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THE BLUE MONEY REPORT.
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The Blue Money Report
"Keep in mind the three most important aspects of real data analysis:
compromise,
compromise,
and compromise."
~ Edward Leame
Welcome to the Blue Money Report
Today's Commentary: 01.17.03 Dear Citizen:
To the citizens of the great state of ______________________, I want to thank for choosing me as your leader. It is an honor to serve our state, our constitution and our people but it is with heavy heart that I should inform you of the changes that are afoot.
As you all know, our President has basically decided that a federal deficit is okay as long as he wants to wage war overseas. I recall President Kennedy once saying that "Those who make peaceful revolutions impossible will make violent revolutions inevitable.". Don't get me wrong, as governor I understand what an elected official must do, the tough decisions and the sacrifices. And I am not about to make this speech a criticism of this administration's misguided policies the cornerstone of my complaint, but you will understand in a moment, why I share my concern about the prudence of this newly targeted war on the recently identified "axis of evil".
Over the past several years, spanning back almost a decade, our great state has enjoyed the fruits of full economic development. Folks were working, companies were running at full capacity, and the coffers of the state treasury were overflowing with a new wealth. The previous governor did give some of the extra money back to you citizens in the form of a rebate when the money collected exceeded the budgetary needs. This was mandated by an amendment that you voted on and what you did was correct.
But things have changed since those halcyon days of fat pockets. Many of you have lost your jobs, companies have scaled back in an effort to keep Wall street interested in investing, and as a result, tax collections literally dried up right before our very eyes. Perhaps this was unavoidable. Perhaps the Federal Reserve should have been less interested in the promotion of equities and the creation of the market bubble than they should have been. Perhaps we should have been more diligent, but our understanding was limited in much the same way yours apparently was.
Your personal portfolios dried up like so much dust in the wind and like you, we also found our investments turn sour. We were also duped by the same folks who promoted untold wealth and endless bull markets. We believed, like you, that was an upward motion that would occur forever.
You need to understand two things. One, we are on our own and two, things are going to have to change. Unlike the Bush administration, we are constitutionally unable to run a deficit. We can't extend the state debt level because we are not allowed to have such a thing, let alone extend it to cover our immediate needs. And the federal government has decided that we should bail ourselves out of a predicament that they feel was our own doing.
Let me tell you right now, much of the proposed tax cuts offered by the President several weeks ago will be lost to the fact that we need to raise those very savings in tax dollars to cover some of the basic services that will be cut. Grim as it may sound, the President has business in a foreign land that he feels needs to be taken care of before he looks to the people of this great land. If I sound bitter, it is because I am. With a deficit of $200 billion, the President's estimate, that could climb to $300 billion, a more accurate estimate, all because we fear a somewhat deranged leader has weapons of mass distraction. Oops, that was a Freudian slip. Weapons of mass destruction. Divvied up among the states in the form of extended unemployment benefits for all workers, not those whose benefits ran out at the end of 2002, but for all citizens who have become either disparaged and have given up the search for work that has yet to surface.
I can understand the president's thoughts on stimulation but to use corporate tax handouts to companies that have paid a continually reduced tax burden is ludicrous especially when this savings will be plowed back into profits. Doesn't he realize that companies will not spend this money immediately. The corporations that are publicly traded in this state are as lean as they can be, having laid off as many workers as they possibly can to cut expenses and increase profits. This latest round of tax cutting proposals is just another way of propping up the balance sheet.
If I stand here and tell you that I want to raise corporate taxes to help offset our diminished budget, many of these employers will high tail it to the next tax friendly state. Suffice to say, this crisis is the worst fiscal problem we have faced since World War II.
There are three things that I would like to do to keep us solvent, two of which will be short of rebellion, and the third is a gamble that we are attractive enough financially to make it work.
First off, we need a stronger tax base. I hate to say it, but without this increase in taxes, services that you have come to expect from your state and local municipalities will need to be cut. Sure you will vote on it while every newspaper in the area trots out our financially lascivious behavior from the past decade. We screwed up but you didn't mind much when you were working. So we did it without remorse. Now we are sorry and I say that for those that have come before me. This month, 24 new governors were elected and I believe that one of us will be the president some day. We are cutting our leadership teeth on you by trying to correct the transgressions of our predecessors, all without directly blaming anyone, especially you the tax payer.
You have extremely high expectations and because of that, we felt as though whatever you thought you needed, we could provide. We cleaned up the streets of all of the petty criminals. Now we must release them. We do not have the money to run the jails, finance the courts to prosecute them, or allow our police to track down every minor offender. The chain reaction from this diminished service will leave you poorer and increase your chances of becoming a victim.
I was speaking to a retail outlet owner who expressed his concern about shoplifting. Realizing that the police will not arrest a petty thief anymore, his security force has been forced to turn a blind eye to persons who steal less than twenty five dollars worth of merchandise. As stores take this increased loss, they will pass the cost on to consumers who will spend more to get less. He suggested that they would simply spend less, forcing his store to add employees to the ranks of the unemployed. He added that he thinks Saddam doesn't care for the dilema he faces.
So we ask for more money from less working people and we still cut services. The only thing left is to issue debt obligations in the form of bonds. Don't think this will be an easy sell either. Credit agencies, the folks who rate us for our ability to pay back these obligations are becoming more and more skittish at the current state of affairs.
Issuing bonds that might not get a high credit rating would force us to increase the yields on those bonds. For those of you that don't know how bonds work, the short story is that when prices are down, yields are up. Low yields mean high prices. When the lower the credit rating is received from the folks who rate these things, the only way to make the bond attractive to investors is with high real rates of return.
The best news would be a quickly recovering economy. Ten year Municipal bonds that we would offer would be at about 3.5%. With inflation, that is pretty attractive. A slowly recovering economy would flatten those yield curves brings the bonds of longer duration down somewhat. But that is mostly trader talk. We still need to sell them.
If Mr. Bush does get his tax cut, the jury is out on whether or not it would effect the sale of those bonds. Just remember, the tax exempt status of these bonds won't be as attractive if Washington get it's way.
So in closing I want to say that this belt tightening forced on us by an underperforming, slow to recover economy will have lasting effects on all of us. We will get through this. I am confident. If we could only get the President to sit up and take notice of our plight, cancel his middle east folly, and help out the citizens who matter.
Previously, Dear Shareholder
Today's Commentary: 01.14.03 Dear Taxpayer:
I know it's been a tough year for you folks in the investor class. I'll bet you didn't even know there was an investor class, let alone realize that you are members of this elite club. Well, between you and me, we just made that term up because we needed a target audience. You know, a group of people that would drive the rest of you to understand what we are trying to do for you. Yes, what we do is for you, the average Dick and Jane, even if if it seems like it is for only a very few.
Before, we go too far in explaining ourselves, let me suggest to those that are quick to criticize our economic stimulus package, that it is not wrong. It is the perfect plan for the perfect moment in our economy. We understand that when the previous President was in office, you correlated his tenure with the bull market. That's because most Democrats wouldn't give Reaganomics the full credit it deserved. That's right. It took all those many years for the fruits of that great president to take root and blossom and it happened at the exact moment that a Democrat was in office. Go figure.
Now we realize that this association of good economy, good president won't go away. We have been unsuccessful in distracting your attention away from the stock market by our escalation of the war effort. We have been unable to slide the expanded deficits for that effort through as though we had a blank check from the world to protect the world fro itself. My friends, the blank check is from you, thank you very much. But you are a fickle group. You want your investments as secure as your homeland and we figure, that if we can protect you from Saddam. we can protect you from further loses in the equity market.
This is the right stimulus for the right group of people. In our speech last Tuesday, we spoke about the folks with over-extended credit card debt. We spoke to the folks living paycheck to paycheck and how our plan to cut double taxation of dividends would help. Perhaps you need a little lesson on how this might work.
There are over 7000 companies that payout dividends. Now for those of you less versed, a dividend is basically an incentive that keeps shareholders interested in the company. Companies have the right to increase or decrease these portions of the profits at their leisure, but it isn't always a good idea. Shareholders like this portion of the profits paid to them and not kept in the company coffers for some high and mighty CEO to come along and squander. Not only that, but companies send a clear signal that they are doing just fine when they fork over a dividend even if they need to carry debt as a result. I'll bet you didn't know that dividend payouts are on the increase. For all of 2002, dividends paid by the top 500 companies as tracked by Standard and Poors actually increased 2.1%
So we looked at this idea of double taxation and saw that there was a major problem that was easy to solve. We realized from the companies we talked to, that paying tax on income is okay but they were forced to do it before the dividend was paid. Then they divvied up the remainder of those taxed profits to the shareholders who are then taxed again.
The popular argument over the wisdom of this comes from those folks who will get no tax break whatsoever from this proposal. I know that our tax proposal doesn't offer relief from dividend taxes in your individual retirement plans, where you folks claim the lion's share is distributed. If we had included that provision it would have watered down the immediate stimulus that it will give to the investors that really matter.
Big investors will use the money to reinvest in the economy because they should. Stocks would rise and you know the old adage, "all the boats will rise." These high rollers, the investor class, are going to make sure that all of that newly freed capital will flow back into markets that need it. That will stimulate the economy. We're sure of it.
So let's review why you should be for this proposal. Companies would get a tax break, whether they need it or not. They didn't get any breaks in my tax cut in 2001 and now they deserve one. The speedy write-off of capital equipment should get those companies back into the mood to buy stuff even if they are at full capacity utilization. If we had our way, we would make corporate purchasing so much of an advantage, companies might actually regard equipment acquisition as a sort of tax haven, better, yet, a shelter.
There is another way for companies to save money that we feel will stimulate the economy. If these big players pay no taxes, they get no break. If they pay taxes and no dividends, they would pay less because of lower capital gains. Either way, corporations get the break we denied them a year ago. And they should.
Whether you benefit directly from this tax cut is not really important. We believe that we can predict your behavior and this is what will happen. There will be a lot of squawking about the deficit and how much this is going to cost but we will get it all back. You folks will start saving more just because there will be incentives to take advantage of the high returns in the stock market. When that happens, companies will get more money to work with, buy more stuff, employ more people and after all of those chips fall in the right place, nothing but growth. That will increase the taxes we collect and that will offset any dividend tax loss.
And then you'll thank us.
Yours truly,
Up next: Dear Citizen
Previously, Dear Shareholder
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