US Shutdown - Questions for Goldman Sachs et al

Goldman Sachs are reported to be claiming that the 'shutdown' of the US Federal Government is costing the US Economy more than $300M a day!  Yes, a day!

As with many news stories, no supporting data is offered - just a self-serving soundbite.  Here's a tip for lazy journalists - ask the questions - how is that number supported and from where do the numbers come?
 
So let's try to think about it on a simple level.

The US Government is not spending money (money that it doesn't anyway have!) and it is doing this by putting employees on unpaid leave.  Is this the >$300M that is hitting the US economy?  If so, how?

What is the saving to the US economy by not having to borrow money to pay these furloughed employees?  Is that shown as a negative in the calculation?

The US military, Homeland Security and the FBI are not sending drones into the skies, to spy on the American people - so that means that they aren't spending money on foreign oil - presuming that the cost is predominantly for the product and not for the US middle-man's profit element,  how does that affect the US economy?

The EPA and other federal agencies are not issuing their usual reams of regulations that impose cost burdens on US business - is that cost benefit included in the $300M number? 

Surely the $300M can't be the daily cost for putting up barriers at places like the WWII memorial to stop veteran's visits? 

I can't believe that the GS number includes taxes and fines and penalties that are not collected, during the shutdown - surely these are simply deferred so no net impact (and they are zero sum anyway!

Here's another question for GS and Wall Street readers - We have heard all sorts of anecdotal evidence from companies across the US, citing by how much their health care costs will rise (and so profits and shareholder returns fall) as a result of the Affordable Care Act (Obamacare) but how much do you think this will take out of the US economy?  Is it a zero sum game?  So every $ of additional premiums that companies must pay is considered to remain sloshing around in the economy but just being transferred from other parts to the health care and insurance sectors?  Or is this wealth extraction from business seen as destructive to America's ability to invest?


If the GS numbers are correct, think about what that says about the US and its economy.  That the government is such an integral part of the economy that it starts to resemble and mirror the effects that the Soviet and it's satellites had on their economies - they become a or the key component in economic activity and so important that they feed their own destruction.

Of course, maybe GS are right and the number is correct but what would be the actual impact on the economy?  We all know that past shutdowns have led to real measured improvements in GDP so maybe the longer the shutdown, the better the benefit.  Since though this kind of positive data feeds into the 'smaller government is good' narrative, I can kind of understand why GS emphasizes the opposite.

Private sector pay

We are just entering the period when financial institutions declare their 2011 corporate earnings and in many cases the 'bonus pool' that will be shared among their employees.

Following the bail-out of RBS, Lloyds and HBOS, the retail and investment banks now fall into two camps.  Part state-owned (see earlier) and those others institutions such as HSBC, Barclays JP Morgan, CitiCorp and Goldman Sachs, which received zero bail-out funding from the UK government  - we will call these latter type - private institutions.

We can expect lots of the usual froth from commentators about 'excessive' bank bonuses and how the 'government ought to do something about it'.

So what can the government do?

Well in the case of the part state-owned RBS, Lloyds and HBOS, they can use the shareholdings, that they hold on behalf of the UK people, to limit the amounts of payouts.  These could be limited to those that are required to meet contractual obligations - some people have bonuses built into their contracts of employment and if they meet certain targets, then legally, these must be paid - and they can then limit other payouts to zero or to certain pay grades etc., however, they and the other shareholders see fit.

In the case of the private institutions, it is really none of the business of government to interfere in how the shareholders (otherwise known as owners) spend the income of their company.

If the government wants to affect such private sector bonus payouts, it could do so through the tax system (as I have proposed, on an earlier blog) but it cannot and should not dictate to private companies on the remuneration that they give to any of their workers.

If the government wants to set the tone around pay restraint, then maybe they should concentrate on the areas which are within its span of control................

So, set a cap on the pay of anyone employed by a public organisation.  So local authority executives, civil servants, military chiefs, ministers, BBC executives, etc.  My suggestion would be around  £100,000 per year.  Many private sector companies have re-organisations and require personnel to re-apply for their role, so do the same with all of the above - get them to re-apply for their job but at a reduced rate of maximum £100,000.  Oh, and let's make the maximum include taxpayer contributions to pension funds.

That might start to sound a little more like 'we are all in this together' in action!

Tax Collecting and MPs

A House of Commons Committee of MPs has criticised the settlements that HMRC, the UK Tax authority, has reached with some companies, as cosy.  They have also asserted that they believe there are more than £25 billion of outstanding tax issues with companies.

So, let's look at that.  HMRC reached agreements with Goldman Sachs and with Vodaphone that settled long running disputes on their complex tax affairs.  That is, supposed experts reviewed the evidence and submissions and then decided that the best deal for the tax payer was the one that was on the table.  This presumably was less than they might have got for us if they had gone to court (and lined the pockets of lawyers) but more than the cost of incurring additional expense. 

Of course, this then frees-up those investigators to examine the affairs of other companies and so perhaps overall get more money flowing in?

As for the £25 billion of outstanding tax issues with companies. 

This is a typical ploy.  Think of a number, make it bigger and add the word billion after it.  Why doesn't, the still biased, BBC and other media, ask these MPs from where this number comes?  Which companies are evading this amount of taxes (that is clearly the implication)?

Could it simply be that this is the amount of tax that is in dispute between HMRC and companies?  If yes, then what would we expect - nothing to be in dispute?  Nothing outstanding?

Here is a quick question - How many of the MPs on this committee do you think actually have real world business experience?

And another one.  How many of them understand that it is common that a company's tax issues can stretch out for a number of years before they are resolved?

And yet one more - doesn't under paid tax accrue an interest charge?

And a final question - do you think that the committee was miffed because the HMRC head, stated that he would not discuss or disclose details to the committee on the grounds of the long held position of confidentiality of tax affairs.