Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Business Week Article on Stock Buybacks

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A recent Business Week article titled “The Buyback Boondoggle” discusses stock repurchases.

As the unemployment rate hovers near 10%, the economic debate is focused on how the government should aid recovery… but it’s business’ task to get the economy back on track – by investing in innovation and job creation. And if the recent past is any guide, corporations may stall the recovery by investing instead in something else – stock buybacks.

This article is an example of poor journalism and populist reasoning right from the start. You can see the writer’s view on business – that its purpose is somehow to create jobs – and that this should be the main goal of a business. Which, frankly, is a terrible assumption.

Businesses are created to make money. Businesses are (usually) run by smart people who want to invest their equity capital (raised from the stock market) in the place that will earn them the most money, and if they have a lot of equity capital outstanding (in the form of stock proceeds and retained earnings) they have to put this money to work on new projects that are at least as profitable as their current portfolio, or they are decreasing their company’s profitability, which is severely disliked by investors.

And the United States nowadays is a poor place for new investment. Want to know which country in the developed world has the least friendly tax outlook? The good ol’ USA. Per that highly recommended site “The Tax Foundation”

Currently, the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, second among OECD countries to Japan’s combined rate of 39.5 percent… Many states impose state corporate income taxes at rates above the national average of 6.6 percent. Iowa, for example, imposes the highest corporate tax rate of 12 percent, followed by Pennsylvania’s 9.99 percent rate and Minnesota’s 9.8 percent rate. When added to the federal rate, these states tax their businesses at rates far in excess of all other OECD countries.

The US also has a surplus of lawyers and a highly litigious culture that requires businesses to spend an inordinate amount of time preparing for lawsuits of every sort. And if you want to build something, such as a manufacturing plant… you must be kidding, right? The environmentalists and regulators will tear you to shreds, with protests, forms, and a never-ending stream of bad publicity. And if you have unions, or are in a state loaded with unions (such as the Midwest, sadly enough) you have a militant work force demanding gold plated benefit plans and happy to walk out and crush your operations at a moment’s notice.

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The Economist on Britain’s Electricity Situation

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The Economist recently wrote an editorial called “How Long Till the Lights Go Out?” describing the electricity situation in Britain. The byline was

Thanks to its posturing politicians, Britain will soon start to run out of electricity. What should it do?

As a long time writer on electricity and energy, I was pleased that The Economist at least hit on the core of the issue:

In 2009 Britain’s electricity demand peaked at 59 GW. Just over 45% of that came from power plants fuelled by gas from the North Sea. A further 35% or so came from coal, less than 15% from nuclear power and the rest from a hotch-potch of other sources. By 2015, assuming that modest economic growth resumes, a reasonable guess is that Britain will need around 64 GW… where will that come from?

This is the HEART of the issue. Electricity has to be generated from somewhere, and traditional sources of generation are 1) Coal 2) Gas 3) Nuclear 4) Hydroelectric 5) everything else (generally insignificant).

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2009 Lollapalooza Day One

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Lollapalooza Day One was quite muddy and cold, which is going to be quite a change from the other days since it is supposed to be extremely hot (for the first time this year in Chicago). The festival attracts over 225,000 people over three days, and it seemed very full, but not too crowed.

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(More) Wants vs. Needs

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At various points on this blog I have pointed out the gap between “wants” vs. “needs”. Since I live in River North there is a huge array of cooking and kitchen stores nearby, with an unimaginable line up of gadgets, tiles, and equipment.

At the complete other end of the spectrum, I was recently at my parent’s house when I noted this pot on the stove. This is the same pot that all of my meals were cooked from growing up, and it is going strong today! In fact, I wasn’t the oldest in my family, so it turns out that this pot is over FIFTY years old!

There was no reason to get rid of this pot, nor of any of the others in the set, so they just kept soldiering on, year after year. While not pretty nor trendy, the pots were FUNCTIONAL and frankly indestructible.

It is interesting to think of how much of our economy is spent on functionally unnecessary items. This photo, below… shows the “wants” side of the equation. I don’t even know how to explain it, seems to be some sort of furniture mosaic of likely high cost (if you have to ask, you probably can’t afford it).

Our wants have become unhinged from our needs to an extreme extent. At least in my little neighborhood…

Cross posted at LITGM

The New “Nomenklatura”

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Recently in Illinois a scandal broke out regarding preferential admissions at Illinois public universities, notably the University of Illinois in Champaign-Urbana. Politicians were forwarding lists of applicants (who otherwise would not have been allowed to attend because they lacked the requisite credentials) and these “connected” applicants were accepted ahead of more qualified but “unconnected” residents.

The scandal has now moved on to other educational institutions, notably the “magnet” high schools such as this Walter Payton High School on Wells street in the River North area of Chicago (it is actually halfway between River North and Old Town). Here is a link to a Chicago Tribune article on the subject. Here is a more recent article… now the Federal authorities are getting involved.

The real issue, however, aren’t the specific instances of corruption. The broader picture is what our country will look like in the future as the government controls more institutions due to economic failure (car manufactures like GM, financial institutions like Citicorp, AIG and Fannie Mae and Freddie Mac) or due to encroaching powers (perhaps the entire medical industry).

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