QUEBEC — Following up on those pre-Christmas cheques for millions of Quebecers, the Legault government now is coming to the aid of seniors struggling with the cost of living.
In the viral “Hastily Made Cleveland Tourism Videos” of the Great Recession era, comedian Mike Polk provided a panorama of his faded hometown. The scenes were of “crippling depression,” the opportunity to “buy a house for the price of a VCR
,” urban redevelopment looking like “a Scooby-Doo ghost town,” and the downtown perches where one could watch “poor people all wait for buses.” Hey but “at least we’re not Detroit!”
Ohio like Michigan adopted a state income tax about fifty years ago, in 1971. In so doing it sealed its fate as a charter member of the Rust Belt. As I’ve been writing lately, the states that in the 1960s and the 1970s added an income tax, including every one from New Jersey across to Illinois, turned out to be precisely coextensive with the Rust Belt that emerged and settled in for good in the 1980s.
Cleveland’s claim as the forge of the American industrial revolution is as strong as anybody’s. Rockefeller’s decision to locate in that city during the civil war sealed its fate. The founding of Standard Oil in Cleveland in 1870 comprehensively transformed the American economy for good. Here was a business that would redefine quality control, customer service, and the practice of management, let alone the accumulation and deployment of profits, creating a new level of ambition of what companies could aspire to as enterprises useful to the public. The immense economic-growth decade of the 1880s saw phenomenal expression in Cleveland, which among other innovations pioneered swell living in the suburbs.
Old timers from Cleveland recall that as of the 1940s, the arc swinging from Buffalo around through Cleveland, including Pittsburgh, Detroit, and Chicago as well, accounted for a wildly disproportionate share of world economic production. The geographic center was Cleveland.
As of the early 1930s, Ohio had neither a sales nor an income tax. After local property taxes clocked property owners in the early years of the Great Depression, Ohio adopted a sales tax in 1933. Miami University tax professor George W. Thatcher contemplated his Ohio as of 1952 with these words:
“A study of the expenditures of the state of Ohio shows a rapid increase since 1931. Total state expenditures….amounted to a rate of increase for the state of Ohio from 1931 to 1950 [of] 669 percent while for the nation as a whole the rate of increase was only 426 percent. The per capita expenditures of the state of Ohio increased 642 percent from 1931 to 1950 while for the United States the increase was only 440 percent….The state, since 1932, has assumed greater responsibility for welfare….Again, there was increased financial participation by the state in public education and highways.”
1880s, huge private wealth creation inclusive of mass public services and amenities; mid-twentieth century, creeping state takeovers of all sorts of functions including—touché Rockefeller—transportation.
In 1952, as the worthy Thatcher reported these data, Ohio had barely contemplated the fiscal implications of the baby boom. The voters would let officials know how they felt. In a remarkable essay in a recent issue of the Journal of Policy History, Josh Mound has tallied the collapse of public support for school-bond issues in Ohio—particularly in the smokestack city of Youngstown—in the 1950s and 1960s. We call on Mound’s work in our new book on the history of the income tax, Taxes Have Consequences.
Place after place in Ohio in the post-World War II era tried to raise their property tax rates. The rates. Huge post-1945 economic growth raised the value of property immensely. Taxed at the same rate, there would have been (there was) a harvest of new revenue for governments. Ohio tried again and again in the 1950s and 1960s to raise property tax rates.
The failures became so epic—they chuckled about it on national TV, on Laugh-In—that new Ohio governor John Gilligan pushed through a state income tax in 1971. He was a one-termer, ushered out of office in the vicious stagflation recession of 1975. In New Jersey, “One-Term Byrne” Brendan Byrne was supposed to meet the same fate after he started an income tax in 1976. Somehow he got re-elected.
The point of Ohio’s income tax, like Pennsylvania’s of the same year, was to cover expansive education spending from pre-K all the way through college. Kent State was going to get a facelift. The problem is that you need young people for such plans. Since 1971, Ohio has lost badly in its share of national population and national income. I offered Michigan’s horrendous statistics on this score last week. Ohio’s are only a little better—see the chart in Taxes Have Consequences.
The top rate of Ohio’s income tax started out at 3.5 percent. Within ten years it was 9.5 percent. Over the last dozen years, the top rate has come down by a third, from 6 to 4 percent. Ohio has miles to go before it thrives.
Columbus is supposed to be the up-and-coming Ohio city, the tech hub and incubator of the future. How did they get Intel
to commit there recently? Tax abatements (plus visions of a federal subsidy). Have a burdensome tax rate, and the exemption from it becomes valuable. Intel’s stock has not moved in this millennium. This is the kind of outfit ready to do business in Ohio. In Rockefeller’s day, the place attracted visionaries before they started something.
China’s Economy Is In for a Bumpy Ride as Covid Zero Comes to an End
(Bloomberg) — Three years after the first case of Covid-19 was reported in Wuhan, Chinese policymakers must now grapple with how to live with the virus while keeping the economy growing fast enough to stave off public anger.
With the Covid Zero policy being rapidly dismantled, the threat of economic disruption remains high. Infections are likely to surge, forcing workers to stay home, businesses may run out of supplies, restaurants could be emptied of customers and hospitals will fill up. Even though there’s optimism the economy will recover as China opens up to the rest of the world, the next six months could be particularly volatile.
Goldman Sachs Group Inc. expects below-consensus economic growth in the first half of next year, saying the initial stages of reopening will be negative for the economy, as was the experience in other East Asian economies. Morgan Stanley predicts China’s economy to remain “subpar” through the first half of next year. Standard Chartered Plc said growth in urban consumer spending will still lag pre-pandemic rates next year given the hit to household incomes during the pandemic.
The economy was already in bad shape this year because of the Covid outbreaks and a property market crisis. While China’s zero tolerance approach to combating infections has kept infections and deaths relatively low for most of the pandemic, the rapid spread of the highly infectious omicron variant exposed the challenges of maintaining strict controls. From snap city-wide lockdowns to almost-daily Covid tests, the restrictions have taken a heavy toll on people’s lives and the economy.
That discontent manifested in mass unrest at the end of last month. People in Beijing, Shanghai and elsewhere started to reject demands for quarantines or lockdowns of their housing estates, and between Nov. 25 and Dec. 5, at least 70 mass protests occurred across 30 cities, according to data compiled by think-tank Australian Strategic Policy Institute.
Authorities have moved to quell public anger by relaxing some Covid requirements around testing and quarantine — although the sudden and confusing changes to the rules over the past few weeks have injected more uncertainty about the economy’s outlook.
Here’s a deeper look at the economy’s downturn and the challenges it faces as China exits Covid Zero.
People have been cooped up in their homesChina’s cities have been hit hard by Covid restrictions, with mobility across the country’s 15 largest cities plummeting in recent months, according to congestion data released by Baidu Inc.
Major hubs are showing strain, including the capital Beijing, as well as Chongqing and Guangzhou. Trips there have plunged in recent months below levels in previous years, according to subway data compiled by Bloomberg.
Few have borne the brunt of China’s Covid Zero policy more than the financial hub of Shanghai, a major epicenter for recent protests. After a two-month lockdown this year to tackle a major outbreak, China’s richest city is still struggling to get back up off its knees.
Malls have seen a surge in vacancies, consumer spending has plunged, and spending in areas like food and beverages has been depressed, mirroring the national trend.
Lack of spending has hit the economy hardCovid restrictions have battered the economy, with consumers pulling back on spending and business output plunging. Retail sales unexpectedly contracted 0.5% in October from a year earlier, with economists surveyed by Bloomberg predicting an even worse outcome of a decline of 3.9% in November.
The government is expected to miss its economic growth target of around 5.5% by a significant margin this year. The consensus among economists is for growth of just 3.2%, which would be the weakest pace since the 1970s barring the pandemic slump in 2020.
With onerous testing rules, flare ups in holiday spots, and official advice discouraging travel, holidaymakers have stayed home, adding a further drag on retail spending. Tourism revenue declined 26% to 287 billion yuan ($40.3 billion) over the week-long National Day holiday in October compared to the same period last year. Flight travel also dropped to its lowest levels since at least 2018.
Youth unemployment is near a record high
That’s all combined to drive growing economic malaise among the country’s youth, with the unemployment rate among 16-24 year-olds soaring to a record high of about 20% earlier this year. Joblessness among young people is more than triple the national rate, with many graduates struggling to find work in the downturn, especially in the technology and property-related industries.
Unemployment will likely get worse next year, when a new crop of 11.6 million university and college students are expected to graduate, adding to pressure in the labor market. Factories are still struggling to cope with Covid outbreaks
So far during the pandemic, the industrial sector has held up better than consumer spending since factories were protected from Covid outbreaks and global demand for Chinese-made goods was strong. That’s changing now.
Export demand is plummeting as consumers around the world grapple with soaring inflation and rising interest rates.
The disruption at a major assembly plant in Zhengzhou for Apple Inc.’s iPhones and violent protests there last month also show the damage that outbreaks can have on production.
The housing market crisis continues to simmer
China’s ongoing real estate slump has also been a source of unhappiness for homebuyers. The property market, which has long been a major driver of the country’s economy, is in its worst downturn in modern history, with sales and prices plummeting. Cash-strapped property developers struggled to finish building homes, prompting mortgage boycotts by thousands of buyers in the summer.
Despite authorities introducing a spate of measures recently to help make borrowing easier and ease tight cash flows for developers, the economy’s downturn and lack of confidence mean the housing market continues to be depressed. The slump is not expected to end soon, with Bloomberg Economics expecting a 25% drop in property investment in the coming decade.Local governments are struggling to fund their spending
Government finances have come under severe pressure as the economy slumped. Land revenues have plummeted and local governments have had to boost spending on Covid control measures. The broad measure of the fiscal deficit in the first 10 months of the year is nearly triple the amount it was in the same period last year.
Relaxing testing and quarantine rules will help ease pressure on local government finances. However, it remains to be seen how far and fast authorities will go in dismantling Covid Zero if a surge in Covid cases puts strain on the healthcare system, a likely outcome given that a significant portion of the country’s elderly and vulnerable population are still unvaccinated or lacking booster shots.
–With assistance from Kevin Varley, Jin Wu, Danny Lee and Fran Wang.
The US Fed’s Balance Sheet Shows What’s Happening To The Economy
The mother of all charts is below. This is the Federal Reserve balance sheet history straight from their website:
This is where the world’s inflation comes from. Not all, of course, because central banks around the world have done the same. In goes new money and up goes the price of stuff. Now if there is less stuff, then up goes the price even more. However, without new money prices cannot rise across the board, inflation is always about money supply.
This is why the Fed is reining it in. Down goes money supply, down goes asset prices.
Now there is one modifying factor. If you pump new money into an economy and that money goes to drive up the prices of illiquid assets, then the inflationary impact will be in those illiquid assets and the new money will be locked up there and will only dribble into the “real economy.” Let’s say you pump in money and make it easy to be grabbed by people buying houses or stocks but make it hard to be grabbed by people buying groceries, well then up will go the price of houses and stocks but groceries will not be that much affected. The lucky (rich) folk with the stocks and house will get much richer and the people who need to buy groceries will get left behind somewhat but at least there won’t be runaway inflation outside of stocks and houses. Woe betide an economy that hands out money to people to buy groceries because boy is everyone in for a bout of inflation then.
Ring any bells?
So to get prices under control you have to drain money from the system because when there is too much in the wrong places it starts rushing around bidding up the price of everything.
There is too much money in the system and that money is parked and it’s parked at the Federal Reserve where banks who can’t use a big chunk of this new money have kind of handed it back to the Federal Reserve to look after. That is the reverse repo which has gone out of whack with all the new money magicked up to bridge the pandemic.
Here is a chart of it:
Note how it matches the Fed balance sheet in character. This money is a bulwark for the banks if things get tricky as they can pull this cash out and back into play in the real economy, but in normality it would be down at 2014-2018 levels if there was just about the right level of money in the system. The Fed will feel there is plenty of room to tighten while these balances are high because if banks need liquidity, there it is.
This is where the big call lies. If banks were to say to the Fed, nope we aren’t going to lend to anyone but you and turn the real economy into a credit desert while damming up the cash with the Federal Reserve then there is no hope of a “soft landing.” If the money stays in the system as is then inflation should run its course and the new money supply would match new price levels, which wouldn’t be so bad, but the trouble is government fiscal deficits would then necessitate further money supply increases creating further inflation which could only be combatted with more interest rate rises, causing a vicious circle of high inflation and stagnation. That is what happen in the 1970s…
But that is all “what if.”
The real map is the progress of these two charts. If these balances fall without much drama then all is working out well, but if tightening starts to badly disrupt the economy without these levels falling materially then it will be a signal to take cover.
The institutions think inflation is about to fall sharply and that then new QE will restart. I say ‘good luck with that.’ However, these charts will provide the guidance necessary to judge the likely outcome ahead.
For me there needs to be a capitulation to define the new beginning we are entering and that hasn’t happened yet.
Once again these charts will give a solid indication of what’s up next.
Quebec looking at $8-billion contingency fund ‘for economic risks’
Tabling his fall economic update Thursday, Finance Minister Eric Girard confirmed previously announced plans to increase the maximum amount of the refundable senior assistance tax credit from $411 a year to $2,000, beginning this year.
The measure applies to those 70 and older who already receive this tax credit, and adds to the list of eligible recipients, Girard said. The news means an additional 398,500 seniors will have access to the credit, for a total of 1.1 million people.
If you add all the previous measures announced for 2022, the total relief for eligible seniors living alone will be $3,100. For a couple, the amount is $2,200.
Girard has also announced a plan to index the income tax system and social assistance programs to reflect increases in the prices of goods and services, to the level of 6.44 per cent. That indexation kicks in Jan. 1 and represents an additional $2.3 billion in relief.
But one day before the National Assembly recesses for Christmas, Girard’s update confirmed what he has been saying for weeks: Quebec’s economy is slowing down at an alarming rate, with little relief in sight in the short term.
“The economic outlook for Quebec and Canada has deteriorated quickly,” the update states. “A high degree of uncertainty hangs over the economic and financial forecast.”
The document spells things out bluntly: Quebec’s economic growth is expected to slow from 3.1 per cent in 2022 to 0.7 per cent in 2023. In his March budget, Girard had predicted two per cent growth for 2023.
And while Girard says he believes inflation peaked at eight per cent in June, the full effects of the slowdown and increases in lending rates by the central bank have yet to be felt.
As a precaution, he included the alternative scenario featuring an $8-billion contingency fund over five years.
“We believe the recession is, more or less, within a 50 per cent probability,” Girard told reporters at a news conference. “It’s good policy to have provisions for contingencies, whether they are pandemic- or economic-related.”
Under the recession scenario, economic activity would decline by one per cent in 2023 before increasing by 1.2 per cent in 2024. The overall negative impact on Quebec’s finances would be a whopping $5 billion in 2023, which would lead to a $4.1-billion deficit in 2023-24.
“For individuals, we have suggested if the economy slows down, it is the appropriate time for a fiscal stimulus,” Girard noted. “The fiscal stimulus we have highlighted as possible would be an income tax reduction.”
In the last election, the CAQ pledged an income tax cut — a promise restated by Premier François Legault in his interview with the Montreal Gazette last month.
For now, Girard’s budgetary deficit projection for 2022-23 remains lower than he said it would be in the March budget. That’s because that same high inflation rate has driven up Quebec’s own source revenues by about $14 billion.
Girard is also able to lower a projected $6.5-billion deficit for 2022-23 to $5.2 billion, including a mandatory contribution to the debt-reducing Generations Fund. Quebec is still on track to balance its books by 2027-28, Girard said.
The update represents a followup to a series of other measures promised by the CAQ during the election campaign to help Quebecers deal with inflation.
Up first were cheques of $400 to $600 for citizens who earned less than $100,000 in 2021. A Revenue Quebec spokesperson told the Montreal Gazette Thursday that more than half of the payments — in the form of direct deposit or paper cheques — have already been sent.
Two promised cost-of-living bills have also been tabled by the CAQ and should be adopted before the legislature recesses Friday. Bill 1 slaps a three per cent ceiling on government fee increases, while Bill 2 imposes the same ceiling on hydro rates.
The opposition parties were not impressed, with Québec solidaire saying the update does not include enough specific relief measures for citizens. QS wanted Quebec to immediately increase the minimum wage from $14.25 to $18 an hour and freeze all government fees.
“It’s not generous enough, it’s not targeted enough,” added Liberal finance critic Frédéric Beauchemin. He noted seniors will have to wait until they do their income taxes in order to get the CAQ tax credit, when they need the money now.
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