Cryptocurrency outlook #5

Bitcoin Magazine: The Insurance Industry And Bitcoin

The article pertains to and refers to life insurance companies. It doesn't mention other kinds of insurance products, such as auto, homeowners, commercial property, and health, and therefore doesn't apply to them or much less so. The magnitude of interest rates affects the pricing of life insurance and annuities more so than the other products because the former are longer-term and without the ability of the insurer to adjust premiums after the contract is issued.

The following numbers illustrate the effect of interest rates on (pure) premiums for whole life insurance.  Here "pure" means they don't include non-mortality expenses or the probability of policy termination. (The premium amount buyers pay include these things.) For an issue age 40 or less the annual premium with the interest rate = 0.05% is more than 2x the annual premium with the interest rate = 5.0%. The ratio declines above age 40, but at age 60 is still about 1.4x times that for 0.5% interest than for 5.0% interest. For annuities the effect of lower interest rates on premiums is even more.

While such pure premiums are not what buyers pay, they are used in calculating reserves -- as required by statutory insurance laws -- for a life insurance company's in-force policies. Such reserves appear on the liability side of an insurer's balance sheet and thus have a real effect.

Kiplinger: How much Bitcoin should you own?

  

Coronavirus - finance

I wrote the following three days ago elsewhere:

Trump-Mnuchin, Sen. McConnell, and Sen. Schumer have all proposed "stimulus" plans in response to financial hardships due to the coronavirus.

Relying on the news stories I have seen, Trump-Mnuchin's plan is stupid in my opinion. It pays everybody and hence is far off-target. Why send $1,000 to Warren Buffett, Bill Gates, Jeff Bezos, the Clintons, or even me? Why send $1,000 to people who are retired, people who still have good paying jobs, or are wealthy? Sen. McConnell's plan is quite a bit better. His plan gives $1,200 to singles with 2018 adjusted gross income (AGI) < $75,000 and married filing jointly couples with 2018 AGI < $150,000. It gives $0 to singles with 2018 AGI > $99,000 and married filing jointly couples with 2018 AGI > $198,000. However, the link between 2018 AGI and current financial difficulty is weak. While Sen. Schumer's plan lacks detail, I believe his basic idea of expanding unemployment compensation is far more on-target -- people who were employed, but lost their jobs due to the coronavirus. Many of them were in low-paying jobs that were hit hard, e.g. at restaurants. His plan is probably slower to implement, but its aim is far better. 

Since then I have learned some more details about McConnell's proposal. For low income folks the amount could be less than $1,200 and as low as $600. Also, any amount received could result in a lower tax refund after 2020. Finally, the IRS lacks the ability to act quickly or accurately. It will not be able to send so many payments as quickly as the pols want, and will make plenty of mistakes in the process (link).

Bernie Sanders wants to outdo both Trump-Mnuchin and McConnell (link). The latter two proposals of $1,000 or $1,200 stipulate a one-time event, with maybe a repeat later, e.g. in a few months. Bernie Sanders wants to give everybody -- no income test -- $2,000 "each month for the duration of this pandemic!" I thought he hated billionaires. Why does he want to start handing Bill Gates, Warren Buffett, Jeff Bezos, Mike Bloomberg et al $2,000 per month? The dictator-wannabe fascist shows total ignorance about producing and market distribution of goods or services and the skills and efforts needed to run a business. He often condemns profit like it is the root of all evil, and fails to understand that his salary as a Senator and his book royalties are or nearly are also 100% profit (since the costs incurred to obtain them are zero or negligible).

Elon Musk has said he could convert part of his business to produce ventilators and masks to deal with the pandemic. He has talked with Medtronic (symbol MDT), a maker of medical devices about ventilators and respirators. Suppose Musk's business or Medtronic do achieve said production. (Medtronic has already increased its ventilator production by more than 40%, and is on track to more than double its capacity in response to demand triggered by COVID-19. Link.) If revenues minus costs < 0, would Bernie Sanders say that is morally acceptable, even heroic? However, if revenues minus costs > 0, would Sanders say it is evil? Suppose an anti-coronavirus drug or combination of drugs is found that saves millions of lives and results in a drug manufacturer getting millions of dollars in revenue. Ditto for a vaccine. A big part of costs would likely be unclear. Regardless, I pose the same questions to Bernie Sanders. 

World Bank's pandemic bonds

The World Bank issued the bonds in 2017. They mature in July, 2020. Their value has dropped sharply recently with the news about the coronavirus. Reuters.  Wall Street Journal (paywalled).

Medicare for All: Pushback against Warren

In my last post about Presidential candidate Elizabeth Warren's Medicare for All plan (better, trial balloon) I wrote that Warren assumes healthcare providers will be reimbursed only 110% of Medicare rates. She says nothing about resulting healthcare facilities closing or healthcare job losses.

Healthcare providers, especially hospitals and doctors, whose revenues Warren wants to slash, have since responded as reported here. Medicare pays providers much less than private insurance does. The difference is especially large at hospitals, where an analysis by Rand Health Care found that private insurers pay more than twice as much on average for similar care. Medicare's (and Medicaid's) low payment rates have forced higher payments onto private insurers for decades.

Warren talks as if slashing revenues would only be superficial, like the 2 million private insurance administrative job losses she flippantly admitted. In their imaginative rhetoric, politicians write a law, snap their fingers, and reality magically changes as they intend and no way else. The providers know better. Lower revenues to providers would not merely reduce the pay of "the rich" and pare "unnecessary" work like Warren (and Sanders) want voters to believe. Lower revenues would affect middle and lower income jobs and how much providers can afford for supplies, equipment, real estate, innovation, etc. Some healthcare facilities would be forced to close.

The article quotes demagogue Bernie Sanders: "People don't like their private insurance companies. They like their doctors and hospitals. We will substantially lower the cost of health care in this country because we will stop the greed of the insurance companies and the drug companies."

Contra Sanders, millions of people, even if not fond of insurance companies, much appreciate and demand the healthcare that the insurers pay for. Nevertheless and anti-freedom, both Warren and Sanders want to eliminate such insurance for 160 million or so people! Also note that Sanders' second sentence fits his reality defying assumption that government can magically change reality as he intends and no way else.

The final paragraph quotes Dr. Stephen Klasko: "Warren saying everyone has to take a hit is probably the right thing." Huh? Warren says that her plan would not take one cent from the middle class.

Medicare for All: Warren's Chicanery

Presidential candidate Elizabeth Warren was sharply criticized by other Democrats for not saying how much taxes would increase to pay for her Medicare for All plan. She finally gave a response (link). It includes plenty of chicanery.

The Associated Press, NY Times, and Los Angeles Times all report her Medicare for All would cost $20.5 trillion more for a decade. Of course, that's her number, and politicians excel in lowballing costs and slight of hand (Blahous). For example, private insurance plans reimburse providers far higher than Medicare does, but Warren assumes they will be reimbursed only 110% of Medicare rates. She says nothing about resulting healthcare facilities closing or job losses.

The first version of the AP article (since updated) gave revenue numbers that summed to $20.5 trillion to pay for it.  However, since Warren has already tagged some of the revenues to pay for climate change, student debt relief, bigger Social Security benefits, etc., the numbers cannot sum to all of the additional government spending she wants.

The $6.1 trillion "savings" she subtracted in arriving at $20.5 trillion is phony. She assumed it's redirected to the federal government from what state and local governments now spend on Medicaid, the Children’s Health Insurance Program, and employer contributions. Huh? The federal government will take the money, and the beneficiaries will get equal or better under Medicare for All. That's not savings; it's slight of hand, evoking revenue and obliterating transfer of cost. Blahous also noticed it. Donald Berwick, whose article I addressed here, fabricated this slight of hand for Liz (link).

Also, $1.4 trillion of it made no sense. The alleged source is more tax revenue from people not having to pay "private health insurance's premiums, deductibles and co-pays."  Sorry, Liz, and contra Blahous, not having to pay those things will not result in higher taxable income and taxes for the vast majority of people. They don't itemize and take medical deductions for income taxes, and health insurance premiums paid by employees are not deductible anyway.

By the way, isn't it amazing that eliminating co-pays and deductibles and handing out new "free insurance" cards to millions of Americans will not increase demand? Yet Liz says nothing about rising demand increasing healthcare costs.

Liz assumes the federal government will extract $8.8 trillion from employers via taxes what they would otherwise spend on private insurance for their employees. Bernie Sanders assumes only $3.9 trillion. She assumes the employers will pay 98% of what they were paying versus Sanders' 75%, but that falls far short of explaining $8.8 trillion versus $3.9 trillion.  Does she assume extracting taxes from state and local governments, public school systems, and non-profits, all of whom are employers that pay zero taxes? Not surprisingly, Liz makes an exception for unions. To the supporters go the spoils.

Liz would restore the corporate income tax rate to 35%. In her fantasy world this will not retard economic growth.

From the AP article: "We can generate almost half of what we need to cover Medicare for All just by asking employers to pay slightly less than what they are projected to pay today, and through existing taxes," Warren wrote in a 20-page online post detailing her program.

Show a little honesty, Liz. You will not ask them. You want the government to coerce them. Is that Liz's newspeak -- asking includes coercing?

I have two more questions for Liz, like ones I had for Bernie Sanders (link):

Q1: Many employers that are nonprofits, state and local governments, and public school systems provide health insurance for their employees. Does Liz advocate the same healthcare tax on them that she does on private employers and eliminating the health insurance such employers provide for their employees? Why should these employees have anything better than private sector employees?

Q2: Would the current healthcare plan for federal employees and retirees (Federal Employees Health Benefits Program) be eliminated? I much doubt it. Special and superior privileges for government employees is the usual for authoritarians like Liz. But if not, why not? Why should federal employees have anything better than private sector employees?

Medicare for All: Profligate Sanders

This article at The Hill reports on an interview of Bernie Sanders by CNBC’s John Harwood. Harwood asks Sanders about how to pay for his Medicare for All plan. Sanders responds: "You're asking me to come up with an exact detailed plan of how every American — how much you're going to pay more in taxes, how much I'm going to pay. I don't think I have to do that right now."

No, evader Sanders. The article makes it very clear that Harwood asked about aggregate additional government spending and taxes for Medicare for All. This Sanders web-page calls for additional revenues that total about $16 trillion over 10 years. However, $4.2 trillion of that is from assuming employers will pay more taxes because they won’t be deducting the cost of health insurance for their employees. Does Sanders intend that the $3.9 trillion premium/tax Sanders wants to impose on them be, unlike wages or health insurance premiums now or FICA taxes (paid to Social Security and Medicare), will not be a tax-deductible expense? It also totally ignores that employers could easily spend the “savings” on other things like hiring more employees, buying supplies, buying new equipment, etc. Thus at least $4.2 trillion of Sanders’ alleged $16 trillion is highly spurious. So Sanders’ plan is for the government to spend $34-36 trillion more on healthcare, as estimated by the left-leaning Urban Institute, and only collect $12 trillion in taxes.

The $34-36 trillion does not even include all other government spending BS wants – for climate change, infrastructure, student debt relief, more subsidies, bigger Social Security benefits, etc.

Of course, this is no problem for BS. Despite the lip service he gives to government deficits and debt – when it is convenient to criticize his political opponents – he doesn’t care an iota about government deficits or debt. He regards any government spending he approves of as a heavenly gift, and in Sanders’ newspeak justice includes extortion.

Another bubble and collapse

Taxi medallions in New York City rose sharply in price and eager but ignorant buyers borrowed money to pay the price. They couldn't afford to repay the loans and medallion prices fell. As the author of two stories (links follow) from the New York Times notes, it was similar to the mortgage and housing bubble and collapse during the previous decade.

How Reckless Loans Devastated a Generation of Taxi Drivers
As Drivers Were Trapped in Loans, Top Officials Counted the Money

The first focuses on the medallion buyers, the second on the lenders and regulators. Two quotes from the second one:
- "banks were increasing profits by steering cabbies into risky loans"
- "a niche banking system had grown up around the taxi industry, and at its center were about half a dozen nonprofit credit unions that specialized in medallion loans"

It's easy enough to understand the lenders were doing well before the loans went bad. But what happened to the banks' profitability after the loans went bad? Is that not newsworthy? Maybe that story fails to satisfy their motto: "All the News That's Fit to Print." 😉

There is plenty of government behaving badly in the story. Again the regulators were "asleep at the wheel." Regulation often isn't the cure that its advocates portray it to be. Also, the city government took in a lot of money selling the medallions.

"History does not repeat itself, but it rhymes." -- Mark Twain, allegedly.

Fannie and Freddie trying to make another housing bubble?

From The Wall Street Journal (link with pay wall) May 13: Fannie and Freddie Back More Mortgages of Those Deeply in Debt. The following quoted text is from the article.

"An increasing number of loans are going to borrowers with debt-to-income ratios of 43% or higher."

"Almost 30% of loans that mortgage giants Fannie Mae and Freddie Mac packaged into bonds last year went to home buyers whose total debt payments amounted to more than 43% of their incomes, according to an analysis by industry research group Inside Mortgage Finance. The share has nearly doubled since 2015."

"Some say cheap, federally backed financing has made credit available for millions of borrowers who otherwise might not have had a shot at homeownership. Others say that more-indebted borrowers are riskier, and that their purchases may be accentuating a rise in home prices that in many areas has outstripped median incomes."

Of course, there is more to judging default risk than a simple rule like total debt payments amounting to more than 43% of income. (It is still a worthy metric.) There are credit scores and what other cash needs and resources the borrower has. There is the purpose of the loan -- first time buyer, refinance, and refinance with cash out. Empirical studies show different default/foreclosure rates among them. (The three are ordered low to high.) Before the housing crisis that began in the 2000s, the debt to income limit (DTI) in practice for conventional fixed-rate loans was circa 35%. But I disagree with the first side. A lower DTI does not bar people from a shot at home-ownership. It only requires they buy a cheaper house they can better afford!

Of course, if defaults ensue, it won't be the Fannie and Freddie rule-makers who suffer the financial consequences of default. It will be the borrower, who is owed, and millions of others. I don't object to a private lender making riskier loans, but government support of it is “a horse of a different color.”

Federal deficits rising

A Wall Street Journal article reports that US federal deficits are rising.

Treasury yields are also rising, some investors think, in part because the supply of government bonds hitting financial markets is on the rise as budget deficits rise as a result of the Trump administration’s recent $1.5 trillion tax cut.

A group of private banks that advise the Treasury estimated the Treasury would need to borrow on net $955 billion in the fiscal year that ends Sep. 30, up substantially from $519 billion the previous fiscal year.

The article does not mention withholding for federal taxes, but I suspect that lower withholding, already implemented, is a significant contributor to the rising deficits. Link.

Like most politicians, President Trump doesn't care a whit about deficits. That was clear during his campaign and reinforced since then. Like most politicians, Trump criticized his political opponents about deficits and the debt, but that is as far as it went. I was all in favor of cutting the corporate tax rate, but not personal tax rates. (Income tax revenues are about 80% personal and 20% corporate.) I recognize that cutting corporate taxes without cutting personal tax rates would probably not have been politically feasible. However, the personal tax rate cuts could have been smaller and more offset by reducing or eliminating tax breaks. The timing for them was bad considering the economic situation.

Financialization #2

Orhangazi's book gives three approaches of explaining financialization.
1. The long-waves approach is a historicist one. According to it, each long cycle of capitalism consists of two segments: an increase in material production followed by a crisis due to over-accumulation and a financial expansion cycle.
2. The neoliberal approach stresses how the neoliberal philosophy -- strong private property rights, free markets, and free trade -- structures governmental institutions and regulation, which in turn help shape the business environment. It encourages shorter time horizons with greater attention to the interests of investors and creditors. Palley, the author of Financialization and very critical of neoliberalism,  is not mentioned.
3. The governance approach focuses on the changing relationship between financial markets and non-financial corporations. It has this in common with #2, but focuses more on the particular interests of investors, creditors, and managers.

I find the the third the most convincing, but even it doesn't include any of the empirical factors I gave in my Amazon review of Palley's book.

The first two approaches are favored by Marxists and /or Post-Keynesians.

The second approach used a new term to me -- coupon pool capitalism, described as follows. Capital is often seen as merely an intermediary between savings of household and production firms. Coupon pool capitalism says capital is not limited to an intermediary role. It also regulates the behavior of firms and households.

Financialization #1

A point I made in my review of Financialization (Mar 11) was as follows: "In the latest 40 years or so, transaction costs for trading stocks and other securities fell dramatically. That plus the number of individuals doing transactions rising due to 401(k) plans and IRAs has raised the volume of trading. The rise in the volume of trading has raised the number of people employed in the infrastructure for trading, which is part of the financial sector."

I'm reading another book -- Financialization and the US Economy by Orhangazi. Unlike Financialization, the author isn't so biased and presents some data. The average daily volume of shares traded on the New York Stock Exchange rose from about 19 million in 1975 to 1,602 million in 2005. That's about 84 times.

Financial sector employment as a percent of total employment rose from around 3% in the 1950's to more than 5% in the mid-1980's, but fell to about 4.7% by 2006. It was even lower around 2000-01 while the stock market dropped sharply and many brokers were laid off.

Review of Financialization

My book review of Financialization is here.

In China, Trump-Style Infrastructure Partnerships Are Used to Hide Debt

The title is the title of this Wall Street Journal article dated Dec. 6. The link may allow the reader to see only a little of the article online, but some excerpts follow.

"The 400-foot JinQing Harbor Bridge under construction in this small seaside city [Wenling, China] is being financed not by bank loans or bonds but by a Chinese twist on the public-private partnerships that the president-elect has proposed to fund infrastructure projects in the U.S.

The city, like many in China, faces budget constraints after years of expansion amid warnings from central authorities that debt is already too high. So to pay for the $1.2 billion highway project that includes the new bridge, Wenling’s government teamed up with Bank of China Ltd. to create an “industrial fund” that pulls in money from ordinary investors.

Ultimately, the city is on the hook to pay back the money with a preset return. Critics of the structure say it is merely a way of disguising debt to pile more obligations on already straining government entities."
..............

“We’re seeing continued proliferation of off-balance-sheet channels to help banks extend and mask credit,” said Jack Yuan, a Shanghai-based analyst at Fitch Ratings. “Much of this is going to infrastructure and other local government projects, sometimes in the guise of funding for public-private partnerships.”

End excerpts.

This doesn't exactly parallel what I wrote in Pied Piper Finance? on Dec. 1, but it is very close. I note two minor differences. The Bank of China is government-owned, whereas the banks in my scenario are privately owned. The source of money is "industrial funds" rather than loans. A major likeness is that a big part of the money is not recognized as official government debt. In other words, it's "off-balance-sheet" like the WSJ article says.

Investment Or Durable Good? #3

There are some business expenses that are clearly investment expenses, e.g. all the parts and labor that go into an auto-maker producing a car or truck. When the car or truck is sold, there will be revenues. Some other expenses aren’t so clearly linked to revenues, so they might be regarded as for durable goods or services or even non-durable goods or services. Consider accounting. Paying for an accountant is an ordinary, necessary business expense, except perhaps for very small ones, but it is not a revenue maker for the firm. (It is a revenue maker for the accountant who is paid.)

A similar sort of analysis holds for claim adjusters for insurance companies and lawyers hired by many businesses. They typically don’t get the company revenues, but using them may indirectly boost the company’s profit (or reduce losses).

What about education? If somebody pays the expenses to attend a technical school or college for an education tailored for a particular kind of job after graduating, that is investment spending. If the parents of such person, the student, pays the expenses instead, I think it is still investment spending.

When parents pay for the education of their children for grades K-12, that is paying for a durable good. The same seems to apply in some other cases, e.g. pursuing a college liberal arts degree with a very unspecific career goal. That would especially be the case of a trust fund child who wants to go into the Peace Corps and do even more volunteer work after that. In other cases it could be a mix.

What about labor? If I rake all the leaves in my yard, that is a consumer good. Most people with an opinion would probably say it was non-durable, since it will need to be done again in about 12 months. That doesn’t change if a pay somebody else to rake all my leaves. However, if I hire somebody to do it, there is income to the yard guy. Most of his income for doing so is for labor, but he does a little investment spending or recouping prior investment spending – the cost of the gasoline he uses in his leaf blower and a little of the cost of the tools he uses.

The Golden Triangle-Yokohama Deal

Sean Hannity talked with Paul Ryan on Fox News. Ryan talked about public-private partnerships to rebuild infrastructure. Link. The Golden Triangle and Joe Max Higgins were mentioned.

Part of the Sunday, December 4, 2016 CBS's 60 Minutes show was about The Golden Triangle and Higgins. Link. Higgins has worked hard to bring manufacturing jobs to Mississippi, which lost a lot of manufacturing jobs over the past few decades.

There is more detail about what has been done here, from which I quote.

To win the Yokohama tire plant Joe Max Higgins "installed water and sewer systems on the proposed site for the plant, and he secured $30 million from the state for a new access road so trucks could reach the factory."

That doesn't sound like public-private funding to me.

"Yokohama agreed to build the $300 million plant in the Golden Triangle. Higgins secured about $100 million in incentives and an estimated $200 million in tax breaks from the state of Mississippi and the counties that make up the Golden Triangle."

The incentives and tax breaks are worth as much as the cost of building the plant. Is that crony capitalism? The devil may be in the details. The plant is expected to bring 2,000 jobs. Assume a generous $100,000 wages per job, a figure given for one worker in the 60 Minutes show. State income tax = $4,660 for single and $4,470 for married. I'll use $4,565. 2,000 x $4,565 = $9.13 million. 200/9.13 = 21.9, the number of years to offset the $200 million in tax breaks. (A lower average wage would lead to more years.) That doesn't include the $30 million for a road, whatever the water and sewer system cost, or $100 million in incentives. Hmm, that suggests crony capitalism to me.

Of course, the people who get those jobs are going to be very appreciative. But it doesn’t sound to me so great for the rest of the people of Mississippi.

Milton Friedman wisely observed that we spend our own money on ourselves very carefully. We spend other people’s money on ourselves less carefully. But the least carefully spent money is other people’s money on other people.

The Carrier Deal

President-elect Trump’s claiming to save 1,100 jobs at Carrier in Indiana was all over the news. A closer look says that it isn’t that many. Of course, Trump tried not to say anything about Carrier’s tax break.

A Wall Street Journal article says the number of jobs saved was 700. “The Indiana governor was offering $7 million over 10 years to encourage the company to keep in the state roughly one-third of the 2,100 jobs it planned to ship to Mexico” (link). 

A Chicago Tribune article says the number of jobs saved was 800. “Carrier, he said, had agreed to preserve 800 production jobs in Indiana. (Carrier confirmed that number.)” Link. 

Does this tax break make sense for Indiana? I will use the Chicago Tribune’s number of 800 jobs.

Assume $50,000 income per worker. That's very close to the that of the Carrier workers. State income tax =$1,617 = 3.23% for single, $1,584 = 3.17% for married. I’ll round the midpoint. 800*$1,600*10 = $12,800,000.

So at first glance Indiana gains about $5.8 (=12.8 - 7) million in tax revenue. (700 jobs implies a $4.2 million gain.) However, this assumes the 800 workers would otherwise vanish from Indiana's workforce such as being unemployed or moving out-of-state. Therefore, it is clearly an unrealistic assumption. If that were true of only 200 jobs, Indiana has a net loss of $3.8 million (= 200*1,600*10*10^(-6) – 7.0). Indeed, if that were true up to 437.5 (=(7*10^6)/(1600*10) jobs, Indiana has a net loss.

One thing that could justify the state government's decision -- one I didn't think of when I first posted this -- is unemployment benefits that Indiana could pay if these 800 workers were laid off. $7,000,000/800 =  $8,750 per worker. A few months unemployment benefits could cost the state  government that much. Beyond that I can only guess. Also, how much such benefits might be (hypothetically) could be diminished by severance benefits from Carrier.

Regarding Carrier’s decision its parent, United Technologies (symbol UTX) is relevant. UTX is a huge defense contractor. Perhaps the high-level executives at UTX considered saving those jobs in Indiana – rather than saving costs by having the work done in Mexico, estimated at $65 million – creates good will that will pay off when UTX deals with people in the Trump administration regarding defense contracts in the future. $65 million is not a lot for UTX; 2015 revenues were $56 billion and net income was $7.6 billion. Of course, it's a good deal to those who keep their jobs. Nevertheless, prima facie, it doesn’t look like a good deal for the Indiana state government and hence for the people of Indiana in general.

Investment Or Durable Good? #2

In this post I will apply the concepts in #1 to some other examples where their application isn’t as clear or is mixed.

What about airports? “The vast majority of airport revenues come from fees paid by passengers using the airport, landing fees and space rental fees paid by airlines, parking charges and sales of food and goods at the airport. Though not well understood by many Americans, commercial airports receive almost no taxpayer-funded support from state or local sources. Federal grants that help pay for airport construction projects come from a portion of the travel taxes paid when you buy an airline ticket or ship a package and fuel taxes paid by general aviation” (link).

So to the extent there is no taxpayer-funded support, building an airport is investment spending. Ditto to federal grant money which is recouped via the taxes as described.

What about housing? Next consider somebody who buys a duplex, half to live in and half to rent out. It is half durable consumer good and half investment by the meanings in #1.

The reader may have thought by now that my meanings are confusing, since it can make the identical entity a consumer good or investment good. That is true, since the focus is not on the physical nature of the entity, but on the purchaser’s intention or use. For example, a car dealer buys a car in order to sell it at the dealership. The car is an investment good. For the person who buys the car from the dealer, it is probably a durable consumer good. On the other hand, if the person buys it to use it half the time as an Uber driver, it’s half investment good and half durable consumer good. It’s similar for food. Food purchased by a restaurant to prepare and fix for its customers is an investment good. The same food purchased to take home to eat is a consumer good.

Pied Piper Finance?

Assume a government wants to do a big infrastructure project – resurfacing a major highway and repairing bridges along the route. This is not a toll road and that will not change. The government finds a contractor who will do the work. However, the government does not want to pay all the cost upfront. Therefore the government’s overseer of the project – call him “pied piper” -- finds a private investor (PI), who will borrow a large part, say 85%, of the money to cover the construction cost. PI will put up the remaining 15%. The pied piper promises to pay PI enough over several years so that PI can pay back the loan, plus some more. How much more might depend on meeting deadlines and how much actual construction costs turn out to be compared to the amount budgeted. If construction is done in less time and/or costs come under budget, PI will receive more from the government. If construction is done in more time than expected and/or there are cost overruns, PI will receive less from the government. In other words, incentives are attached to PI’s 15% equity stake.

Since the government doesn’t borrow – PI does that – the project will not increase the government’s debt or any deficit it has initially, under current cash-based public accounting practice. However, it probably will over time when the payments to PI come due, whenever the government does not have enough cash on hand at the time to make said payments.

This is off-budget treatment by the government. It is what the federal government does already regarding Social Security and Medicare. It is obligated to make payments to beneficiaries of these programs well into the future in excess of incoming revenue. But there is no corresponding debt for the excess of future outgo over future FICA tax revenues on a federal government balance sheet. The federal government doesn’t even publish a balance sheet. The only item that the government prominently presents that is a balance sheet component is the national debt. Cash deficits for the programs become debt as they materialize.

Is the scenario described above what Mr. Trump has in mind when this webpage says his infrastructure plan will be deficit-neutral? (This document by two Trump advisers had more detail.) Of course, it will be deficit-neutral early on when PI puts up the money, borrowing 85% of it. But when the government payments to PI commence, I will bet that it won’t remain deficit-neutral. The government will likely issue more Treasury debt to offset shortfalls, and that debt will be added to the national debt, which is now about $20 trillion. Depending on how the pied piper’s deal with PI is structured, those payments may not start coming due, and some may not be due anyway, until after Trump no longer occupies the oval office. Then they won’t be “his debts”; they will be the next president’s … and ours.

Or maybe much of the $1 trillion infrastructure plan would be pushed onto state and local governments. They already pay for a lot of infrastructure and get earmarked revenues to do so, e.g. fuel taxes for roads and bridges. Whatever is so pushed would be off-budget for the federal government. It might even be done selectively with strings attached. The state or local government is told it must contribute some of the money, e.g. raising it by issuing bonds. If they don’t, then they get no federal money.

Investment Or Durable Good? #1

I will start with the meaning of some terms.

Investing - The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. (Investopedia).  

I take "profit" here in a monetary sense, not an amorphous one that might include, for example, somebody profits by doing more physical exercise or buying dentures.

Investment spending – spending which is part of an investment activity

Consumer good – something purchased (or otherwise obtained), but not an investment. There is no intent to bring about revenue, sales proceeds, or money profits.

Following common usage, consumer goods may be durable or nondurable. Investment spending may be for durable or nondurable goods. Ditto for consumer spending. (Here is the topic on Wikipedia). 

Some people, like here, distinguish between industrial goods and consumer goods. I won’t use the former term. “Investment goods” will suffice in lieu of it and puts more emphasis on the intention to produce future revenue or sales proceeds or money profits.

Easy examples of an investment are purchasing stocks or bonds. A home builder laying out money to build a house for future sale is an investment and all the money he spends to do is investment spending.

Part of what inspired this post is current politics – proposals for government investing in infrastructure, e.g. repairing roads and bridges or building new ones. First consider a new toll road. A hypothetical private investor builds a road expecting to recoup the amount of money used to build it and make a profit from collecting future tolls and maybe rents from gas stations and restaurants at service plazas. Suppose instead a government did this, but future expected revenues amount to only half of the upfront cost. Then by the above meanings the cost of the new road is half investment and half purchase of a durable good.

Next suppose a government spends to repave (resurface) an existing road or build a new non-toll road. That is not an investment by the above meaning. It is far more like buying a consumer durable good such as a house to live in, or a furnace, or water heater, and so forth. In the repaving case, it's akin to spending for a new roof on your residence. 

Therefore, when politicians and others talk about government investing in infrastructure, it is loose talk by the above meaning. In some cases or to some extent, it is investing. Otherwise, it is spending on a durable good.  

Pied Piper Donald Trump

Since Donald Trump won the November 8 election, some of his proposals have gotten more attention. One such proposal is about the country's infrastructure -- highways, bridges, airports, water and sewer systems, etc. One can find several articles/comments about this proposal by searching Google News. Even though Democrats believe there is a need for improving infrastructure, they don't like Trump's proposal. 

One such article is in the Wall Street Journal here. Online subscribers can read the whole article at the link. Others who want to do so will need to find another way, e.g. a library. The ones I have seen have very little detail about his plan. An exception is this document written by two Trump advisers about a month ago. 

Trump’s infrastructure plan strikes me as another half-baked idea from the pied piper Donald Trump. In my view it has a big enough hole to drive an Abrams tank through it. Whence the revenues for the hypothetical private investor (PI)?

Said document says, “For infrastructure construction to be financeable privately, it needs a revenue stream from which to pay operating costs, the interest and principal on the debt, and the dividends on the equity.” Again, whence the revenues for the hypothetical PI? The article offers no answer I can see. 

The article assumes that for every $1,000 of an infrastructure project the PI will make an equity investment of $167 and it will borrow $833. If borrowed at 4.5% for 20 years like the article says, the debt service will be $37.5 each year for interest plus $833 in 20 years.  In addition there are all the construction costs for labor and materials, which I will assume is $1,000 to keep it simple. So aggregate cost, simply speaking, is $1,000 + 20*$37.5 + $833 = $2,583. 

The only “revenue” in the proposal for PI is the 82% tax credit, which amounts to a mere $137 (=0.82*$167).  But this could be realized only if PI has taxes due as the result of other operations. Regarded as an isolated business, the revenue would be $0! That’s unless Trump plans for more handouts to crony capitalists.

I leave it to those under the spell of the pied piper, or anybody else, to tell me whence the revenues in excess of $2,583 to cover the $2,583 of costs identified above plus whatever the target profit is. (A 9% dividend on the $167 equity implies a target profit of $300, i.e, 0.09*$167*20.) How much of that revenue comes from the US Treasury in the pied piper's plan? Does he plan to siphon off gasoline and diesel tax revenues, toll revenues, heavy vehicle use fees that truckers pay, etc. that the federal and state governments receive now and have for decades? Are there going to be lots of new tolls on many roads and bridges that have none now and those go to PI?

The idiom "PI in the sky" seems fitting. 😊