Category Archives: Economics

Productivity growth

Productivity is a major issue in this economy and has been for a number of years.

4th quarter GDP just came out at .7% . I think Q3 as it was 4%.
There may be an inability to measure productivity growth with accuracy. I have not seen a study or paper on the effect of the increasing service and information sector and the shrinking manufacturing sector on productivity. It only makes sense that as jobs change from manufacturing to services there is a significant increase in productivity and that measuring this change is difficult.

Conflicts around the world

If you read the Economist, (which all of you should!), you would notice how many conflicts around the world there are that we could stick our nose into that never make it into our mainstream press. From Rhodesia to Nepal, we have ample opportunity to oust leaders, feed people and police the world. We choose only a very few.

BTW, the number one export of Somalia was uranium. We went there. Coincidence or Oliver Stone movie plot? You make the call.

Consumer confidence

Consumer confidence is a very important indicator of the economy. The uncertainty about Iraq is an issue that will probably have to be resolved before we see a recovery. We are going into a nesting mode and making our homes our sanctuary from that big old cruel world out there.

On the other hand isn’t it possible we have just all bought enough stuff for awhile?

Econ update

Busy week ahead in this increasing shrinking world of ours.  Monday is UN inspection reporting day followed by Tuesday, the State of the Union address by President Bush and the first day of the Fed Meeting.  Wednesday is the UN Security council meeting and the Fed announcement and Thursday we get trailing GDP.  Friday we take an aspirin and decide again what the heck is really going on! J

The World Economic Summit is going on in Davos, Switzerland.  Leaders there are preoccupied, as the rest of us are, with the situation in Iraq.  President Bush’s State of the Union address Tuesday night, the day after Hans Blix reports to the UN, may or may not be eventful.  The more secluded event is the closed door UN security council meeting Wednesday.  So as we near a war the experts might fret, but top finance ministers and business leaders at the World Economic Forum are showing surprisingly little concern over the soaring euro and tumbling dollar.  Policymakers appear to be assuming that the U.S. currency will regain its balance once market turmoil triggered by geopolitical uncertainty passes.

A rising Euro can crimp exports and disrupt business profits. The dollar certainly has taken a drubbing, falling for seven straight sessions on worries about Iraq. Since last June, it has tumbled 11 percent on a trade weighted basis . The euro, meanwhile, has surged, ending Friday at $1.0815, up 3 percent since Jan. 1 and a huge 25 percent over the past year.

At first blush, that would seem a boon for the European Central Bank, which aims to get inflation below 2 percent this year. The problem arises if the euro’s upward march continues.  A 20 percent appreciation would bring euro zone inflation to around zero, even tip it into deflation, which is very tough for central banks to stop.

The ECB did cut rates by 0.50 percentage points to 2.75 percent in December. But some economists say that is not enough.  The argument being that the strength of the euro has more than offset the easing of the European Central Bank. A further surge in the euro could be very damaging to the European economy.

Here at home, the Federal Reserve policymakers will probably hold interest rates steady when they meet this week, hoping war jitters now restraining the U.S. economy will give way to a healthy recovery.

While many economists think economic activity nearly ground to a halt in the final three months of last year, most believe the pause will prove temporary and that the recovery will regain momentum as the new year wears on.

Fed officials gather on Tuesday and Wednesday to discuss the outlook and plot interest rate policy. They are expected to announce their decision on rates and offer a brief summary of their economic views around 11:15 pst on Wednesday.

Confronting data that showed the economy slowed abruptly as summer turned to fall, the central bank slashed the benchmark federal funds rate by a sharp half-percentage point in early November to a fresh four-decade low of 1.25 percent, saying the move should help the economy through its “current soft spot.”

But the stretch of weakness has lingered and many economists think U.S. gross domestic product expanded at no better than a 1 percent annual rate in the fourth quarter. In fact, a few believe the economy may have contracted which would have meant a double dip recession.  Fourth-quarter GDP data do not come out until Thursday, the day after the rate-setting meeting but of course the Fed will have the data.

While economists say the dismal performance at the end of last year raised the odds the central bank could lower rates again, seemingly no one expects the Fed to cut rates this week.  We shall see.  I think I have a better handle on predicting the winner of the Superbowl and I won’t even bet on that!

Dividends and Taxes

The dividend tax cut is not a simple issue. But this is a great start on the discussion. I would like to add a couple of things.

The efficient use of free cash flow discussion framework should include an element of what type of company, basically growth vs income, is involved. I would suggest that if you are a gold mine that dividends are a superior use of capital assuming you can find any other gold mines to buy or areas to mine. If you are a growth company, such as a plasma television equipment part manufacturer, dividends don’t make much sense as the free cash flow can provide a superior return by investing in more equipment and plant space as the life cycle of the product matures. Of course with any life cycle, maturity sets in and cash flow becomes more predictable, ala Microsoft, and dividends become more rational. But again that is based on the type of company and their goals and their point in the life cycle of development.

Also regarding dividends, stock options are also an issue, aren’t they? Employees with lots of options don’t want to see dividends as they reduce the capital gain of the stock and hence the value of the option plus they don’t pay dividends on the option shares unless exercised. Can a case be made that this issue will reduce the potential “microsoft” millionaires of the future and therefore reduce the number of new ventures that are started? A real hit to Silicon Valley, no?

Regarding taxation of dividends, I am not a CPA but my understanding of the tax code is that short term capital gains (less that one year) are taxed at the marginal tax rate, not a maximum of 20%. So you would have to hold a stock for one year to get long term (20%) treatment. However you point is very valid that you don’t pay capital gains unless you sell whereas dividends are taxed yearly at your marginal rate. So if dividends are tax free, why wouldn’t someone buy the day before they are paid and sell the day after? Although somewhat risky, many have made lots of money doing this and the elimination of the tax would surely increase it.

An explanation of agency theory

Basically, there is a cost associated with having an agent working for a principal in that the agent will, even with the best intentions, not do it the same way as the principal would. This difference can produce minor costs in the case of an agent that keeps the principal in mind when making decisions or a major cost as we have seen with many CEO’s and others as they aren’t concerned with anyone except themselves. Essentially, it deals with the separation of ownership and control.

Moral hazard as an offshoot of Agency theory deals with the decision making of agent being more risky because the consequences have been shifted to third party which is advantageous to the risk taker and, more importantly, potentially disastrous to the party that has assumed the risk. We will get into this more when we deal with FDIC and bank depositor insurance.