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Economics & Research Blog

No Matter How You Slice It, It's Still Baloney

The Federal Reserve issued its regional business conditions report,

By Dr. Joe Webb
Published: April 15, 2009

The Federal Reserve issued its regional business conditions report, known as the Beige Book, and it did not contain anything we didn't know. As I mentioned in a recent column, this will be the year of things being “less worse,” or as the Fed puts it: “...overall economic activity contracted further or remained weak. However, five of the twelve Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.”

Earlier, there was the Consumer Price Index report. It claimed that inflation was -0.4% for the last year. We're about to get lulled into a false sense of security with all of the inflation reports. Last year was the bursting of the commodity bubble, which got to its bursting point in mid-year. This means the next few months will show stunning declines in inflation, and the Fed will have to be treated for exhaustion because they're tired from patting themselves on the back so much. While comparing prices to the same time as last year is the right way to calculate the inflation rate, you do have to look at other factors, too. Inflation for all of 2008 ended at +0.1%. Since December, these are the annualized inflation rates: CPI running @ +2.2% rate, transportation @ +8.8%, medical @ +4%.

It is claimed that +2.2% is within the Fed's target range. If +2.2% is acceptable, that means consumers will have one quarter less purchasing power than they have today in 10 years. Why can't 0% be in their target range, huh?

That's a reminder that the biggest losses of value for savings are taxation and inflation. Neither seem to be taken all that seriously by most people. Taxation seems like a mystery, and very few even have an idea of how to even start to make the adjustment for inflation.

Tax Freedom Day, the day when we get to keep our earnings, is tracked by The Tax Foundation, and it actually arrived on Monday, April 13, for the average American. That is, if you live in a state called “average.” If you're an Alaskan, Tax Freedom Day was March 23; if you're in Connecticut, you have two weeks to go.

There are two economic fallacies that I do my best to fight. The first one is that there is something called “fair” in economics. “Fair” is only what buyer and seller decide is mutually agreed upon for them to exchange things of value, usually one side with cash, and the other with a good or service. Beyond that, “fair” doesn't really exist. There's no crying in baseball, and there's no “fair” in economics.

The second one is that someone other than consumers pay business taxes. Businesses pass all of their taxes on in their prices, yes, even the employment taxes, their property taxes, just like any other cost they have. Consumers pay it because... there's no one else involved in the final transaction. The Center for Fiscal Accountability has published its “Tax Bites,” which shows how much of a selling price of various goods pays taxes. They tally, according to their site, “sin” taxes, telecommunications taxes, taxes on tourists, sales taxes, corporate income taxes, payroll taxes, property taxes, capital gains taxes, unemployment insurance taxes, workmen’s compensation taxes, and other payments businesses must make to federal, state and local governments. These are all costs that businesses pass on directly or indirectly in their prices.

These are the top items by the percentage that taxes represent of the final bottom-line price the consumer pays:

cigarettes: 86.7%

distilled spirits: 79.6%

car rentals: 60.6%

beer: 56.2%

domestic airfare: 55.0%

phone - landline: 51.8%

gasoline: 51.2%

hotel stays: 50.0%

phone - wireless: 46.4%

cable (video): 46.3%

firearms: 45.6%

meals: 44.8%

soda: 37.6%

The same group publishes a report calculating “Cost of Government” day. This is the day when “the average American worker has earned enough gross income to pay off his or her share of spending and regulatory burdens imposed by government on the federal, state and local levels.” Last year, it was mid-July. This year, it will be in August.

The Wall Street Journal reports that the US won't file an official complaint about China manipulating its currency. The funniest line in the article should have been part of our April Fool edition: “Wednesday's report indicates the administration believes no country is manipulating its currency.” What? If anyone should complain, it's China! All of those Treasuries they've been buying will erode in value due to inflation, and there is good reason to think it's more than a coincidence that things started to unravel worldwide when China gave into political pressure and stopped pegging their currency to the US dollar. But as far as no country manipulating its currency, we only have to look at this chart to see what country has done the most manipulating of all. Maybe that's why a complaint won't be filed.


Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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