Saturday, March 21, 2009

Tax on Bonus- A perfect disaster in the wings

The frantic passage of the Populist Tax "The Bonus Act" was a new low in the US government's response to this crisis. It just amazes me and confirms to me how clueless are the politicians, and whenever we throw politicians at a problem, this is what you get. Take any country for that matter.It shows just how likely we are to doom ourselves to a decade or more of misery--by choking our markets, closing our borders, turning our banks into tools of social policy, and wrecking what's left of our economy.

Yes I am outraged by AIG people giving bonus to employees, but never in my wild dream would I have thought that congress would act in such a childish way. In the first place they don't do a good job of policing it properly and then to gain some brownie points with the voters ( please remember elections are due next year) they pass this ridiculous bill.

If the "TARP bonus" bill the House passed yesterday becomes law, any of the hundreds of thousands of people who work for Citigroup, Bank of America, AIG, and nine other major US corporations will have to fork over 90 cents of every bonus dollar that puts their household income over $250,000.

That's household income, not individual income. If you're married and filing singly, you'll have to surrender anything over $125,000. Indefinitely.

Is $250,000 per household a lot of money? Sure. But it's not a lot of money for two moderately successful corporate executives. Or a corporate secretary married to a lawyer. (If you're a $40,000 a year telemarketer at a TARP company married to a $210,000 doctor, any bonus will be taxed). So this tax will be felt by a lot more than the handful of execs at AIG and Merrill who ran off with several million dollars apiece.

Believe it or not, hidden inside these companies are thousands of decent, competent people whose households bring in more than $250,000 a year. Many of these folks had NOTHING to do with the gambling addiction that bankrupted their firms. Many of them still have a choice where to work. And now that they've learned that their family's pay will be capped at $250,000 indefinitely, many of them will quickly decide that now is a good time to pursue their careers

To begin with we gave TARP money to these companies so we can bolster their balance sheet and stabilize the market and then we do this. I am sure Banks will stand in a line to return the TARP money because we are not leaving them any option, how do they run a business when good people will not work for a company where the pay is restricted.Remember the saying 'Throw Peanuts and you will only get Monkeys".

The real lesson here, unfortunately, is that it's a disaster for the government to run private companies.

Now just imagine health Insurance also run by the government.

Let's not pretend to be a socialist economy.. we are bad at that.

Your thoughts...

Tuesday, March 17, 2009

US is still a power to reckon with

As the world is currently debating what needs to happen to the economy in the G20 summit in Britain, lot of people have been questioning whether US is still a leader in the world economy. the distinction between emerging markets and developed markets have evaporated, in fact the risk premiums are coming closer, the questions people are asking is if a developed economy with so much transparency can have these problems, what can be said about economies like China,India etc which are still very opaque.

The five biggest investment banks in the world i.e Lehman, Bear Sterns have vanished, the 2 biggest mortgage companies namely Freddie Mac and Fannie Mae are under government support. The biggest bank Citibank, is depending on the government largess to survive. The biggest auto companies GM, Chrysler,Ford are at the mercy of the govt to survive.

How did these happen in a developed economy?

But before we pass any judgement, I feel that even though there are problems with US Capitalism, it still is the best we have.

The most vocal critics of US capitalism are sinking too and fast, For example look at Venezuela,Bolivia,Ecuador,Russia,Iran. For all their socialist rhetoric, they are all practically bankrupt states. One IMF estimates talks about Venezuela and Iran needing oil prices to be in the $90-95/barrel to balance the budgets.

The Russian economy soared along with oil prices, is also now in shatters. In the Russian model, the president and friends own all the natural resources and were printing money sometime back. The Russian stock market has fallen more than any other . Russia has spent one-third of it's for ex reserves to defend the ruble, which is down anyway.

It is no accident that so many critics of western capitalism are petro-states. A market economy succeeds by providing incentives for raising productivity and incomes. A state-controlled system is lousy at providing the right incentives, and so is bad for productivity. But a petro-state thrives simply on the geographical accident of mineral wealth, not great enterprise or efficiency.

Socialists bemoan the capitalist emphasis on profit and growth, and focus on distributing wealth instead. This would be fine if money dropped from up there , and the only task of governments was to distribute it. But if you have to produce the wealth in the first place, markets do it much better.

In this context the biggest critics of the US model are in fact pathetically dependent on it. When capitalist economies decline, so do the supposedly rival models. Clearly, they are not rival models at all but dependants of the capitalist model.

The true strength of a system is revealed in times of adversity. Today, despite US economic travails, the world views the dollar as a safe haven. The US system has a thousand flaws, but others are no better, and sometimes worse. Certainly the world economic system urgently needs major reform, and the G-20 meeting in Britain needs to kick-start the process. But the reforms must aim at a safer, gentler capitalism, not hardheaded socialism.

Your thoughts

Saturday, March 14, 2009

Protectionism and America do not go together

Recently there has lot of news on policy makers talking about keeping foreigners out and provide job to local citizens. How unfortunate that politicians make such narrow statements without really understanding what made USA the country it is today. I wanted to discuss this topic in depth as I am also considered so called Foreigner who came to this country on an H1 Visa worked hard in a foreign country and then became a Permanent Resident. In fact after 10 years I can say I feel more American than the local citizen.

I feel terribly pained when people talk about these issues without really understanding that this actually aids the country in many way, let's look at some of things I can think of, I am sure there are many more reasons.

1) The first and most important is US retaining and attracting global talent, I am sure everyone agrees that the next century is going to be decided by brain power rather than muscle power, If US does not attract the best people from all over the world, someone else will do it and that is definitely a loss for US. For example recently UK has started a program for making it easy for professional to work, same is the case with Canada.

2) One survey I was reading was mentioning that almost 50% of the students in various top colleges are from outside the country, and I know for sure many of these people get the scholarship from the schools, well then what is happening is that US is training it's competitors, how will it sound if we say that Ford gets people, train then on the best technology and then these guys go and work for Toyota. Well that is exactly what is happening and we call it reverse brain drain.

3) People who come here to work on visa actually contribute to all the social network which is there in US like the Tax system, Social Security, Medicare. You name it and they contribute to everything out here, but many people go back after the stipulated time say 6 years and they do not take any benefits out of the system, so in a way they are contributing to our country.

4) Out of the top 5 companies getting people on H1b, 4 are Indian companies. SO this means that the restriction on the cap will affect only foreign companies anyway so these companies will stop sending people out, anyway these H1s never really displaced American workers.

Supporters say this law will help US born workers and stimulate the economy, but this is just plain wrong. The economy is not of fixed size in which more foreign-born workers necessarily mean fewer US workers. Productive foreign born workers can help create more jobs here. Keeping them out damages us.

Protectionist measures such as the ‘Buy America’ clause and the H-1B legislation suggested by the US government will not have any impact on other countries, but in fact, the measures will hurt the US economy.

Your thoughts