Aug. 18, 2022

Joe Biden, Selling The Bright Blue Sky

In the late 19th Century, a group of stock salesmen sprung up who were excellent at selling but dismal on delivery. They would visit the unsuspecting and sell them what they promised to be one of the best stocks. These men were so good that they could sell the “Bright Blue Sky.” And that’s what they usually did. In the end, the unwary investor had little left of their investment.

The result of all this was that states around the nation enacted what was called Blue Sky Laws. Laws that prohibited stock salespeople from making unwarranted promises about the future performance of a company’s stock.

We could use such a Blue Sky Law for the recently passed Inflation Reduction Act.

Our “Salesman in Chief,” Joe Biden, has promised that this new law will accomplish four remarkable feats. But upon closer examination, I think you’ll agree that those accomplishments are far less than advertised.

You can find these promises at The very first sentence for the Inflation Reduction Act reads:

The Inflation Reduction Act will lower costs for families, combat the climate crisis, reduce the deficit, and finally ask the largest corporations to pay their fair share.

And like any good Blue Sky Salesman, those are the benefits. And how could anyone be against those benefits: lower cost, lower deficit, fairer taxes, and of course, Bluer Skies?

Now, you may ask, just how are those benefits achieved? And as you might guess, the answer is in the fine print. And in that case, the fine print goes on and on for literal pages. After all, this Bill began with another name: The Build Back Better Bill. But after the hefty new taxes under that Bill was revealed, the President withdrew it.

This Bill, The Inflation Reduction Act, is the second attempt at the same sort of effort. Five versions of this Bill were proposed before the final Bill could pass. Altogether, there have been 295 amendments proposed to this Bill.

So, let’s take a comprehensive look at just what those alleged four benefits will mean to you and me.

The first alleged benefit is to “lower costs for families.” In other words, subsidies for Obamacare will increase. They provide cash subsidies for those who use the Affordable Care Act for their primary health insurance. Republicans estimate the cost for this part of the Bill, at $280 Billion, over the next ten years.

The second alleged benefit of this IRA is to “combat the climate crisis.” This new law slaps a 16.4% additional tax on all imported oil. You may think that will only make oil and gas more expensive. How will that “combat the climate crisis?” Well, that’s simple: as gasoline becomes more and more expensive, you and I will drive less. And the less we commute, the less we pollute. And just like that, we’ve solved the climate crisis.

Simple, isn’t it?

Let’s skip ahead and look at the part of the Law that will generate revenue. And that’s the part that asks corporations to “pay their fair share.” Since I was young, this “benefit” has been one of the principal shibboleths of the left. As an average consumer, I’ve often wondered how it benefits me to have corporations “pay their fair share.” Does it help me that those same corporations will have to increase their price on goods and services? After all, that’s what higher taxes mean. But we’ll leave that for another discussion.

Today, this Law has a precise way they want those corporations to pay their fair share. By eliminating certain write-offs for new plants and equipment. This special 15% minimum tax for large corporations will do away with the principal tax deduction for expansion.

New high-tech equipment and new facilities require a substantial upfront expenditure. Currently, those expenditures can be “written off” against company taxes. This helps companies manage their cash flow, by giving a boost at tax time. Under this new law, that write-off goes away. And so too goes the incentive for business to expand. The Tax Foundation sees this as a top way that this Law will depress economic growth in the years ahead.

Finally, we come to the fourth and last alleged benefit. The claim is that the new law will reduce the deficit. However, that will only happen in an unchanging world. Unfortunately, this new law will change the current tax policy so dramatically. That corporations and individuals will need to adjust.

Let me explain. Like most of these economic projections, the assumption is that everything remains static. But we know that isn’t true. If the price of gasoline, for instance, goes higher, you and I will cut back on our driving even more. That new tax on imported oil and gas will raise far less revenue because of the change in our behavior.

So too, corporations will build fewer new plants and purchase less equipment if they can no longer write off those deductions. Our behavior will change. We will have to adapt to this new tax law.

Unfortunately, one benefit does not appear in this new law, and I wish it did. That benefit would be to promote economic growth. Note: any mention of “economic growth” is conspicuous by its absence.

We get more climate regulation, more Obamacare subsidies, higher taxes on imported oil, and higher taxes for corporations. But nowhere in this new law is any incentive to grow the economy.

We’ve known, at least since Ronald Reagan was President, that the way to economic growth is through reducing regulation and lowering taxes. Unfortunately, the Inflation Reduction Act provides none of that. Instead, we get just the opposite, higher taxes and more regulation. 

And, oh yes, more of the bright blue sky.

Economic News

You no doubt saw yesterday that Retail Sales came in flat for July. Below all expectations and another sign that the consumer side of the economy is struggling. But did you notice that the Census Bureau also lowered June’s number? Unfortunately, they revised June’s Retail Sales lower by 20%. As you suspected, things are not looking good for the average American Shopper.

Exciting news out of France this morning, as we see higher interest rates circle the globe. The French 5-year note, which for eight years carried a negative yield, is now trading solidly above 1%. It may not seem like much, but 1% interest will make a profound difference, not only in the financing of French Sovereign Debt but also in the structure of their capital markets.

A little later this morning, the National Association of Realtors will announce the latest in Existing Home Sales. And following all the other news in Real Estate, we’re expecting this also to come in lower.

Also reporting this morning will be the latest reading on Initial Claims for Unemployment Insurance. Wall Street is looking for these claims to be roughly unchanged from last week. But don’t be surprised if this number comes in higher than expected. I think we may start to see some weakness in the labor market, beginning right about now.

In earnings this morning, a slate of retailers. Unfortunately, most are currently trading lower on their results. Leading off was specialty retailer Estee Lauder, then fashion brands company Tapestry, and the big loser of the day, Kohl’s Department Stores. The only company bucking the negative trend has been BJ Wholesale. In just a little bit, Ross Stores will announce earnings.