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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: Peter Dierks who wrote (27364)	4/2/2008 11:29:04 PM
From: Peter Dierks	Read Replies (1) \| Respond to of 71588

Iceland Isn't Melting By HANNES HOLMSTEINN GISSURARSON April 2, 2008 REYKJAVIK, Iceland The global credit crisis has sparked fears that Iceland's economic miracle is about to unravel. Critics point to the large current account deficit and private-sector debt as evidence of impending doom. As a result, investors have pushed down the krona about 20% against the euro in the last month alone, forcing the central bank to lift rates by 125 basis points to 15%. But fears of a meltdown in my subarctic homeland are vastly overblown. True, the current account deficit was 16% of GDP last year, but that's an improvement from more than 25% in 2006. And while net private-sector debt is about 120% of GDP, there is virtually no public debt in Iceland. This is largely the result of unparalleled political stability and continuity. The business-friendly Independence Party has led the government since 1991 and has turned persistent fiscal deficits into surpluses, cutting the public debt to a projected 3.8% of GDP this year from 32.7% in 1994. The bulk of Iceland's private debt is the result of aggressive investing by banks and investment funds. But this brings us to the second reason why Iceland should not be regarded as a high-risk country. To correctly assess the health of the economy, it's not enough to look only at the future value of the investments financed by this debt but also at the new capital that has been created in Iceland over the last 16 years. This new capital, rather than reckless borrowing, is the main explanation why Icelandic investors have recently been able to play a far more important role in international finance markets than the small size of our economy might suggest. Where did this new capital come from? In the early 1990s Icelanders, traditionally a nation of fishermen, developed an ingenious system of semiprivate property rights -- so-called individual transferable quotas, or ITQs -- for their rich fish stocks. Each fishing firm holds a transferable and divisible right to harvest a given proportion of the total allowable catch in each fish stock over each year. Before the reform, fishing was for free, which led to overfishing and overinvestment. Only with the introduction of the ITQs has the fishing stock in essence become registered, transferable capital, which could be used as a collateral. The total value of these fishing rights is about $5 billion. The second source of new capital in Iceland came from the extensive privatization of public assets since 1991, including banks, and investment funds. Capital which had laid largely dormant in public companies became registered, transferable and could be used as collateral. The additional value of Iceland's privatized assets is about $6 billion. Third, Iceland has (on a per capita basis) one of the strongest state pension systems in the world, according to the OECD. The total assets of the pension system, not counting various private pension plans, amounted to about $24 billion at the end of 2006, more than the total GDP of about $17 billion in that year. What has happened in Iceland since 1991 can best be explained by Hernando de Soto's famous contrast between dead and liquid capital. Many poor countries are held back in their development because capital is unowned, unregistered, untransferable and cannot be used as collateral. The transformation of the Icelandic economy since 1991 was essentially one to liquid from dead capital. So it is no mystery why in recent years Icelandic investors have been able to burst upon the international financial scene. What's more, Iceland's main export goods, seafood and aluminium, presently fetch record prices. In the current financial crisis, there is less reason to be worried about Iceland than about many other places. Iceland is not melting down. Mr. Gissurarson is a board member of the Central Bank of Iceland and a professor of political theory at the University of Iceland. online.wsj.com

To: Peter Dierks who wrote (27364)	4/3/2008 6:11:58 PM
From: TimF	Read Replies (1) \| Respond to of 71588

Oil Subsidies in the Dock Yesterday, Congress summoned the heads of BP, Shell, Chevron, ConocoPhilips, and ExxonMobil to defend the prices they’re charging at the pump and the subsidies they are receiving from the federal government. The former issue is of less interest to me than the latter. The main issue is the so-called Section 199 tax credit passed in 2005. The credit is available to all domestic manufacturers - not just to oil and gas companies - and it allows the oil industry to write-off $13.6 billion over ten years that might otherwise be sent to the federal treasury. While a good case could be made to get rid of Section 199 in toto – the feds shouldn’t be in the business of artificially making some business activities more economically attractive than others – limiting that deduction for oil and gas companies and oil and gas companies only will compound the underlying economic distortion and encourage investors to put relatively less money in oil and gas production and more money in other industrial sectors. How is that a good thing with oil prices topping $100 a barrel? Oil companies are already paying a staggering tax bill. In 2006, for instance, big-bad ExxonMobil faced an effective tax rate of 44 percent on a profit margin of around 11 percent, a figure that actually understates things because corporate revenues sooner or later find their way to oil company employees, contractors, shareholders, and those who do business with the same, and that revenue is taxed again via the personal income tax. “So what?” you ask? Well, the more you tax “Big Oil,” the less return investors will get on money plowed into oil production. The less return on investment, the less investment there will be. Less investment equals less production, and less production equals higher prices. This is fact, not theory. Analysts at the Congressional Research Service report that the 1980 Crude Oil Windfall Profits tax reduced domestic oil production by 3-6 percent and increased oil imports by 8-16 percent for exactly that reason. If the Congress were really interested in ending oil and gas subsidies, it could eliminate preferential tax treatment afforded intangible domestic drilling expenses, increase the amortization period for geological and geophysical expenditures from five years to seven, end preferential expensing for equipment used to refine liquid fuels, close the exemption from passive loss limitations for owners of working interests in oil and gas properties, and eliminate accelerated depreciation allowances for small oil producers, natural-gas distribution pipeline investments, and expenditures on dry holes. Such a plan would reduce – rather than compound – economic distortions produced by the tax code and deliver about $8.3 billion for the Treasury over 10 years. Congress is presumably less inclined to offer such a plan because those subsidies are far more important to “Little Oil” than they are to their “Big” brethren, and it’s the former – not the latter – that has most of the political clout in Washington. Regardless, if getting rid of subsidies is such a good thing, then why does Congress propose to take those subsidies away with one hand but to reallocate them to the renewable energy business with the other? If renewable energy is economically competitive, it doesn’t need the subsidy, and if it’s not economically competitive now – with energy prices setting records across the board – then what makes anyone think that federal subsidies will make any difference? After all, they never have in the past. Ethanol has been lavished with government subsidy for 30 years, yet ethanol is still about $1.20 per gallon more expensive than conventional gasoline on wholesale markets last week after we adjust for the differential in energy content between the two. Nuclear energy has lived off a plethora of federal subsidies for five decades now, yet rather than being “too cheap to meter,” it’s still more expensive than any other conventional source of electricity once we account for the cost associated with building the reactor. Examples of similar subsidy boondoggles are legion. Getting rid of energy subsidies is a fine thing, and Democrats are right to argue that those subsidies are even less warranted at a time when energy prices – and thus, energy profits – are relatively high. Too bad they aren’t serious about translating their rhetoric into legislative reality. posted by Jerry Taylor cato-at-liberty.org