govern. Governing after all is setting the rules, which we can all live together, provide for our lives, give some meaning to our existence. However, this will be another day of phony smiles and another day where the government spends about $ 4 billion it does not have. It is another day forward to the point of no return, when the international threat and fiscal dilemma created by our leaders causes actions that will be incredibly disruptive and painful for the country.

Taking a sobering approach, there is no reason to celebrate unless you hope or believe the current course of events is the right course. I am concerned about two overarching issues if the current course goes on.  The first one is Iran and its’ development of nuclear material will force Israel to create a stir the likes not seen since World War II. The second is the continued growth of government funded by borrowed money, which erodes the freedom of the individual and will eventually crash around all of us.

I do not believe Mr. Obama possess the will, the foresight, the desire or the ability to address these concerns. Unfortunately, I do not find anyone or institution that can possibly influence or change events to come given the polarity in the country and in government. In this case, I hope I am proven to be wrong.

 

 

Debt Ceiling and Taxes: Show us what you have in mind, Mr. Obama

It has not been even 18 months since the Federal debt ceiling has been raised to just over $16 trillion. The limit has been breached and the government is kiting checks to keep paying its bills and resorting to some minor financial manipulation to keep in business. The time of playing these games, however, is coming to an end. Sometime in the mid-February, the government becomes like many Americans, having to chose which obligations to pay and not pay.

The debt ceiling has become a political focal point with extremely drastic consequences. It is a symbol of bloated government growth and an obstinate President who does not believe there is a spending problem in government. While all this goes on each and every day, the government spends about $ 4 billion more than it take in. Deficits have surpassed more than $1 trillion a year in the last 4 years. Even it debt ceiling is lifted by another trillion dollars it will barely last to the end of the year.

The ruling political parties have formed opposite views of the situation. Republicans-who have already acquiesced to a tax increase-believe there needs to be some spending cuts. Democrats reject any spending cuts and want more revenue.

The President says there needs to be a “balanced approach” to solve the problem but has not even hinted spending should be cut at all. In fact, I have to say, his rhetoric is quite plain, balanced means more revenue. Whenever a politician says balance or bipartisan, it really means do it my way.

There is no spending problem: Earth to Obama, Come in

Yesterday, I wrote about the debt limit. I posed the following question about the view of the President on spending cuts and the problems caused by the increasing of national debt. In part, it went:  

Liberals refuse to address the spending issue. Mr. Obama says he is not even going to discuss or negotiate the debt limit. Mr. Obama either believes the amount of debt is not a problem, is willing to take the risk that it will not hurt the country on his watch or does not care as long as the largesse of the government and a growing reliance on it continues. I do not know which one it is but any of them are feckless and dangerous policy.

We have the answer now. It comes from a conversation (if you can call it that) Mr. Obama and House Majority Leader Boehner had several weeks ago during the fiscal cliff negotiations.  To wit,

Mr. Boehner told the Wall Street Journal "At one point several weeks ago, "the President said to me, 'We don't have a spending problem.'"

Now that is a revelation and very telling. It demonstrates the philosophy and mindset of the President. It is also contra to almost all rational economic thinking and the statement rebukes Mr. Obama's own debt commission, which made clear spending is the driving force behind the nation's debt crisis.

Spending not a problem? Even with the latest round of tax increases, the federal deficit will be more than a trillion dollars this year—the fifth year in a row. The government borrows somewhere about 40 cents of every dollar it spends. The federal debt will increase to more than $17 trillion by the end of the year.

 It is hard to know how to react to such a statement of such, really, nonsense. It has not gotten much attention even though the polls show a vast majority of American would disagreee with it. It is disheartening and such an attitude portends more rancor to come not to mention econmic consequences.  I am not surprised but not much else to say on the issue. Now we know the answer. No wonder Republicans are preparing to go to the mattresses.

 

 

Where are the Spending cuts? Show me the Cuts!

The next political and legislation battle de jure in Washington will be over the debt limit. The debt limit is a statutory amount-currently around $16.1 trillion-of borrowing authority given to the Federal government. No new debt obligations above this amount are allowed. No more notes, bills or bonds can be issued.

As the amount of government debt increases each year, Congress has increased the limit. It is an historical fact the debt limit goes up, 10 times in the last 10 years. In the past, sometimes raising the limit was a routine and perfunctory increase and at other times, there was some opposition and political maneuvering.

Leaders need to take the Class again: Fiscal Cliff Grades

The review of the fiscal cliff continues. The grades on the substance and policy have been posted. Sadly, the results were meager and, in fact, almost abysmal given the opportunity. The best thing that can be said is panic and hysteria was adverted, if they were going to happen at all.

 

Now it is time to grade the participants. The major players, the public servants, our national leaders, and products of the best of the best the political system has to offer.

To summarize the events of the past week or so, Congress pass and the President signed into law measures that essentially keep the status quo. Government revenues will marginally go up due to an elevation of tax rates on taxpayers with net incomes over $400,000 and by eliminating the reduction of the employee two percent payroll tax. In additional, a number to subsidies were extended for business and for those that do not pay any taxes at all.

Federal spending will continue unabated. The Budget sequester was delayed. Federal debt will continue to increase. Debt ceiling has been hit. There is no budget in place as the government continues to operate on a Continuing Resolution

So, let look at the players.