Monday, February 21, 2011

The Recession Is Over For Some People...(Part 2)

     ...But it is going to last a long time for the rest of us. As I wrote on February 15th, “The conservative mantra that 'offering tax incentives and other perks to business will stimulate job recovery' is true, but the jobs will not be in the USA.” The tax incentives being offered today will exacerbate the problem in still another way.
     The major offering to business is allowing the manufacturer to deduct up to $500,000 of new equipment in the current tax year. In the past the cost of such equipment had to be spread over the life of the equipment. (In the interest of being “fair and balanced,” this tax break has been available for several years, although on a smaller scale).
     For example, suppose a manufacturer buys $500K worth of equipment that is estimated to last for 20 years. In the past he could deduct 1/20 of the cost each year for 20 years. If his tax rate was 35%, he would reduce his taxes by $8,750 each year. With accelerated depreciation he would save $175,000 the first year. And he can buy more equipment every year and save big money every year in taxes.
     So if a manufacturer can buy automated equipment— equipment which will replace humans on the production line— and save $166,250 in taxes, he will do so. In other words, the government is giving manufacturers tax incentives to eliminate jobs! Go figure.
     In my last blog I also told about a Massachusetts firm, Evergreen Solar, that received over $43M in state aid to open its new plant. After only three years the company is closing the plant and moving the 800 jobs to China.
     If you think that was an isolated case, check this headline from the January 25th Business Section of the local newspaper: Chinese Sales Drive GM's Comeback. The article goes on to say that “ 2010 GM sold more vehicles in China than in the U.S. for the first time.” That's 2.39M vehicles, roughly 136,000 more than in the U.S.
     It would be wonderful if GM had manufactured those vehicles in the U.S., but according to The Economic Populist, 1.03M of those vehicles were manufactured in China by Chinese owned companies in joint ventures with GM—Chinese companies using their own factories, their own manufacturing techniques and their own workers. Experts estimate that wages and benefits for Chinese workers amount to about 1/10 of their cost in the U.S.
     According to a May 18th, 2009 article in TIME, GM executives are planning to build their own factory in China in the next few years. I can understand that from a business standpoint, but does the government need to subsidize them?
     GM received $49.5B in government bailouts when they were facing bankruptcy. According to Senator Charles Grassley (R-Iowa), they have repaid about $23B, but the government still needs to receive $26.4B in order to recoup its entire investment.
     On February 15th the AP reported that GM plans to pay about $400M in bonuses to its workers. GM is reportedly sitting on $25B in cash. How about using some of that money to make a payment on their loan from the other 300 million citizens of the U.S.?
     The point of all this is to illustrate that government incentives do not necessarily create jobs, at least not in the U.S.
     Even more later.
     About 5 billion years ago, a small star on one of the outlying arms of the Milky Way Galaxy was ignited. We call it the Sun. The solar system, including our beautiful Earth, coalesced out of the surrounding stardust about 4.5+ billion years ago. At least for us, it was the Spirit's crowning achievement. We still get stardust as well as occasional other visitors (meteorites) from outer space.
     Matter Matters – The Spirit Runs Through It.

The book is available in paperback or on Kindle at Amazon.

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