$4,000,000,000 is NOT Enough Four billion dollars. A mammoth sum. But it’s not enough. Most of us have little concept of a billion, or even a million for that matter. It’s difficult to imagine having a million dollars to spend—to get to a billion you have to multiply that by one thousand. Simple math, but yielding numbers so far beyond individual budgets that comprehension is difficult. The situation is different for the federal government, however, which operates on a multi-TRILLION dollar scale.
Four billion dollars is the amount of federal funds for research and development (R&D) that are spent every year in Texas. It’s enough to rank us fifth among the states (plus DC and Puerto Rico). It pays for research of tremendous value. Key federal agencies involved in the process include NASA, the Department of Defense (DoD), Health and Human Services, the Department of Energy, the National Science Foundation, and the US Department of Agriculture. NASA and the DoD combined account for some 78% of the spending.
Where does the money go? To pay for research into water quality and the effects of pollution, floods, and droughts. A host of agriculture-related research facilities study crops, irrigation, livestock, wildlife, endangered species, bird migration, and other topics. DoD pays out some $1.4 billion to fund development of new weapons and aircraft and otherwise enhance the capabilities of the military. NASA conducts space-related research, of course, but also works on uses of technologies originating in the space program in other contexts such as human heart pumps and cancer studies.
In addition to these research facilities, Texas’ higher education institutions are sites for additional activity. Every major university receives federal funds for research. Approximately $661 million is funneled to the colleges and universities in the state.
What’s the benefit? These are the dollars that pay for “basic research.” Unlike corporate R&D, which typically has to show a direct relationship to gains for the corporate bottom line, basic research can be far more creative. It’s this basic research which can ultimately lead to the largest social gains in the long run.
A quick side note on that topic. There have been some moves recently toward the expectation of a specific payoff on a scheduled basis for federal research dollars. Without an appropriate rate of return, the argument goes, R&D money should not be spent. The problem with this idea is that the most creative research is often the most difficult to adequately quantify in terms of the payoff. What is the value to society of finding a cure for a deadly disease? While we don’t want taxpayer dollars to pay for researchers to take what amounts to a permanent, posh vacation generating essentially nothing of value, we have to be careful of going too far the other way. If a measurable rate of return becomes the prevailing standard for awarding research grants, we run the risk of choking off the most potentially rewarding projects. But enough time on that soapbox for now.
So why do I say the $4 billion is not enough? Because given the size of our Texas population and economy, we should be getting even more. Texas boasts some of the best and brightest minds in the country. We have the higher education infrastructure to support far more research than is currently channeled our way. As the second largest state (behind California) on almost every meaningful measure, we should not rank fifth in research funding. This is an area with huge potential gains, not only for the people of Texas, but also for the people of the world. Exploring ways to attract additional federal research dollars to the Lone Star State makes sense from many perspectives.
The laboratories of the world contribute new discoveries which improve productivity, healthcare, and indeed our understanding of the universe. These endeavors have long been subsidized on a massive scale by public funds. This commitment reflects our collective belief that (1) basic science has overall benefits that exceed private gains, and (2) successful research often requires high-risk experimentation, uncertain outcomes, and the freedom to fail—characteristics not easily accommodated in the market. Basic science is in many ways a laboratory of our natural and physical worlds, opening the way to greater social achievement, enhanced quality of life, and sustainable economic prosperity.
Tax Time A while back, there was a popular expression that claimed “nothing is certain except death and taxes.” Some people today seem to feel that cryogenics and procrastination may dramatically affect the veracity of that axiom, but such efforts won’t work, at least not with regard to taxes. Like it or not, paying taxes has become an American birthright.
I certainly agree that government should be prudent with the money it extracts from us, and that some forms of taxation are inappropriate. One such example is the so-called “death tax” which enables the government to ignore double jeopardy. Uncle Sam dips into our pockets when we die in spite of the fact that those estates were taxed while we were living. The amount of this tax will slowly decrease over the next seven years while the exemptions rise. But in 2010, the situation will revert back to the voracious rate of 55%, which is what it was before Congress approved last year’s tax cut. If that one is not changed, hit men may have a banner year not far down the road.
But that tax affects only a small percentage of Americans, so most of us don’t have a great amount of interest in it. Nonetheless, it’s not just a problem for the super rich, as it is often portrayed; many of the hardest hit are small business owners and those with family farms.
April 15, on the other hand, affects all Americans. Taxes are the oil that keeps the wheels of government turning, and the greatest source of revenue for the federal government’s operations comes from the income taxes paid by households.
Taxes have been a part of American’s lives since Colonial times, and history is replete with examples requiring people to “render unto Caesar.” Our first income tax came in 1861 when a 3% tax on incomes over $800 a year was imposed by the Union to help pay for the war. The tax was repealed not long after the war concluded, but the Bureau of Internal Revenue remained.
Congress passed an income tax in 1893, but it was ruled unconstitutional two years later. The 16th Amendment, ratified in 1913, reversed that decision. Through the years, the tax has incrementally crept upward as the number of taxpayers has similarly increased. World War II introduced a $500-per-dependent exemption practice, but as inflation gradually eroded that benefit, a cottage industry arose to create hundreds more ways to reduce one’s taxes.
During the last couple of generations, we have seen the ramifications of intrusions on our income caused by myriad changes in the tax codes, some caused by war-time needs, others by desires (at times misplaced) to enhance our country’s economy, still others to help those who are less fortunate. We have also seen growing efforts by many people to find loopholes to avoid paying their fair share, or at least to avoid paying more than their fair share. This, of course, is not a new phenomenon as people, businesses, and corporations historically and understandably seem to dislike paying taxes. This year seems to be a watershed for people trying to argue that the income tax is illegal, and we don’t have to pay it. Forget it! They’re wrong!
Some recommend that we should have a flat tax where everyone pays the same amount on what they earn; others suggest eliminating income taxes and having only sales taxes as the more equitable path to follow. There are probably some elements of value in both these propositions, but the taxation infrastructure is extremely complicated, and there are no easy or simple ways to redesign it. Even so, we should never give up trying to make the system more equitable, just as we should never fail to recognize that we have to pay for the many legitimate services and benefits that government provides.
Clearly, some taxes are more damaging to the economy than others, and some situations (such as the strange set of conditions imposed by the phasing out and then reintroducing the estate tax) are just plain nonsensical.
Nonetheless, as Americans, we are blessed to live in one of the freest societies in the history of the world. It costs money to protect this nation—in terms of defense, social well-being, and in many other ways. Taxes are both necessary and reasonable ways to fund this protection. In exchange, Congress should do everything in its power to ensure the tax dollars are used wisely and that the taxes are as fair, and sensible as they can possibly be.
An Imperfect (But Very Real) Relationship Stock market volatility is a way of life these days. The slightest signal and the sell offs begin. Buying sprees happen for little apparent reason, though not often enough for all the folks who are still waiting for their portfolios to regain lost ground. As I’ve said before, good economic news is often bad for the markets while negative news can send stocks into positive territory. (Overemphasis on anticipating what the Fed might do if the news is too good is a big part of the reason for this seeming lack of logic.)
I have often said that information drives the market. A study was released this week suggesting that the emphasis on consumer confidence is misplaced because, in fact, there is little relationship between consumer sentiment and actual consumer spending. I disagree—sort of.
This announcement makes some sense, of course, if you stop and think about it. The consumer confidence surveys generally measure an emotional state—the degree of our feelings of well being, if you will. Most of the time, how we view the world has something to do with our economic prospects. But there are notable exceptions. The most recent example in the negative direction is, of course, last September 11. Confidence measures dropped like rocks. One would have thought the brakes would be put on consumer spending as well, but not so. Instead, Americans went out and bought cars in record numbers the following month.
We took advantage of great financing deals and a patriotic rallying cry to spend, spend, spend. Although September 11 did devastating things to our national psyche, it hardly touched the pocketbooks of the vast majority of Americans. Yes, there was an economic slowdown underway which may have dampened some incomes, but the bottom didn’t drop out of our capacity to spend in those few horrific hours. So the pattern of consumer sentiment wasn’t a good indicator of the level of actual spending.
But Wall Street pays close attention to the consumer confidence numbers. If consumers stop spending, after all, the economy slows and all companies’ earnings stand to suffer. There is no doubt that the US is a consumer-driven economy. Thus, it is appropriate for the market to dislike a bleak outlook in the area of confidence. (Ignore for the moment, if you will, that the market also might not like GOOD consumer confidence news either if it sparked fears of perceived economic overheating and—heaven forbid—a potential interest rate hike.)
Is the market wrong? I think not. First of all, there is evidence that the consumer sentiment surveys generally capture whether spending momentum is building or waning. And it is certainly true that the economy will be hard pressed to recover or grow if Americans hoard their money. Just because the patterns in sentiment and spending don’t track hand in hand doesn’t mean they aren’t related. If I feel optimistic about things, I am more likely to spend money. However, no matter how great I think the future will be, my current assets and income are what they are today. We can’t spend our future raises indefinitely, though credit card debt can make it seem that way for a while. (That’s a whole other story we need to talk about at some point.) So no matter how bullish I become, my current financial situation is still a constraint on my spending.
Similarly, gloomy consumers do tend to spend less, dampening the level of economic growth. But the exact nature of the statistical relationship is complex, and few would suggest that a survey can precisely measure what is in people’s heads. The implications for the stock market are even more complicated. In its incredibly omniscient way, the market is considering each bit of information as a part of the whole.
The market does great at reading between the lines. At present, consumers are feeling better than they have in long months, but they’re shelling out extra at the gas pump. Their tax rebate checks are a memory. They wonder if the interest they’re paying out is going to begin to edge up. And so many of them don’t actually spend any more on consumer goods even though they’re feeling better. Some of us just don’t have any more to spend. Just like they didn’t suddenly have less to spend on September 12.
The relationship between consumer sentiment and consumer spending is clearly there, but its imperfect. No huge surprise.
Another False Symptom of Enronitis The saga continues—and gets more bizarre daily. Politicians, reformers, and other warm bodies are weighing in. The revolution in corporate accounting sweeping the nation continues unchecked. Dirty little secrets are coming to light with amazing frequency. Companies are admitting to skeletons lest someone make them seem worse than reality. At times, the skeletons appear to be fashioned from whole cloth. Companies now believe that confession is good for their souls (and stock values), even if they have to make something up.
Call it Enronitis if you will; everybody else does; but it goes beyond that. The days of “skimming a financial statement substituting for a hard look at the guts of a company” are over. Everyone is newly aware these pieces of paper are just that—paper. They are prepared, reviewed, filed, and believed by people. The documents are only as good as that information chain. Despite their official appearance, balance sheets and income statements never have been and never will be any more than representations. Concepts of revenue, debt, and value are not as black and white as an accountant’s personality. Of course, there are cases where true intent to deceive is involved. We have jails for that.
Corporate accountants diligently doing their jobs, however, should not be subjected to a national witch hunt. We should get back to business, wiser but not overly fixated. As I’ve said before, the market will do far more than any regulatory agency could hope to in forcing firms with shaky practices to shape up. There are genuine issues which can be addressed, such as separating auditing from other functions. But the market may handle those as well.
Take the recent announcement of a plan to mandate “proper” accounting for dilution. In theory, dilution occurs when the number of outstanding shares of a company increases. The same underlying assets are spread over more shares; not surprisingly, dilution causes share prices to fall. One such scenario is when firms grant options.
But there’s a catch. Share prices will fall when shares outstanding rise only if the market didn’t know about it beforehand. The market must be surprised, meaning that none of the zillion people watching publicly-traded companies notice that shares or options were going to be issued. Shares of stock don’t just magically appear; there’s a process involved.
Many mechanisms, from footnotes in financial statements to press releases to eagle-eyed analysts, provide opportunities for word to get out. And it does. Everyone who needs to know is well aware that options have been issued. The market price fully incorporates this information, together with anything else deemed relevant. Very competent academicians have demonstrated this phenomenon for decades.
Some elected officials think they must rescue us from this phantom menace. They don’t! Stock options are not without costs, but they are fully recognized and reflected in the stock price.
This move is likely nothing more than a slap at corporate compensation. By making options more controversial, their use may decline, crimping executive pay. While it is certainly possible to limit options, no one is the better for it. Compensation should be left to those involved, not legislators with a camouflaged agenda. The proper solution is to structure options so that the CEO has an incentive to maximize the value of the company in the long term, rather than manipulate quarterly results. There is no one better able to accomplish this task than the shareholders themselves.
Stripping away the fluff, we’re left with an effort to impose complicated legal and accounting structures to deal with a problem that isn't a problem. There are substantive matters to consider, but this is not one of them. The needed changes will be handled by astute investors, who, after all, are the ones with money at stake. There are plenty of real issues for Congress to address. Education, perhaps?