Economy
World GDP Change Over The Last 500 Years
The graphic below shows the change in composition of World GDP over the last 500 years. The economy of China and India were much larger in the 16th,17th, 18th and 19th centuries than they are today.Both the economies started to shrink from the 1850s. However they are growing at an increasing pace with China’s GDP reaching 12% of global GDP in 2000 and India reaching 5%.
It is interesting to note that the U.S. economy grew dramatically from early 1800s thru 1950. As China takes a larger portion of the world’s economic growth, the US share of the global output may decline.
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Source: http://www.visualizingeconomics.com
Health Care Spending Comparison Across OECD Countries
Rising health spending is adding more pressure to government budgets according to a recent health data report by the OECD.
In all OECD countries health spending is rising faster than economic growth. The average ratio of health spending to GDP rose from 7.8% in 2000 to 9.0% in 2008. Growing health care costs with falling GDP growth have led to a sharp increase in the ratio of health spending to GDP in some countries such as Ireland and Spain. In Ireland it rose from 7.5% in 2007 to 8.7% in 2008 and in Spain it increased from 8.4% to 9.0%.
Health Expenditure as % of GDP
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Source: OECD
Note: The dark blue color in the bar denotes public expenditure on health and the light blue color denotes private expenditure
The total U.S. spending totaled 16.0% of GDP in 2008. Half of this was public spending primarily due to Medicare, Medicaid and other social benefit programs.
Health Expenditure per Capita
In terms of per capita health spending, the US spent $7,538 in 2008, well over double the $3,000 average of all OECD countries. The next biggest spenders were Norway and Switzerland. Both these countries spent much less than the U.S. per capita but still some 50% more than the OECD average.
The OECD report also noted:
“Governments of most OECD countries shoulder the lion’s share of healthcare costs. The share of government expenditure devoted to health increased in most countries, rising from an average of 12% in 1990 to an all-time high of 16% in 2008. Given the urgent need to reduce their budget deficits, many OECD governments will have to make difficult choices to sustain their healthcare systems: curb the growth of public spending on health, cut spending in other areas, or raise taxes.”
Growing use of medical technologies such as CT and MRI imaging are also contributing to rising health care costs. CT and MRI scanners are expensive to buy and operate. The per capita use of these devices in the U.S. is much higher than other OECD countries. This is primarily due to the practice of defensive treatment by doctors who fear of getting sued. However there are concerns that some of these imaging may not to be useful to the patients.
Unnecessary medical procedures using expensive hi-tech equipments is one of the major factors of soaring healthcare costs in the U.S. This important point is not addressed in the health care reform passed by the Obama administration. In fact the reform does not seem to achieve anything meaningful other than to require the currently uninsured millions of Americans to get insurance. The following excerpt from a news release proves that the administration is still out of touch with reality:
“President Barack Obama’s new health coverage for uninsured people with health problems won’t be cheap — monthly premiums as high as $900, administration officials said.
Prices will vary by state and type of coverage from a low of $140 a month to as much as $900, said Richard Popper, deputy director of a new insurance office at the federal Health and Human Services department. Officials provided details of the plan, which starts enrolling people Thursday.
The price range is so wide because premiums will be keyed to standard individual health insurance rates in each state, which can differ dramatically because of medical costs and the scope of coverage. Independent experts estimate premiums will average around $400 to $600 a month. Younger people will pay less.
“There are going to be meaningful premiums that are going to be required to stay in this plan … in the hundreds of dollars,” said Popper, with the Office of Consumer Information and Insurance Oversight.
Despite the cost, consumer advocates are urging uninsured people with health problems to sign up soon, because they cannot be turned away for medical reasons. Family members may be able to help with premiums.
The Pre-Existing Condition Insurance Plan will start taking applications Thursday in many states, the rest by the end of the month. Coverage will be available as early as August 1.”
With falling wages, high unemployment and rising cost of living it would be interesting to see how many of the uninsured are able to afford the premiums and sign up for this government-run insurance plan.
The Different Phases of a Bubble
I came across this interesting graph that shows the different phases of a bubble:
Source Video: http://www.youtube.com/user/ancientsong#p/u/18/PHo1bqIp71E
On a related note, Bloomberg BusinessWeek published an article on the real estate bubble in Vancouver, Canada.
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From the article:
“The Olympics are over, and the Village is for sale. The complex in Vancouver, British Columbia, that housed the athletes during the 2010 Winter Olympics has been converted into 1,100 luxury condos. About 450 have been pre-sold, and the sales of the remainder may well render a verdict on a mystery that looms over this city like Grouse Mountain: Did Canada prudently steer its way clear of the worst of the financial crisis only to be rewarded with a massive housing bubble of its own?
On a bright, warm Saturday in late June, couples and families wandered through the empty village, which has been renamed Millenium Water. It opened for public tours last month and draws about 100 people a day. Millenium Water is a city of the future, built with enviro-touches like green roofs and automatic shades that moderate the temperature inside the apartments. An 815-square-foot, one-bedroom apartment is on sale for C$879,000, which works out to C$1,078 per square foot, or $12 higher than the average price in Manhattan, according to The Corcoran Report. (A Canadian dollar is currently worth about U.S. 96 cents.)
Millenium Water isn’t in downtown Manhattan, of course. It’s not even in downtown Vancouver, which is across an inlet known as False Creek. It isn’t really even in a neighborhood; the nearest establishment is the sales office for another condo development. If all this is starting to sound a little irrationally exuberant, especially given the shaky international outlook, well, that’s Vancouver for you.”
The Vancouver real estate market is currently in the Mania Phase. It is not just Vancouver where prices have reached the bubble stage. Across Canada home prices have soared and continue to defy gravity. It remains to be seen how long the mania phase can last in Canada.
Lower Corporate Tax Payments Do Not Necessarily Benefit Shareholders
Japan’s corporate income tax rate of 40% is the highest among major developed countries according to the OECD. Surprisingly the U.S. has the next highest rate at 39%.
2010 Corporate Income Taxes of Select Countries:
Source: Kan Seeks Cuts in Japan’s 40% Corporate Tax Rate, The Wall Street Journal
The corporate rates in the Asian countries of Singapore and South Korea is much lower than the U.S. at 17% and 24% respectively.
The journal articled noted that “different rules on depreciation and other areas make the total tax burden generally lighter in the U.S., experts say.”
Experts are correct in this case. Most major U.S. corporations do not pay the top marginal rate of 39% in income taxes to Uncle Sam. In fact a few of them pay no taxes. General Electric (GE) is the most interesting example of a U.S. company when it comes to avoiding taxes. GE generated $10.3 in pretax income in 2009, but paid no taxes to the US government. In fact, it recorded a tax benefit of $1.1B for last year.GE’s tax return is the largest the IRS deals with each year running at almost 24,000 pages if printed out.
From an article in Forbes magazine titled “In Pictures: What The 25 Top U.S. Companies Pay In Taxes“, the top five tax paying companies were:
Wal-Mart - 2009 Tax Rate: 34.2%
Exxon Mobil - 2009 Tax Rate: 47.0%
Chevron - 2009 Tax Rate: 43.0%
Chevron - 2009 Tax Rate: N/A
ConocoPhillips - 2009 Tax Rate: 51%
Some companies also evade taxes legally by establishing foreign subsidiaries and using a strategy called “Transfer Pricing”. Tax economist Martin Sullivan believes that companies are keeping some $28 billion a year out of the clutches of the U.S. Treasury using this method.
Another article in BusinessWeek last year discussed tax payments by U.S. companies. From the article:
“FPL Group (FPL), owner of Florida Power & Light, understands the value of alternative energy. By setting up everything from 1,500 acres of solar electric systems in California to wind farms across the U.S., the Juno Beach (Fla.) utility has avoided the need to build 12 new power plants. And those investments create another green benefit: tax breaks. Over the past four years, FPL has paid just $88 million in taxes on earnings of nearly $7 billion. FPL spokeswoman Jackie Anderson says the company is merely taking advantage of incentives to develop renewable resources.”
What do U.S. companies do with excess cash ?
They simply hoard them at least in the current economy. According to a report in The Wall Street Journal earlier this month, U.S. “nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.”
Companies also do not pay the excess cash as higher dividend payouts to shareholders. In fact the dividend yield of the S&P 500 Index, which includes the largest 500 American companies, is about 2%.
A research study by Credit Suisse showed that U.S. companies had high dividend payouts from 1871 to 1945. The focus of companies during this period was on the payout ratio. After 1945 companies started to focus on managing the amount of dividends paid and they were also slow to increase dividends when earnings increased, thus reducing the payout ratio. The dividend payout ratio declined from about 70% till 1945 to about 50% from 1946 thru 2005.
Source: Credit Suisse, Quantitative Research -High Yield, Low Payout, August 2006
Hence it can be argued that many American companies with huge cash-piles can raise dividends but they chose not to. Instead these companies hope to use the cash for future expansion either by investing in new equipments, factories, etc (or) grow by acquiring other companies. In the past few decades, management of companies have also paid themselves lavishly before paying or raising dividends to shareholders. Even during the global financial crisis, some financial firms that were bailed out by Uncle Sam paid their executives huge bonuses and compensation from profits before resuming suspended dividend payments to shareholders.
Which is More Important: Job Security or Dividends?
When the property market crashed in the U.S., many experts argued that prices were 25% above trend. By mid-2008, property prices were down about 30% based on the Case-Shiller index. This meant that price correction was complete and the U.S. economy would go back to normal like it did eventually in Japan. However this did not happen.
One of the reasons for this dichotomy is that Japan has a very different kind of economy in terms of corporate governance. Japanese firms are much more stake-holder oriented whereas U.S. firms are shareholder oriented. This implies that Japanese companies care about their workers, suppliers and other stakeholders than just their shareholders. Hence Japanese firms have traditionally reacted very differently to shocks and crises than U.S. firms.
The evidence of this phenomenon is provided by the answer to the following survey question:
“What’s the prevalent view in your country? If times get bad, should firms maintain dividends and lay off workers or should firms cut dividends and keep stable employment?”
The chart below shows the answer to the above question.
The difference in answers between Japan, Germany, France,the U.S. and UK is very interesting. Japanese firms want to cut dividends and maintain employment. However it is the exact opposite in the U.S. and U.K. In these two countries shareholders of a firm take higher priority above everyone including workers. In Germany and France, firms prefer to maintain employment than pay dividends when faced with tough economic conditions.
Source: The Global Financial Crisis by Franklin Allen and Elena Carletti, Banco Central de Chile
The current unemployment rates in the five countries mentioned are:
Japan = 5.10% in April
Germany = 8.10% in April
France = 10.10% in March
USA = 9.50% in April
UK = 8.00% in March
U.S. Federal Redistribution of Income Continues to Climb
The U.S. has posted budget deficits year after year except for a brief period in the 1960s and between 1998 and 2001. One of the reasons for this shortfall is that the Federal government’s revenue is not keeping up with the rising expenditures. Among the expenditures, I believe the most important one to concentrate on is the federal handouts to individuals.
In economic terms, the handouts are called “current transfer payments”. These types of handouts include social security, welfare benefits such as medicare, medicaid, etc. Transfer payments can also be called, redistribution of income since it is the portion of government expenditure that is simply transferred to individuals without a requirement to provide anything in exchange. The current receipts represent the total Federal revenue such as income tax, payroll taxes, corporate income taxes, etc.
Chart 1 - Yearly US Budget Surplus/Deficit
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Chart 2: U.S. Current Receipts vs. Current Transfer Payments from 1920 to 2009
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Source: BEA NIPA Table 3.2
The chart above shows that in 2007, current receipts started to decline sharply. However the current transfer payments rose sharply due to the great recession forcing many people to seek benefits, rising medicare and medicaid costs, the extensions of unemployment benefits, etc. As millions of workers lost jobs government revenues declined due to the reduction in income taxes collected.
In 2008, the current receipts was $2,475 billion and the current transfer payments was $1,840 billion or 74% of revenue. This number jumped to a staggering 96% in 2009. In addition, the current receipts in 2009 fell to $2,226 billion from $2,475 billion in 2008. The sharp fall in revenue may continue for a few years due to stagnant income levels and high unemployment.
The creation of social security, medicare, and other income redistribution programs by the Feds, have accelerated government expenditures. For example, in 1929 transfer payments were just 22% and in 1950 it accounted for 31% of revenues. However in 1990, it was almost half of revenues at 49%. Last year it reached 96%.
Chart 3: U.S. Current Receipts vs. Current Transfer Payments from 1990 to 2009
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The chart above shows that since 1990, though the current revenue increased due to economic growth, federal handouts also increased steadily. When the dot com bubble burst there was a dip in the revenues but payments continued the onward march. If the revenues do not increase and transfer payments continue to climb then the budget deficit would widen dramatically. In April, the U.S. posted the 19th straight month of deficit at $82.69 billion deficit. The total deficit for this year is projected to $1.5 trillion on top of the $1.4 Trillion deficit last year. So it is imperative that the Obama administration stimulate economic growth leading to higher tax collections and implement sensible policies to reduce wasteful expenditures and limit soaring healthcare costs.
